Before lenders decide to lend you money, they have to know if you are willing and able to repay that loan. To figure out your ability to pay back the loan, lenders look at your debt-to-income ratio. In order to calculate your willingness to repay the mortgage loan, they look at your credit score.
The most commonly used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). 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 factors like gender, ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was developed to assess willingness to repay the loan without considering any other personal factors.
Deliquencies, payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scoring. Your score is calculated wtih both positive and negative information in your credit report. Late payments count against you, but a consistent record of paying on time will raise it.
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 report to build a score. Should you not meet the minimum criteria for getting a credit score, you might need to establish a credit history prior to applying for a mortgage loan.
Channel Mortgage LLC can answer your questions about credit reporting. Give us a call: (718) 639-9500.