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 if you are willing to pay it back. To assess whether you can repay, they look at your income and debt ratio. To assess your willingness to pay back the mortgage loan, they consult your credit score.
Fair Isaac and Company formulated the original FICO score to help lenders assess creditworthines. We've written more on FICO here.
Your credit score is a result of your repayment history. They don't take into account your income, savings, amount of down payment, or factors like sex ethnicity, nationality or marital status. These scores were invented specifically for this reason. Credit scoring was developed to assess a borrower's willingness to pay without considering other irrelevant factors.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scores. Your score results from both positive and negative information in your credit report. Late payments lower your score, but establishing or reestablishing a good track record of making payments on time will improve 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 payment history ensures that there is sufficient information in your credit to calculate an accurate score. Should you not meet the criteria for getting a score, you may need to establish your credit history prior to applying for a mortgage loan.
At America's Money Source, we answer questions about Credit reports every day. Give us a call: 4078987559.