Before they decide on the terms of your loan (which they base on their risk), lenders must know two things about you: whether you can pay back the loan, and how committed you are to repay the loan. To assess whether you can pay back the loan, they assess your income and debt ratio. To calculate your willingness to pay back the mortgage loan, they look at 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 (very high risk) to 850 (low risk). We've written a lot more on FICO here.
Your credit score comes from your history of repayment. They do not take into account your income, savings, down payment amount, or demographic factors like sex race, nationality or marital status. These scores were invented specifically for this reason. "Profiling" was as bad a word when these scores were first invented as it is today. Credit scoring was developed as a way to take into account only what was relevant to a borrower's likelihood to repay the lender.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scoring. Your score considers both positive and negative information 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 history ensures that there is sufficient information in your report to assign a score. If you don't meet the minimum criteria for getting a score, you may need to establish your credit history before you apply for a mortgage loan.
At Homewithloan.com, we answer questions about Credit reports every day. Give us a call: 972.798.2110.