Before lenders make the decision to give you a loan, they want to know if you are willing and able to pay back that mortgage loan. To assess your ability to repay, they look at your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.
The most widely 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 is a result of your history of repayment. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was envisioned as a way to take into account only what was relevant to a borrower's willingness to pay back a loan.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scores. Your score is calculated wtih both positive and negative items in your credit report. Late payments lower your credit score, but consistently making future payments on time will improve your score.
Your credit report should 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 sufficient information in your report to generate a score. If you don't meet the minimum criteria for getting a credit score, you might need to work on a credit history before you apply for a mortgage.
Alternative Mortgage Group can answer your questions about credit reporting. Call us: 561-395-4264.