Before deciding on what terms they will offer you a mortgage 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 pay back the loan. To figure out your ability to pay back the loan, they look at your debt-to-income ratio. To assess your willingness to repay, they use your credit score.
Fair Isaac and Company formulated the first FICO score to assess creditworthines. You can learn more on FICO here.
Credit scores only take into account the info contained in your credit reports. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when these scores were invented as it is now. Credit scoring was developed as a way to take into account only that which was relevant to a borrower's willingness to pay back a loan.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and the number of credit inquiries are all considered in credit scores. Your score is based on the good and the bad in your credit report. Late payments lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
Your report should have 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 a score. Should you not meet the criteria for getting a credit score, you might need to work on a credit history prior to applying for a mortgage loan.
Equity Edge Mortgage, Inc. can answer questions about credit reports and many others. Call us: 719-425-2226.