Before they decide on the terms of your mortgage loan, lenders need to find out two things about you: whether you can pay back the loan, and how committed you are to repay the loan. To figure out your ability to repay, they assess your debt-to-income ratio. To assess your willingness to repay, they use your credit score.
The most commonly used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (high risk) to 850 (low risk). We've written more on FICO here.
Your credit score comes from your repayment history. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when these scores were first invented as it is now. Credit scoring was envisioned as a way to assess willingness to repay the loan without considering any other irrelevant factors.
Deliquencies, payment behavior, debt level, length of credit history, types of credit and number of inquiries are all considered in credit scoring. Your score is calculated from both the good and the bad in your credit history. Late payments count against your score, but a consistent record of paying on time will improve it.
Your report must have at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This payment history ensures that there is enough information in your report to assign an accurate score. Should you not meet the criteria for getting a score, you might need to establish your credit history prior to applying for a mortgage loan.
Alternative Mortgage Group can answer questions about credit reports and many others. Call us: 561-395-4264.