Buying homes almost always requires good credit. The extreme exception would be if you had a large lump of cash handy to buy a home, which is usually unlikely. Good credit and financial preparation is essential before buying homes. Your credit worthiness is reflected in your Credit Report, in the US there are three credit reporting agencies (often incorrectly referred to as Credit Bureaus):

• Experian
• Transunion
• Equifax

One major problem in establishing credit is that banks/creditors could use any or all of these three credit reporting agencies, which makes it necessary for you to monitor your credit reports with all three agencies. Recent federal law changes allow you to obtain one free credit report from each agency per year, the official website is www.AnnualCreditReport.com.

An alternative is to subscribe to a credit monitoring service that allows you unlimited access to your credit reports, some even offer security alerts and identity theft insurance. The three credit agencies do their best to make getting the Federally mandated free annual credit report as difficult as possible - often arbitrarily asking for documentation to be mailed back and forth. The paid services offer a much easier path as they are making (a good deal of) money from you. Either way, you must be fully aware of the contents of all three of your credit reports. If you intend to purchase the new home with your spouse as a co-owner, you also need to ensure the spouse's credit is clean and credit scores are good.

All three credit agencies use a "Credit Score" that gives you a numeric ranking. Unfortunately the free annual credit report does NOT include your credit score, you are asked to pay for that as an optional item. The paid credit monitoring services on the other hand often provide your credit scores at no extra charge. The scoring method itself is another problem. In the past, a scoring method called FICO (Fair Issac Credit Organization) would provide a number between 350 and 850, with 850 being perfect credit. Most creditors had accepted the FICO scores and built their approval methodology around this number. However, at the time of this writing, all three credit agencies switched to a new proprietary scoring system called Vantage Score - that is totally different and ranks from 0 to 990. Some creditors and banks are starting to adopt the new system, but many are still using FICO which they are obtaining indirectly from Fair Issac. In any case, you must be aware of your credit scores and how you rank statistically among other Americans. A high score is a high score, regardless of which scoring system was used. And a low credit score is a low credit score, which could negatively affect your ability to get a good interest rate, or even a mortgage at all.

Many home sellers and their real estate brokers will insist on running a credit check on you before they even agree to show you the property. A preferred method is for you to obtain a pre-approval (or at least a pre-screening) from your preferred mortgage bank that you can show the seller/agent. The mortgage bank will always run a credit check before considering your home purchase loan request. So it comes back to the same point, you must get your credit looking spotless - well in advance of your actual home buying experience. Also keep in mind that credit scores are averaged, so they take into account your credit history over time - not just your current credit report contents. Keeping a clean credit history is something you should do in any case.

If your credit report contains any bankrupties or judgements - these are very bad. Unless the information is inaccurate, you will have a very had time getting credit - or a good interest rate. If there are any errors in your credit report, you must immediately file the appropriate challenge to each of the credit agencies that are reporting it. They usually correct the error within 30 to 60 days. Consistent late payments on your accounts are also shown in your credit history, there is not much you can do about this at the last minute, so always try to be on time with your payments. Remember, credit scores average out your credit behavior over time. An occassional late payment may not adversely affect your credit worthiness, creditors know that sometimes checks can get lost in the mail or payments can be mis-applied by banks.

If you have a lot of debt on revolving accounts (credit cards, store cards) you should try to reduce these well in advance. Balances over 50% of the credit limit are considered bad on credit cards, note that auto loans or other fixed period loans are not considered in the balance calculation. Remember, credit scores average out your history, so paying large amounts at the last minute may not help your credit scores at all. You should NOT simply cut up your card and cancel your credit card account - having an open account with a balance is more helpful than a closed account with no balance. Creditors want to see you use credit, but they want to see you using it wisely. Cancelling your credit cards will result in no credit history on open accounts. If you are afraid that you will go on a charging binge and run up your account balance, one crazy suggestion is to take the credit card and put it into a plastic cup filled with water. Then put it in the freezer - your credit card will be encased in a block of ice, making it impossible for you to go on an impluse buying binge. If you absolute need to make a purchase, you will have to thaw out the credit card ice cube over a couple of days.

Once you have your revolving debt down to under 50% on each (or a majority of) credit cards, you must prepare your downpayment. In most states in the US, if you pay less than 20% down you will be charged for PMI (Private mortgauge Insurance) which could run into several hundred dollars a month. PMI offers no benefit to you, the buyer. It only guarantees payments to the home purchase loan creditor if you default. Ideally you would want to make at least 20% downpayment, if financially possible. If you can collect donations or borrow from parents/family/friends, do so well in advance. Mortgage lenders will ask for copies of your bank statements, some may ask for several months worth. If they see a sudden infusion of cash they will figure out that you borrowed the money and will assume it as another credit debt liability. Note that if you get cash gifts, be sure to get a signed/notarized letter from the giver - stating that it is a gift and no repayment is necessary. This will reassure the creditor that maybe it is not another debt.

You can also use all or part of your IRA/401-K retirement plan toward a first time home purchase, without any early-withdrawal penalties. Be sure to include these account statements with your financial information when submitting to the mortgage bank. Check with your closing lawyer about the best time to make the withdrawal, and be sure to inform the IRA/401-K account manager that you intend to use the funds for a first-time home buying reason. They have to notify the IRS about the purpose, so be sure to also check the year end statement to ensure they have updated their records correctly.

In addition to your downpayment, you will also require additional funds for closing costs, lawyer fees, title insurance, any urgent repairs or improvements to the home you are buying, and moving costs. Keep this money ready well in advance, as mortgage banks expect to see this cash waiting in your account on your bank statements.