A Score that Really Matters: The Credit Score
Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must know two things about you: your ability to repay the loan, and if you are willing to pay it back. To figure out your ability to repay, they assess your debt-to-income ratio. To assess your willingness to repay, they use your credit score.
Fair Isaac and Company calculated the first FICO score to assess creditworthines. We've written a lot more about FICO here.
Your credit score comes from your history of repayment. They don't consider income, savings, down payment amount, or personal factors like sex race, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was envisioned as a way to consider only that which was relevant to a borrower's likelihood to pay back a loan.
Your current debt level, past late payments, length of your credit history, and other factors are considered. Your score results from both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of at least six months. This history ensures that there is enough information in your report to build a score. If you don't meet the criteria for getting a score, you might need to work on a credit history before you apply for a mortgage loan.
At Blue Door Mortgage, we answer questions about Credit reports every day. Call us: (617) 527-BLUE(2583).