Before lenders make the decision to lend you money, they must know if you are willing and able to repay that loan. To assess whether you can pay back the loan, they assess your income and debt ratio. To assess your willingness to repay, they use your credit score.
The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (very high risk) to 850 (low risk). We've written more about FICO here.
Credit scores only take into account the information in your credit profile. They do not 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 FICO scores were first invented as it is today. Credit scoring was invented as a way to take into account solely that which was relevant to a borrower's willingness to repay a loan.
Deliquencies, derogatory 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 considers both positive and negative information in your credit report. Late payments lower your score, but consistently making future payments on time will raise your score.
Your credit 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 a score. Should you not meet the minimum criteria for getting a score, you might need to work on your credit history prior to applying for a mortgage loan.
At Real Property Finance, we answer questions about Credit reports every day. Call us: 310-379-5997.
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