A Score that Really Matters: The Credit Score
Before they decide on the terms of your mortgage loan, lenders must 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 debt-to-income ratio. In order to calculate your willingness to repay the mortgage loan, they consult 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 (high risk) to 850 (low risk). You can learn more about FICO here.
Credit scores only assess the information in your credit reports. They do not consider income, savings, amount of down payment, or factors like gender, ethnicity, national origin or marital status. These scores were invented specifically for this reason. "Profiling" was as bad a word when FICO scores were invented as it is today. Credit scoring was envisioned as a way to assess a borrower's willingness to pay while specifically excluding other personal factors.
Deliquencies, payment behavior, debt level, length of credit history, types of credit and the number of credit inquiries are all calculated into credit scores. Your score reflects the good and the bad of your credit history. Late payments count against you, but a consistent record of paying on time will improve it.
For the agencies to calculate a credit score, borrowers must have an active credit account with six months of payment history. This history ensures that there is sufficient information in your credit to calculate a score. If you don't meet the criteria for getting a credit score, you might need to establish your credit history prior to applying for a mortgage.
The Mortgage House can answer questions about credit reports and many others. Call us: 9037471800.