Before they decide on the terms of your mortgage loan (which they base on their risk), lenders need to discover two things about you: whether you can pay back the loan, and if you will pay it back. To understand whether you can pay back the loan, they assess your income and debt ratio. To assess your willingness to repay, they use your credit score.
The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (high risk) to 850 (low risk). We've written more about FICO here.
Credit scores only consider the information in your credit reports. They don't consider income or personal characteristics. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to assess willingness to pay while specifically excluding any other demographic factors.
Past delinquencies, payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scores. Your score is based on both the good and the bad in your credit history. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will improve your score.
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 credit to calculate an accurate score. Should you not meet the criteria for getting a credit score, you might need to establish a credit history prior to applying for a mortgage loan.
At Homewithloan.com, we answer questions about Credit reports every day. Call us at 9727982110.