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Before lenders decide to lend you money, they have to know if you're willing and able to repay that loan. To assess your ability to repay, they assess your income and debt ratio. To assess your willingness to pay back the loan, they check your credit score.
Fair Isaac and Company built the first FICO score to assess creditworthiness.
Credit scores only consider the info in your credit reports. They don't consider income or personal characteristics. These scores were invented specifically for this reason. "Profiling" was as dirty a word when these scores were first invented as it is now. Credit scoring was developed to assess a borrower's willingness to pay while specifically excluding any other personal factors.
Delinquencies, payment behavior, debt level, length of credit history, types of credit and number of inquiries are all considered in credit scoring. Your score reflects the good and the bad in your credit history. Late payments will lower your score, but consistently making future payments on time will raise your score. Keep in mind lenders will run a Residential Mortgage Credit Report or RMCR. This "tri-merge" credit report tells us your score from each of the three major credit bureaus (Experian, Transunion, and Equifax) and merges all your credit items into one easy-to-read report. The highest score you can get is 850 so the score will be different from what you see when you look at your own score, which is rated differently.
To get a credit score, you must have an active credit account with a payment history of at least six months. This history ensures that there is sufficient information in your report to assign an accurate score. If you don't meet the criteria for getting a score or if you have had credit established for less than two years, you may need to work on a credit history before you apply for a conventional mortgage loan. There are options for those with no credit history to qualify for an FHA loan where you can qualify based off "alternative credit." Alternative credit is where we verify payment history and references for apartments you may have rented, cell phone bills, medical bills, etc. Alternative credit can not be used to overcome derogatory credit history although sometimes you can ask your utility companies to report to the bureaus to help with the scoring.
Cha Mortgage Company can answer your questions about credit reporting. Give us a call at 503-753-7577.
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