Before deciding on what terms they will offer you a loan (which they base on their risk), lenders want to discover two things about you: your ability to pay back the loan, and your willingness to pay back the loan. To assess your ability to repay, they assess your debt-to-income ratio. To calculate your willingness to repay the mortgage loan, they consult your credit score.
The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (high risk) to 850 (low risk). You can learn more on FICO here.
Credit scores only take into account the information contained in your credit reports. They don't take into account your income, savings, amount of down payment, or demographic factors like gender, ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when FICO scores were first invented as it is in the present day. Credit scoring was envisioned as a way to assess willingness to pay without considering any other demographic factors.
Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scores. Your score considers both positive and negative items in your credit report. Late payments count against you, but a record of paying on time will improve it.
For the agencies to calculate a credit score, you must have an active credit account with six months of payment history. This history ensures that there is sufficient information in your report to calculate an accurate score. Some borrowers don't have a long enough credit history to get a credit score. They should spend some time building credit history before they apply.
Alternative Mortgage Group can answer your questions about credit reporting. Call us at 561-395-4264.