About Your Credit Score
Before they decide on the terms of your loan (which they base on their risk), lenders want to find out two things about you: your ability to pay back the loan, and if you will pay it back. To assess your ability to pay back the loan, lenders look at your debt-to-income ratio. In order to assess your willingness to pay back the mortgage loan, they look at your credit score.
The most widely used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.
Your credit score comes from your history of repayment. They don't consider income, savings, down payment amount, or personal factors like gender, ethnicity, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was developed 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 inquiries are all calculated into credit scores. Your score is calculated wtih positive and negative items in your credit report. Late payments will lower your 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 at least six months of payment history. This history ensures that there is enough information in your credit to build a score. Should you not meet the minimum criteria for getting a credit score, you might need to work on a credit history prior to applying for a mortgage loan.
Custom Lending Group can answer questions about credit reports and many others. Call us at (707) 252-2700.