Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders want to find out two things about you: whether you can repay the loan, and your willingness to repay the loan. To figure out your ability to repay, they assess your debt-to-income ratio. In order to calculate your willingness to repay the loan, they consult your credit score.
The most widely used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). You can learn more about FICO here.
Your credit score comes from your history of repayment. They never take into account income, savings, down payment amount, or personal factors like sex ethnicity, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as bad a word when these scores were first invented as it is now. Credit scoring was envisioned as a way to consider solely that which was relevant to a borrower's willingness to repay the lender.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and the number of credit inquiries are all calculated into credit scoring. Your score is calculated from the good and the bad of your credit report. Late payments count against your score, but a record of paying on time will raise it.
For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of at least six months. This payment history ensures that there is enough information in your credit to calculate a score. Some folks don't have a long enough credit history to get a credit score. They may need to spend some time building up credit history before they apply for a loan.
At United Capital Mortgage, Inc., we answer questions about Credit reports every day. Call us at 214-718-7183.