You should be honest with your loan officer if you have had any credit problems. There are many legitimate reasons why persons may have encountered a credit problem. If you dealt with your credit problem and have maintained a satisfactory record for a minimum of one year, you will most likely qualify to most mortgage professionals.

Credit Determination
Most people will have a credit history. This history plus your income will determine your credit-worthiness. Your credit history has been established through any use of credit cards, loan payments such as student or car loans, and even previous apartment or house rentals in addition to other debt payments and bankruptcies.

Again, your credit history is extremely important to a lender as it gives a picture of your payment history and any possible problems. Thus, a credit check is usually the first step in a loan application process.

Debt-to-Income Ratio, also known as Capacity
Lenders will calculate with information you provide, your "Debt-to Income" (DTI) ratio. This means your financial capacity to repay your loan. Can you repay your loan plus your regular monthly debts such as credit cards, car loans, student loans etc. and have enough money to still live on. The DTI is calculated by adding up all of your monthly debts and dividing the total monthly debts by your gross monthly income.

An example of this would be a proposed mortgage payment of $1200 per month and $600 per month in other debts creating a debt load of $1800 per month. If your gross monthly income were $5400, your DTI would be 33% ($1800/$5400 = .33)

A standard guideline sometimes referred to as the "Fannie Mae" guideline is that your total DTI should not exceed 36%, but lenders offer some leeway with clients who may have a large down payment or an excellent credit history. This "leeway" has been pushed to 40% and beyond for someone with good credit, capacity, collateral and character.

Collateral
The real value of the property that you are buying is what constitutes collateral. If you fail to make your mortgage payments, the lender will seize your property and sell it to satisfy the debt. An appraisal will ensure that the home is not worth less than you paid for it and therefore the lender would not incur a loss should you not be able to make your mortgage payments.

Character
The subjective determination of your over-all financial situation formed by your job stability, continued employment and your proven credit history is what is called "character", another determining factor used to grant or to not grant a loan.