Before they decide on the terms of your mortgage loan, lenders want to know two things about you: your ability to repay the loan, and how committed you are to pay back the loan. To understand your ability to repay, they look at your income and debt ratio. To assess your willingness to pay back the loan, they look at your credit score.
The most commonly used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.
Your credit score comes from your repayment history. They don't consider income or personal characteristics. These scores were invented specifically for this reason. Credit scoring was developed 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 number of credit inquiries are all considered in credit scoring. Your score reflects both the good and the bad in your credit history. Late payments lower your credit score, but consistently making future payments on time will improve your score.
To get a credit score, borrowers must have an active credit account with a payment history of at least six months. This history ensures that there is sufficient information in your credit to build a score. If you don't meet the minimum criteria for getting a credit score, you may need to work on your credit history before you apply for a mortgage.
At American Commerce Mortgage, we answer questions about Credit reports every day. Call us: 714-970-9700.