Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders must find out two things about you: your ability to pay back the loan, and if you will pay it back. To assess whether you can pay back the loan, they assess your income and debt ratio. To assess how willing you are 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 (very high risk) to 850 (low risk). You can learn more on FICO here.
Your credit score is a result of your repayment history. 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 take into account only what was relevant to a borrower's likelihood to repay the lender.
Past delinquencies, payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scores. Your score is based on both the good and the bad in your credit report. Late payments count against you, but a record of paying on time will improve it.
Your report should contain 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 generate an accurate score. Some borrowers don't have a long enough credit history to get a credit score. They should spend some time building up a credit history before they apply.
Blue Door Mortgage can answer questions about credit reports and many others. Call us: (617) 527-BLUE(2583).