Before they decide on the terms of your loan, lenders must find out two things about you: your ability to repay the loan, and if you will pay it back. To figure out your ability to pay back the loan, they look at your debt-to-income ratio. In order to calculate your willingness to repay the loan, they consult your credit score.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more on FICO here.
Your credit score is a result of your history of repayment. They don't 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. Credit scoring was developed as a way to take into account solely what was relevant to a borrower's likelihood to repay a loan.
Your current debt level, past late payments, length of your credit history, and other factors are considered. Your score is based on the good and the bad of your credit report. Late payments count against your score, but a consistent record of paying on time will raise it.
Your credit report should have 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 enough information in your credit to assign a score. Some folks don't have a long enough credit history to get a credit score. They should spend some time building a credit history before they apply.
At Contemporary Mortgage Services, Inc, we answer questions about Credit reports every day. Call us: 407-834-3377.
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