A Score that Really Matters: The Credit Score
Before they decide on the terms of your mortgage loan (which they base on their risk), lenders must discover two things about you: whether you can pay back the loan, and if you are willing to pay it back. To assess your ability to repay, they look at your income and debt ratio. In order to assess your willingness to repay the mortgage loan, they consult your credit score.
Fair Isaac and Company built the first FICO score to assess creditworthines. For details on FICO, read more here.
Your credit score is a direct result of your history of repayment. They don't take into account your income, savings, down payment amount, or personal factors like gender, ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as bad a word when these scores were invented as it is in the present day. Credit scoring was invented as a way to take into account only what 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 is calculated wtih both positive and negative items in your credit report. Late payments will lower your score, but consistently making future payments on time will improve your score.
To get 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 an accurate score. If you don't meet the criteria for getting a credit score, you may need to work on your credit history prior to applying for a mortgage loan.
At Homewood Mortgage, Inc., we answer questions about Credit reports every day. Call us: 205-941-1484.