Unless you have the available cash, you will be financing your real estate purchase. That means applying and qualifying for a mortgage loan. In doing so, you will undoubtedly be faced with the realities of your credit score. But what is a credit score and what part does it play in your mortgage loan process? Here are the answers to these and other frequently asked questions about credit scores.

What is a credit score?
Whether you realize it or not, you have a credit score. Your score is a summary of your credit data expressed in the form of a three-digit number. That number essentially represents your credit rating. You might hear your credit score referred to as your FICO® score. This is because the computer model most commonly used as a basis to compute credit scores was developed by Fair Isaac Corporation, a company that provides analytic solutions, such as predictive models, that automate and improve decision strategies. Generic FICO® scores range from 300 to 850. In general, the higher your score, the lower risk you represent to lenders in terms of paying back your loan. On the reverse side, the lower your score, the greater credit risk you are assumed to be.

How are credit scores computed?
Your credit score is the result of a sophisticated statistical analysis on the information in your credit report. Data elements drawn from your credit file are plugged into mathematical formulas that calculate your score. Those formulas and your score also take into account how your information compares to the credit track record of thousands, sometimes even millions, of other consumers with similar credit profiles.

According to Fair Isaac, the data that is used in the calculation of your credit score can be grouped into five categories. These categories are not equally important in the scoring process. Each is assigned a weight based on how strong a predictor it is of credit risk. These categories are presented below in order from greatest to least in terms of weight, with the first two categories being the most heavily weighted.

• Payment History
• Amounts Owed
• Length of Credit History
• New Credit
• Types of Credit Used

Each of the three major U.S. credit bureaus calculate credit scores. They use credit scoring software to do so. Even though each bureau has its own system and calculations, the statistical scoring models they use have been standardized so that the scores from each bureau are comparable.

How do credit scores affect mortgage loans?
Mortgage lenders recognize that there is a correlation between credit scores and risk of delinquency or default on mortgage loans. They therefore use credit scores to help them determine eligibility of borrowers as well as terms offered on the loan. Credit scores are not usually the sole determinant for approval or rejection, however they are a very important factor in that decision. If the mortgage loan is approved, credit scores can also impact the interest rate offered. Generally speaking the higher the credit risk, the higher the interest rates.

Does everyone have a credit score?
Not necessarily. Some consumers may not have enough information, or enough recent information, in their credit report for scoring models to generate an accurate score. Thus, if you have little or no credit history, you probably will not have a credit score.

Does your credit score change over time?
Yes it does. Your credit score is not a static number. Rather it is a fluid value that adjusts up or down based on the data that is in your credit file when your score is calculated. Since your credit data is continually updated as creditors provide new information based on your activity, your score changes to reflect that underlying information. How much your score changes will depend on your activity during that given time. If you are consistent in your credit behavior, your score will remain relatively stable. You are more likely to see a bigger change if you significantly modify your behavior.

How do you find out your credit score?
There is a fee associated with getting your credit score. You can access that information through each of the three national credit bureaus or the central credit report site sponsored by all three bureaus:

• Equifax (equifax.com)
• TransUnion (transunion.com)
• Experian (experian.com)
• Central credit report site is AnnualCreditReport.com

You can also purchase information on all three of your credit scores through myFICO.com, a division of Fair Isaac. This site also has a credit education section that provides additional detailed information about understanding and managing your credit score.