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Before they decide on the terms of your mortgage loan, lenders must know two things about you: whether you can pay back the loan, and if you are willing to pay it back. To figure out your ability to pay back the loan, lenders look at your debt-to-income ratio. To assess how willing you are to repay, they use 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.
Credit scores only take into account the information contained in your credit reports. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when these scores were invented as it is today. Credit scoring was envisioned as a way to assess willingness to pay without considering other irrelevant factors.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scores. Your score reflects the good and the bad in your credit report. Late payments lower your credit score, but consistently making future payments on time will raise your score.
Your 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 credit to generate a score. Some folks don't have a long enough credit history to get a credit score. They may need to build up credit history before they apply.
Mid America Mortgage Company NMLS 150009 can answer your questions about credit reporting. Give us a call: (866) 298-0700.