Credit scores

In determining the terms of a loan to be offered to a mortgage applicant, two important factors are considered: 1) the ability of the applicant to pay back the loan, and 2) the applicant's willingness to pay. To determine ability debt-to-income ratio is considered, while willingness is determined by studying credit history. 

In today's mortgage marketplace "credit scores" are increasingly relied upon by lenders to make loan decisions. A credit score is essentially a "snapshot in time" of a person's credit profile.  The most widely used credit scores were developed by Fair Isaac & Company, Inc. and have become know as FICO scores. A FICO score runs between 350 (high risk) and 850 (low risk).

Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. The score considers both positive and negative information in a credit report. Late payments will lower the score, while establishing a record of making payments on time will raise the score.

Different portions of an applicant's credit history are given different weights. For example, thirty-five percent of a FICO score is based on specific payment history, while thirty percent of the score is attributed to the current level of indebtedness. Length of credit history (five year old accounts have greater value than six month old lines) and types of credit available (installment loans versus revolving debt) each account for 15% of the score. Finally, five percent is of a score is determined by the number of  recent credit inquiries.

To get a credit score, a credit report must contain at least one account which has been open for a minimum of six months, and at least one account that has been updated in the past six months. This ensures that there is enough information in a report to generate an accurate score. For those who do not meet the minimum criteria for getting a score, establishing a credit history prior to applying for a mortgage is suggested.

What can you do about your FICO score? Plenty. But it takes time and is not subject to quick fixes. The most important thing is to know your FICO score and to ensure that your credit history is correct. Conveniently, Fair Isaac has created a web site (www.myFICO.com) that let's you do just that. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. Also available is some helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score. Each of the credit services offers similar services on their web sites: www.equifax.com, www.experian.com, and www.transunion.com.