Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders want to find out 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 repay, lenders look at your debt-to-income ratio. To assess how willing you are to repay, they use 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 (high risk) to 850 (low risk). You can find out more about FICO here.
Your credit score is a direct result of your history of repayment. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was developed to assess a borrower's willingness to pay while specifically excluding any other demographic factors.
Deliquencies, payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scoring. Your score results from positive and negative information in your credit report. Late payments lower your credit score, but establishing or reestablishing a good track record of making payments on time will raise 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 sufficient information in your report to build a score. Some folks don't have a long enough credit history to get a credit score. They should build up a credit history before they apply.
Harbor View Lending* a DBA of Megastar Financial can answer your questions about credit reporting. Give us a call at (207) 571-8034.