Your Credit Score: What it means

Before they decide on the terms of your mortgage loan (which they base on their risk), lenders need to know two things about you: whether you can pay back the loan, and how committed you are to pay back the loan. To assess your ability to pay back the loan, they assess your income and debt ratio. In order to assess your willingness to repay the mortgage 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). You can learn more about FICO here.

Credit scores only consider the information in your credit reports. They do not consider your income, savings, down payment amount, or personal factors like gender, ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was developed as a way to consider only that which was relevant to a borrower's likelihood to pay back a loan.

Past delinquencies, payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scores. Your score comes from both the good and the bad of your credit history. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will improve your score.

For the agencies to calculate 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 report to calculate a score. Should you not meet the criteria for getting a credit score, you might need to work on your credit history prior to applying for a mortgage.

At American Mortgage Advisers, Inc, we answer questions about Credit reports every day. Call us: 214-865-7442.