Before they decide on the terms of your mortgage loan (which they base on their risk), lenders want to find out two things about you: your ability to pay back the loan, and if you will pay it back. To figure out your ability to repay, they assess your debt-to-income ratio. In order to assess your willingness to repay the loan, they look at your credit score.
The most commonly used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more about 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. Credit scoring was developed as a way to take into account solely what 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 number of inquiries are all considered in credit scoring. Your score comes from both the good and the bad in your credit history. Late payments lower your credit score, but consistently making future payments on time will raise your score.
To get a credit score, borrowers must have an active credit account with at least six months of payment history. This history ensures that there is sufficient information in your credit to generate an accurate score. Should you not meet the criteria for getting a score, you might need to work on a credit history prior to applying for a mortgage.
At Harbor View Lending* a DBA of Megastar Financial, we answer questions about Credit reports every day. Give us a call: (207) 571-8034.