Before deciding on what terms they will offer you a loan, lenders need to find out two things about you: whether you can pay back the loan, and your willingness to pay back the loan. To assess your ability to repay, they assess your income and debt ratio. To assess how willing you are to repay, they use your credit score.
The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.
Credit scores only consider the information in your credit profile. They do not take into account income, savings, amount of down payment, or personal factors like gender, race, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when FICO scores were first invented as it is today. Credit scoring was developed to assess willingness to pay while specifically excluding other personal factors.
Deliquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scores. Your score is calculated wtih both positive and negative information 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, you must have an active credit account with at least six months of payment history. This payment history ensures that there is sufficient information in your report to assign a score. Should you not meet the criteria for getting a score, you might need to work on a credit history before you apply for a mortgage.
At Southwest Funding #841, we answer questions about Credit reports every day. Give us a call: (512) 291-6100.