Before deciding on what terms they will offer you a loan, lenders must discover two things about you: your ability to pay back the loan, and how committed you are to pay back the loan. To assess whether you can pay back the loan, they assess your income and debt ratio. In order to assess your willingness to pay back the mortgage loan, they consult your credit score.
The most widely used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (high risk) to 850 (low risk). You can find out more on FICO here.
Your credit score comes from your repayment history. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as bad a word when FICO scores were invented as it is now. Credit scoring was developed as a way to consider solely that which was relevant to a borrower's likelihood to repay the lender.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scores. Your score reflects the good and the bad of your credit history. Late payments 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 six months of payment history. This history ensures that there is enough information in your report to assign a score. Some people 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 Saab Mortgage, we answer questions about Credit reports every day. Give us a call: 703-288-0777.
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