A Score that Really Matters: The Credit Score
Before deciding on what terms they will offer you a mortgage loan, lenders need to find out two things about you: whether you can pay back the loan, and if you are willing to pay it back. To figure out your ability to repay, they look at your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.
The most widely used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (very high risk) to 850 (low risk). You can find out more on FICO here.
Your credit score is a result of your repayment history. They do not take into account your income, savings, amount of down payment, or factors like gender, race, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when FICO scores were invented as it is now. Credit scoring was envisioned as a way to take into account solely that which was relevant to a borrower's likelihood to pay back the lender.
Your current debt level, past late payments, length of your credit history, and a few other factors are considered. Your score is calculated wtih positive and negative items in your credit report. Late payments lower your score, but consistently making future payments on time will improve your score.
Your credit report must have 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 generate an accurate score. Should you not meet the criteria for getting a score, you may need to establish your credit history before you apply for a mortgage.
At United Capital Mortgage, Inc., we answer questions about Credit reports every day. Give us a call at 214-718-7183.