A Score that Really Matters: Your Credit Score
Before they decide on the terms of your mortgage loan (which they base on their risk), lenders need to find out two things about you: whether you can repay the loan, and how committed you are to pay back the loan. To figure out your ability to pay back the loan, they assess your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.
The most commonly used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (high risk) to 850 (low risk). We've written more on FICO here.
Credit scores only assess the info in your credit profile. They don't take into account your income, savings, amount of down payment, or factors like sex race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when these scores were invented as it is today. Credit scoring was envisioned as a way to assess a borrower's willingness to pay without considering other demographic factors.
Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scoring. Your score is calculated from both the good and the bad of your credit report. Late payments count against you, but a record of paying on time will raise it.
Your report should contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This history ensures that there is sufficient information in your credit to build a score. Some borrowers don't have a long enough credit history to get a credit score. They may need to spend some time building credit history before they apply for a loan.
Savers Home Loans can answer questions about credit reports and many others. Call us at (800) 974-0509.