Your Credit Score: What it means

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Before they decide on the terms of your mortgage loan, lenders must discover two things about you: your ability to pay back the loan, and if you will pay it back. To figure out your ability to pay back the loan, lenders assess your debt-to-income ratio. To assess your willingness to repay, they use your credit score.

The most widely 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). You can learn more on FICO here.

Credit scores only consider the information contained in your credit reports. They never consider your income, savings, amount of down payment, or personal factors like gender, race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when these scores were first invented as it is today. Credit scoring was developed as a way to take into account only what was relevant to a borrower's willingness to repay the lender.

Your current debt level, past late payments, length of your credit history, and a few other factors are considered. Your score is based on both the good and the bad of your credit report. Late payments lower your credit score, but consistently making future payments on time will improve your score.

Your report must contain 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 history ensures that there is sufficient information in your credit to generate an accurate score. Should you not meet the minimum criteria for getting a score, you might need to work on your credit history prior to applying for a mortgage loan.

RPM Mortgage - Paul Schectman Senior Mortgage Advisor can answer your questions about credit reporting. Give us a call at 415-381-7006.