A Score that Really Matters: Your Credit Score

Before deciding on what terms they will offer you a loan (which they base on their risk), lenders want to discover two things about you: whether you can repay the loan, and your willingness to repay the loan. To assess your ability to repay, they look at your income and debt ratio. To calculate your willingness to repay the mortgage loan, they consult your credit score.

The most commonly 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 more about FICO here.

Credit scores only consider the information contained in your credit reports. They don't take into account your income, savings, down payment amount, or personal factors like sex race, nationality or marital status. These scores were invented specifically for this reason. "Profiling" was as dirty a word when these scores were first invented as it is now. Credit scoring was envisioned as a way to take into account solely what was relevant to a borrower's likelihood to repay a loan.

Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score reflects 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 improve your score.

Your report should 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 enough information in your report to calculate a score. If you don't meet the criteria for getting a credit score, you might need to establish a credit history prior to applying for a mortgage.

Baywide Funding Corporation can answer questions about credit reports and many others. Give us a call: 650 428 0234.