Credit Scoring

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Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders need to find out two things about you: your ability to repay the loan, and how committed you are to repay the loan. To understand whether you can repay, they assess your income and debt ratio. To calculate your willingness to repay the loan, they consult your credit score.

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

Your credit score is a direct result of your history of repayment. They do not consider your income, savings, down payment amount, or factors like sex ethnicity, national origin or marital status. These scores were invented specifically for this reason. "Profiling" was as dirty a word when these scores were invented as it is today. Credit scoring was developed to assess willingness to repay the loan while specifically excluding any other irrelevant factors.

Deliquencies, payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scoring. Your score is calculated with positive and negative information 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.

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 credit to build a score. Some folks don't have a long enough credit history to get a credit score. They should build up credit history before they apply for a loan.

Lake Area Mortgage can answer questions about credit reports and many others. Call us at 651-209-2900.