Before deciding on what terms they will offer you a mortgage loan, lenders want to know two things about you: your ability to repay the loan, and how committed you are to repay the loan. To understand whether you can repay, they look at your income and debt ratio. In order to calculate your willingness to pay back the 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. Your FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more about FICO here.
Credit scores only assess the information contained in your credit reports. They don't consider income or personal characteristics. These scores were invented specifically for this reason. "Profiling" was as dirty a word when FICO scores were first invented as it is now. Credit scoring was envisioned as a way to take into account solely what was relevant to a borrower's likelihood to pay back the lender.
Past delinquencies, payment behavior, current debt level, length of credit history, types of credit and the number of credit inquiries are all calculated into credit scoring. Your score results from both 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 improve your score.
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 history ensures that there is enough information in your report to build an accurate score. If you don't meet the minimum criteria for getting a credit score, you may need to establish a credit history prior to applying for a mortgage loan.
MidTowne Mortgage can answer your questions about credit reporting. Give us a call at (478) 746-2063.