Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders need to know two things about you: your ability to repay the loan, and if you will pay it back. To assess your ability to repay, lenders assess your debt-to-income ratio. To assess your willingness to repay, they use your credit score.
The most commonly used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (high risk) to 850 (low risk). For details on FICO, read more here.
Credit scores only assess the info contained in your credit reports. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was invented as a way to consider only what was relevant to a borrower's likelihood to pay back a loan.
Deliquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scoring. Your score results from both positive and negative items in your credit report. Late payments will lower your credit score, but consistently making future payments on time will improve your score.
Your credit 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 history ensures that there is enough information in your credit to generate a score. Some borrowers don't have a long enough credit history to get a credit score. They should spend some time building up credit history before they apply.
Contemporary Mortgage Services, Inc can answer your questions about credit reporting. Call us at 407-834-3377.
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