Before they decide on the terms of your loan (which they base on their risk), lenders want to discover two things about you: your ability to pay back the loan, and how committed you are to repay the loan. To understand your ability to pay back the loan, they look at your income and debt ratio. To assess how willing you are to repay, they use your credit score.
Fair Isaac and Company formulated the original FICO score to help lenders assess creditworthines. You can learn more on FICO here.
Your credit score comes from your history of repayment. They do not take into account your income, savings, down payment amount, or demographic factors like gender, race, national origin or marital status. These scores were invented specifically for this reason. Credit scoring was developed as a way to consider only that which was relevant to a borrower's likelihood to repay a loan.
Past delinquencies, payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scoring. Your score is calculated wtih positive and negative items in your credit report. Late payments count against you, but a consistent record of paying on time will improve it.
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 payment history ensures that there is sufficient information in your credit to build an accurate score. Should you not meet the minimum criteria for getting a score, you may need to establish your credit history before you apply for a mortgage loan.
At Contemporary Mortgage Services, Inc, we answer questions about Credit reports every day. Give us a call: 407-834-3377.
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