A Score that Really Matters: Your Credit Score

Before they decide on the terms of your mortgage loan (which they base on their risk), lenders want to discover two things about you: whether you can repay the loan, and how committed you are to pay back the loan. To assess your ability to repay, they look at your debt-to-income ratio. To assess your willingness 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 (high risk) to 850 (low risk). You can find out more about FICO here.

Credit scores only take into account the info in your credit reports. They never take into account income, savings, down payment amount, or demographic factors like gender, ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as bad a word when these scores were first invented as it is in the present day. Credit scoring was envisioned as a way to assess a borrower's willingness to pay without considering any other demographic factors.

Your current debt load, past late payments, length of your credit history, and a few other factors are considered. Your score results from both positive and negative information in your credit report. Late payments lower your credit score, but consistently making future payments on time will raise your score.

To get a credit score, you must have an active credit account with a payment history of six months. This history ensures that there is enough information in your credit to generate an accurate score. Should you not meet the criteria for getting a credit score, you may need to establish your credit history before you apply for a mortgage.

Baywide Funding Corporation can answer your questions about credit reporting. Give us a call at 650 428 0234.