Before they decide on the terms of your loan, 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 figure out 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 called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (high risk) to 850 (low risk). For details on FICO, read more here.
Your credit score comes from your history of repayment. They do not take into account income, savings, amount of down payment, or demographic factors like sex ethnicity, national origin or marital status. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to consider only that which was relevant to a borrower's likelihood to repay a loan.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scoring. Your score is calculated wtih positive and negative items in your credit report. Late payments count against you, but a consistent record of paying on time will raise it.
For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of six months. This history ensures that there is enough information in your report to generate a score. Some borrowers 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.
At Nationwide Home Loans, we answer questions about Credit reports every day. Give us a call at 5626935048.