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 repay the loan, and if you are willing to pay it back. To understand your ability to repay, they assess your income and debt ratio. To assess your willingness 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. The FICO score ranges from 350 (high risk) to 850 (low risk). We've written more on FICO here.
Credit scores only take into account the information in your credit profile. They do not take into account income, savings, amount of down payment, or personal factors like sex ethnicity, national origin or marital status. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to assess a borrower's willingness to pay without considering other personal factors.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scores. Your score comes from both the good and the bad in your credit report. Late payments lower your credit score, but establishing or reestablishing a good track record of making payments on time will improve your score.
For the agencies to calculate a credit score, you must have an active credit account with six months of payment history. This history ensures that there is enough information in your credit to assign an accurate score. If you don't meet the minimum criteria for getting a score, you may need to work on a credit history before you apply for a mortgage loan.
First Community Bank of Central Al. can answer your questions about credit reporting. Give us a call: (334) 285-8850.