Your Credit Score: What it means

Before they decide on the terms of your mortgage loan, lenders must know two things about you: your ability to pay back the loan, and how committed you are to pay back the loan. To assess your ability to pay back the loan, lenders look at your debt-to-income ratio. To assess your willingness to pay back the mortgage loan, they look at 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.

Your credit score comes from your history of repayment. They never take into account your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. These scores were invented specifically for this reason. Credit scoring was invented as a way to take into account solely that which was relevant to a borrower's likelihood to pay back the lender.

Your current debt level, past late payments, length of your credit history, and a few other factors are considered. Your score is calculated from both the good and the bad of your credit report. Late payments count against your score, but a consistent record of paying on time will improve it.

For the agencies to calculate a credit score, you must have an active credit account with at least six months of payment history. This payment history ensures that there is sufficient information in your report to assign an accurate score. Should you not meet the criteria for getting a credit score, you might need to work on a credit history prior to applying for a mortgage loan.

North American Financial can answer questions about credit reports and many others. Call us at 702-524-1376.