Before they decide on the terms of your loan, lenders must discover two things about you: your ability to pay back the loan, and how committed you are to pay back the loan. To assess your ability to repay, they assess your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.
The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk). For details on FICO, read more here.
Your credit score is a direct result of your repayment history. They do not consider 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 these scores were invented as it is today. Credit scoring was envisioned as a way to assess willingness to repay the loan without considering any other demographic factors.
Your current debt load, past late payments, length of your credit history, and other factors are considered. Your score results from positive and negative items in your credit report. Late payments count against your score, but a consistent record of paying on time will improve it.
For the agencies to calculate a credit score, you must have an active credit account with at least six months of payment history. This history ensures that there is sufficient information in your credit to assign a score. If you don't meet the minimum criteria for getting a score, you may need to work on your credit history prior to applying for a mortgage.
At C2 Financial Corporation, we answer questions about Credit reports every day. Give us a call at (727) 478-2797.
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