Your Credit Score: What it means

Before they decide on the terms of your mortgage loan (which they base on their risk), lenders want to discover two things about you: your ability to pay back the loan, and if you are willing to pay it back. To assess your ability to repay, they look at your income and debt ratio. In order to calculate your willingness to repay the mortgage loan, they look at your credit score.

The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (very high risk) to 850 (low risk). You can learn more about FICO here.

Your credit score is a result of your repayment history. They never take into account your income, savings, amount of down payment, or factors like gender, race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was developed as a way to consider only that which was relevant to a borrower's willingness to pay back the lender.

Past delinquencies, payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scores. Your score is based on both the good and the bad in your credit report. Late payments lower your credit score, but establishing or reestablishing a good track record of making payments on time will raise your score.

For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of six months. This history ensures that there is enough information in your credit to generate a score. Some folks don't have a long enough credit history to get a credit score. They should spend some time building credit history before they apply for a loan.

At Savers Home Loans, we answer questions about Credit reports every day. Give us a call at (800) 974-0509.