Tips on cleaning up your credit report

•  Look closely for any errors and correct them. Check for credit cards you no longer use and close them out.

• Note late payments and credit balances; you may have to explain them to a lender.

•  Compare account numbers to make sure they're yours.

•  Resolve outstanding bills.
•  Pay all bills on time
•  Limit your amount of outstanding credit. Even if you pay your bills on time, you'll improve your credit score by having lower balances and fewer cards.

The vast majority of homes are purchased with mortgage loans. When you borrow money on a home, you are committing yourself to two financial documents. The note is a personal obligation to repay the loan on a timely basis. The mortgage pledges the home as security in case you fail to live up to your obligation. This document sets out the obligations you are expected to meet and defines your rights and those of the lender.

All mortgage loans have an interest rate and a term. The interest rate is applied to the amount of money you borrowed and haven’t yet paid back. You pay this interest in monthly installments. In addition to interest, your payment includes an extra amount to pay back the principal. Therefore, the principal balance is reduced with each payment. This means that the interest payment is also reduced, as time passes.

Since the total payment remains constant, more money is applied to principal reduction as the loan ages. The payment schedule is designed so that the loan will be completely paid off at the end of the term even though few mortgage loans survive their full term. Most are ended when the home is sold or refinanced several years after the loan was originated.

Definitions of a few key terms are provided below to help you better understand mortgage financing.

Refinancing is the process of replacing the current financing with a new loan or set of loans. This may involve replacing the original loan with one of the same amount, increasing the amount of the loan, or replacing several mortgages with one mortgage loan.

Amortization is the process of paying down the principal of the loan. If the interest rate on the loan is fixed, an amortization schedule for the full term can be prepared when the loan is originated.

Fixed-rate loans have the same interest rate applied over the entire teim. The combined monthly payment for principal and interest is unchanged.

Adjustable-rate mortgages (ARMs) provide for adjustments to the interest rare at specified intervals. When the rate is adjusted, the principal and interest payment may change.

A balloon payment occurs when the term of the loan is shorter than the full amortization term. Most balloon payment loans are made by nonprofessional lenders, such as sellers who provide financing to induce a sale. They want to limit the life of the loan without making monthly payments prohibitively high. When a balloon payment becomes due, the borrower will have to refinance the loan.

Loan assumption is the process of allowing a later home buyer to take over the existing loan, possibly substituting for the seller. Many loans have due-on-sale provisions that prevent assumptions. Loans that don’t are called assumable mortgages.

An escrow account is required by most lenders. The account provides funds to pay for hazard insurance and property taxes. The borrower makes a deposit in the account with each monthly payment (the total payment is sometimes called PITI, for principal, interest, taxes, and insurance). Since insurance premiums and taxes may vary, the monthly payment may change over time even for fixed-rated loans.

A loan commitment indicates the lender’s intention to provide a loan with specified terms. The lender has to process the loan application before the loan is approved, but a rate commitment may be granted when you apply.

This states that, if the loan is approved, it will be for a certain amount and have certain terms. A loan closing, also called settlement, marks the time when the money is provided (usually coinciding with the closing of the sale) and interest starts to accrue. Pay­ments are often timed to be paid at the beginning of the month and include interest that has accrued during the previous month. Interest accruing between the closing and the end of the month is paid at the closing.