Before lenders make the decision to give you a loan, they must know that you are willing and able to pay back that mortgage. To assess your ability to pay back the loan, they assess your income and debt ratio. In order to calculate your willingness to repay the mortgage loan, they look at 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 (very high risk) to 850 (low risk). We've written more about FICO here.
Credit scores only assess the info contained in your credit reports. They do not consider income, savings, amount of down payment, or factors like sex ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when these scores were first invented as it is today. Credit scoring was developed as a way to take into account solely what was relevant to a borrower's willingness to repay the lender.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scoring. Your score results from positive and negative items in your credit report. Late payments will lower your credit score, but establishing or reestablishing a good track record of making payments on time will raise your score.
Your report must 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 report to build an accurate score. Should you not meet the minimum criteria for getting a credit score, you might need to work on a credit history prior to applying for a mortgage.
The Elite Lending Team at Milestone Mortgage Corporation can answer questions about credit reports and many others. Call us: 561-373-4149.