Before deciding on what terms they will offer you a mortgage loan, lenders need to know two things about you: whether you can pay back the loan, and if you are willing to pay it back. To figure out your ability to pay back the loan, lenders assess your debt-to-income ratio. To assess your willingness to repay, they use your credit score.
The most commonly used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (very high risk) to 850 (low risk). We've written more about FICO here.
Credit scores only consider the info in your credit reports. They never consider 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. "Profiling" was as bad a word when FICO scores were invented as it is today. Credit scoring was envisioned as a way to assess a borrower's willingness to repay the loan while specifically excluding any other demographic 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 considers both positive and negative information in your credit report. Late payments count against your score, but a consistent record of paying on time will improve it.
To get a credit score, you must have an active credit account with a payment history of six months. This history ensures that there is enough information in your report to calculate a score. If you don't meet the criteria for getting a credit score, you might need to work on your credit history before you apply for a mortgage loan.
Blue Door Mortgage can answer questions about credit reports and many others. Call us: (617) 527-BLUE(2583).