Before lenders decide to lend you money, they must know that you are willing and able to repay that loan. To assess your ability to repay, lenders look at your debt-to-income ratio. To calculate your willingness to repay the mortgage loan, they look at your credit score.
The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk). We've written more about FICO here.
Your credit score comes from your history of repayment. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when FICO scores were first invented as it is today. Credit scoring was developed to assess willingness to repay the loan without considering any other demographic factors.
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 positive and negative items in your credit report. Late payments count against you, but a record of paying on time will improve it.
Your credit report should 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 enough information in your credit to calculate a score. Some borrowers don't have a long enough credit history to get a credit score. They may need to build up credit history before they apply for a loan.
At The Rate Kings Mortgage LLC, we answer questions about Credit reports every day. Call us: 6105723635.