A Score that Really Matters: The Credit Score
Before they decide on the terms of your mortgage loan, lenders must find out two things about you: whether you can repay the loan, and if you are willing to pay it back. To figure out your ability to pay back the loan, they assess your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.
The most commonly used credit scores are called 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 learn 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 like these. "Profiling" was as dirty a word when these scores were invented as it is now. Credit scoring was envisioned as a way to assess willingness to repay the loan without considering other demographic factors.
Your current debt level, past late payments, length of your credit history, and a few other factors are considered. Your score results from positive and negative items in your credit report. Late payments count against your score, but a record of paying on time will improve it.
Your report must 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 payment history ensures that there is sufficient information in your report to assign an accurate score. Some folks don't have a long enough credit history to get a credit score. They should build up credit history before they apply for a loan.
Blue Door Mortgage can answer your questions about credit reporting. Give us a call: (617) 527-BLUE(2583).