A Score that Really Matters: Your Credit Score
Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders want to find out two things about you: your ability to pay back the loan, and your willingness to pay back the loan. To understand whether you can repay, they look at your income and debt ratio. To assess how willing you are to repay, they use your credit score.
Fair Isaac and Company formulated the original FICO score to help lenders assess creditworthines. We've written more about FICO here.
Credit scores only consider the information contained in your credit reports. They do not consider income, savings, down payment amount, or demographic factors like sex race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as bad a word when FICO scores were first invented as it is today. Credit scoring was envisioned as a way to consider solely what was relevant to a borrower's willingness to pay back a loan.
Your current debt load, past late payments, length of your credit history, and other factors are considered. Your score is calculated from both the good and the bad in your credit history. Late payments count against you, but a record of paying on time will raise it.
Your 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 sufficient information in your report to generate a score. If you don't meet the minimum criteria for getting a credit score, you may need to work on a credit history prior to applying for a mortgage loan.
At Alternative Mortgage Group, we answer questions about Credit reports every day. Call us: 561-395-4264.