Before deciding on what terms they will offer you a loan (which they base on their risk), lenders want to know two things about you: whether you can pay back the loan, and if you are willing to pay it back. To figure out your ability to pay back the loan, they assess your debt-to-income 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 (very high risk) to 850 (low risk). You can find out more on FICO here.
Credit scores only consider the information in your credit profile. They never take into account income, savings, down payment amount, or factors like gender, race, nationality or marital status. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to assess willingness to pay without considering other irrelevant factors.
Past delinquencies, payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but consistently making future payments on time will improve your score.
Your credit 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 enough information in your report to build a score. If you don't meet the criteria for getting a credit score, you might need to establish your credit history before you apply for a mortgage.
Debbie Oliver NMLS License #248252, America's First Choice Mortgage, NMLS License #279234 can answer questions about credit reports and many others. Call us at 214-663-5355.