Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders need to know two things about you: your ability to pay back the loan, and if you will pay it back. To assess your ability to pay back the loan, they look at your debt-to-income ratio. In order to assess your willingness to pay back the loan, they consult your credit score.
The most commonly used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk). You can learn more about FICO here.
Credit scores only consider the info in your credit reports. They don't take into account income, savings, amount of down payment, or factors like sex ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when these scores were invented as it is in the present day. Credit scoring was developed to assess a borrower's willingness to repay the loan while specifically excluding other irrelevant factors.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of credit inquiries are all calculated into credit scores. Your score is calculated from both the good and the bad of your credit history. Late payments count against your score, but a consistent record of paying on time will raise it.
For the agencies to calculate a credit score, you must have an active credit account with a payment history of at least six months. This payment history ensures that there is sufficient information in your report to calculate an accurate score. Should you not meet the minimum criteria for getting a score, you might need to work on a credit history prior to applying for a mortgage loan.
Milestone Mortgage, Inc. NMLS#136714 can answer questions about credit reports and many others. Give us a call: 3175959600.