Understanding Your Credit Score
Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders want to discover two things about you: whether you can pay back the loan, and if you are willing to pay it back. To understand whether you can repay, they look at your income and debt ratio. To assess your willingness to repay, they use your credit score.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk).
Credit scores only take into account the info contained in your credit reports. They never consider income, savings, amount of down payment, or personal factors like gender, 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 first invented as it is now. Credit scoring was envisioned as a way to assess willingness to pay without considering other personal factors.
Your current debt load, past late payments, length of your credit history, and other factors are considered. Your score is calculated with both positive and negative items in your credit report. Late payments will lower your credit score, but consistently making future payments on time will improve your score.
To get a credit score, borrowers must have an active credit account with six months of payment history. This payment history ensures that there is sufficient information in your report to assign an accurate score. If you don’t meet the minimum criteria for getting a credit score, you may need to work on a credit history prior to applying for a mortgage loan.