Before deciding on what terms they will offer you a mortgage loan, lenders must know two things about you: your ability to repay the loan, and if you will pay it back. To assess your ability to repay, they look at your debt-to-income ratio. In order to calculate your willingness to pay back the mortgage loan, they look at your credit score.
The most widely used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.
Credit scores only take into account the info in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. 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, 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 lower your score, but consistently making future payments on time will raise your score.
For the agencies to calculate a credit score, borrowers must have an active credit account with at least six months of payment history. This history ensures that there is sufficient information in your credit to calculate a score. If you don't meet the minimum criteria for getting a score, you might need to establish a credit history before you apply for a mortgage.
Blue Door Mortgage can answer your questions about credit reporting. Give us a call: (617) 527-BLUE(2583).