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Before they decide on the terms of your loan (which they base on their risk), lenders need to discover two things about you: whether you can repay the loan, and if you are willing to pay it back. To understand your ability to pay back the loan, they look at your income and debt ratio. To assess your willingness to pay back the loan, they consult your credit score.
The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more about FICO here.
Credit scores only consider the info contained in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was envisioned as a way to assess a borrower's willingness to pay while specifically excluding other personal factors.
Your current debt level, past late payments, length of your credit history, and a few other factors are considered. Your score comes from both the good and the bad of your credit history. Late payments lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
Your credit 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 sufficient information in your credit to assign an accurate score. Should you not meet the minimum criteria for getting a credit score, you may need to work on your credit history prior to applying for a mortgage loan.
At Scott Fenner & The Mortgage Team, we answer questions about Credit reports every day. Give us a call: 602-647-2555.