Credit Scoring

Before they decide on the terms of your loan (which they base on their risk), lenders need to find out two things about you: your ability to repay the loan, and if you will pay it back. To assess your ability to pay back the loan, they look at your income and debt ratio. To calculate your willingness to pay back the mortgage loan, they look at your credit score.

The most widely used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more about FICO here.

Your credit score comes from your history of repayment. They don't take into account your income, savings, down payment amount, or factors like gender, race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was developed as a way to take into account only what was relevant to a borrower's willingness to repay a loan.

Your current debt level, past late payments, length of your credit history, and a few other factors are considered. Your score considers positive and negative items in your credit report. Late payments will lower your credit score, but establishing or reestablishing a good track record of making payments on time will improve your score.

Your credit report must have 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 payment history ensures that there is sufficient information in your report to assign a score. Should you not meet the minimum criteria for getting a score, you may need to establish your credit history prior to applying for a mortgage.

At Hometown Financial Services, we answer questions about Credit reports every day. Give us a call: (772) 252-6724.