A lender wants two things: to sell you a loan and to do it with the least risk possible. The key to success is to be steady and consistent in repaying loans. Each lending company has a variety of products (loans), all with different rules and costs (interest rates, points and fees). The better your credit, the less risk the lender perceives and the less a loan will cost you.

What do lenders look for? "The first and most common answer is your credit score. They also look at employment history, debt history, liabilities, your job, how much you make," says Ron Culver, account executive for Webster Bank, a Connecticut-based wholesale mortgage company. "There are other small things—bankruptcy history, collection history. A 'lack of credit' is an unknown. This person doesn't use credit, and we don't know if they are going to be responsible if they do."

To assess the risk involved in lending to you, lenders piece together the story of your financial life, your spending and payment habits over the last few years, says David Rubinger, spokesman for credit reporting firm Equifax. Try to see your application through a lender's eyes to assess the strengths and weaknesses of your story. Anticipate problems—a gap in employment history or late bill payments—and include a brief letter of explanation. You may have had an illness, for example, a divorce, a death in the family or a period of searching for work before landing a job.

Tell your own story by collecting supporting evidence. Well-prepared applicants are the most successful, says Vicki Rosenthal, home loan underwriter (she analyzes applications and decides which to accept and reject) with the private Mortgage Guaranty Insurance Corporation (MGIC).

Having no credit is not an impossible obstacle. Plenty of loans exist for such nontraditional borrowers, says underwriter Rosenthal, who has approved many first-time home-buyers' loans. If you happen to be a nontraditional borrower, tell your story by documenting transactions with people who have extended you services: a childcare provider or a landlord, cell phone carriers, cable service, utilities, car insurance—none of which appears on a credit report. Include names, addresses, account numbers and phone numbers.

"The more prepared you are at application; the less follow-up you'll need to do," Rosenthal says. "A good application presentation makes a huge difference."

Since your loan application will be viewed by people you'll never meet, your winning personality alone won't be enough to inspire confidence in your ability to repay a loan. Mysteries in your credit story may be interpreted negatively. The letter of explanation (keep it brief) is the best friend of the home buyer whose application veers from perfection. Scan your loan application for consistency in every detail with what's in your credit reports and explain any variations in your letter. Look for flaws, errors or a place where timelines don't exactly meet. (You left school in June, for example, and started work in November.) Include a good reason for the missing time period in your letter.

There's another home-buying myth that Rosenthal wants to demolish: "One of the requirements to buying a home is not that you have to save 20 percent for a down payment," she says. "There are [loan] programs out there and insurable programs for up to 100 percent of the value and beyond, based on your qualifications."

What a 20 percent down payment does buy you is the opportunity to avoid paying for mortgage insurance, which protects the lender in case of a default.

Loans are offered, also, for those with damaged credit. The downside is, they'll cost more. "Derogatory credit doesn't necessarily mean you are not going to be eligible," says Rosenthal.

With poor credit, however, your best friend is time, says Heather Greer, spokeswoman for Experian, a credit reporting firm. Positive information stays on your credit report indefinitely. Bad entries live for up to seven years, but carry less weight as they are replaced with a stronger record. Inquiries by merchants into your creditworthiness remain for two years.

"It's important to take a peek at your report so there's enough time to make changes," Greer says. "Do this at least a few months before going into a lender. Then you can say, 'Yes, I may have had this late payment, but for the last three or six months I've been paying on time and everything is good.'"

"Pay off what you can," adds Equifax's David Rubinger. "The more you can pay off your accounts and pay regularly, the more it will help your score. If you have many inquiries, it can potentially impact your score. But paying your bills on time and paying them off as much as possible is a more important factor. You should not open new credit cards if you don't need to increase your available credit—to a lender, this means that you have all this extra available credit, making you a greater risk."

To tell your story right, get copies of your credit reports. Three national agencies, Equifax, Experian and TransUnion, collect and report credit data. Their reports aren't identical, so get all three.

Fortunately, that just got easier. With recent passage of an amendment to the Fair Credit Reporting Act, each agency must give consumers one free report annually. The law is being rolled out through the year, starting in the West in December, the Midwest in March, the South on June 1 and, finally, in U.S. territories and Eastern states on Sept. 1, 2005. See a map of states and roll-out dates and apply for free credit reports at Annual Credit Report.com, a Web site launched by the agencies.

You'd also want to buy—this one's not free—your credit score, a three-digit rating of your creditworthiness. The higher your score, the lower the interest rate you command. According to Rubinger, about 70 percent of lenders use the FICO scoring system. Several firms, including the credit reporting agencies, use their own systems—similar to but different from FICO. To ensure you purchase the same score (or scores) as your lender, ask the lender you're thinking of using which they prefer. Scores start at under $10.

Finally, knowing your story lets you shop for the right lender. Armed with your new self-knowledge, make lots of phone calls to learn which lenders have the most choices, the best rates, the lowest fees, the speediest processing times. Don't be shy about describing your situation. If you have had credit problems, consider avoiding lenders whose loans require sterling credit.

"Compare what's available, what types of programs they have," says Rosenthal. "If you don't know what the programs mean, they can get you the disclosures [fine-print rules and explanations]."

"With your homework done, you'll be your own advocate, there won't be as many surprises," she says. You'll be glad that you learned to see yourself through a lender's eyes.