Clean Up Your Credit

Lenders are requiring much more than a pulse to give you a mortgage these days.
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As a special feature for April, TheStreet.com offers a 20-part series on virtually everything to do with real estate. Today's installment is Part 2.

The minute we hit April, everyone jumps on the spring-cleaning bandwagon. Well, after you finish cleaning out the garage and your closet, be sure to clean up your credit.

Especially if you're going to be looking for a mortgage this spring.

Thanks to the recent subprime fallout, lenders are requiring much more than a pulse to give you a mortgage these days.

A year ago, many mortgage lenders were giving money away with their eyes closed. You didn't need a down payment, lousy credit was not an issue, and you barely had to prove your income.

But that backfired -- duh! -- and surprise, surprise, the folks who had bad credit and no income weren't able to make their mortgage payments after all. Shocking. So lenders have decided to pull in the reins a bit.

Does that mean you're stuck?

"It's too early to tell. We haven't yet seen the affect of a full possible tightening yet," says Dick Gaylord, the president-elect of the National Association of Realtors.

But things are clearly becoming tougher for the less-than-stellar borrower.

"If you're a good-credit, quality borrower who can document his income, has manageable debts, reasonable asset strength and is offering a decent down payment, then you get the gold star," says Keith Gumbinger, vice president of HSH Associates of Pompton Plains, N.J., which tracks a variety of loan products. Those borrowers will be just fine and won't see any changes in their loan options.

But if you're missing any of the above requirements, you will probably get some pushback from the lender.

So if you're not a "gold star" borrower, you need to clean up your act a bit, or you won't be living in your dream home after all. That means you need to go to one of the many credit-report Web sites, such as Experian.com, Equifax.com and TransUnion, and pull up your credit report. Look through it, line by line, and have old debts and unused credit cards removed.

Then borrow from everyone you know to scrape up a down payment, and be sure to document all of your income when you apply for a mortgage.

All this cautiousness could actually translate into good things for the borrower, notes Gaylord. Mainly, our borrower probably won't be able to squeeze into a home he can't really afford.

Of course, the flip side of the argument is that the subprime market was actually created to help people with little or no credit buy a home. And if the standards get too tight, this defeats its original purpose.

That's something the government is wrestling with currently. There are several pieces of legislation in Congress that seek to address this balance, so that people who need help can still get it, says Gaylord. All of the bills would increase the size of loans eligible to be insured, either by

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

or the Federal Housing Administration. That would enable cheaper financing to people such as veterans, teachers and nurses who would otherwise end up paying higher interest rates on subprime or jumbo loans.

So things are still very much unknown. The good news is that if you're looking for a mortgage this spring, you might not feel as much pressure as from lenders to ante up your firstborn child you would in, say, the fall, as tightening standards continue to kick in.

In addition, it's still a buyer's market. There are a lot more houses to choose from, and sellers are much more willing to negotiate these days. So use all that to your advantage to get yourself into a home you can reasonably afford.

In the meantime, educate yourself. Learn all you can about the mortgage process. Try to determine what you need to get approved and what you can qualify for even before you sit down with a lender. The NAR and the

Center for Responsible Lending have a ton of research and information available.

So good luck with the spring cleaning. It will be a great improvement for your home -- in many, many ways.

Coming up next: Consider an FHA loan.

Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;

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