A Score that Really Matters: Your Credit Score
Before they decide on the terms of your mortgage loan (which they base on their risk), lenders must discover two things about you: whether you can repay the loan, and if you will pay it back. To assess your ability to repay, lenders look at your debt-to-income ratio. In order to assess your willingness to repay the mortgage loan, they look at your credit score.
Fair Isaac and Company formulated the first FICO score to assess creditworthines. You can learn more on FICO here.
Your credit score comes from your history of repayment. They never take into account your income, savings, amount of down payment, or factors like sex race, nationality or marital status. These scores were invented specifically for this reason. "Profiling" was as dirty a word when these scores were first invented as it is in the present day. Credit scoring was envisioned as a way to assess willingness to repay the loan while specifically excluding any other demographic factors.
Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all considered in credit scoring. Your score results from positive and negative information in your credit report. Late payments will lower your score, but consistently making future payments on time will improve your score.
For the agencies to calculate a credit score, you must have an active credit account with six months of payment history. This history ensures that there is sufficient information in your report to calculate a score. If you don't meet the minimum criteria for getting a credit score, you might need to work on a credit history before you apply for a mortgage.
Ashok Lakshmanan can answer questions about credit reports and many others. Call us at 630-717-3600.