Before they decide on the terms of your mortgage loan (which they base on their risk), lenders must discover two things about you: your ability to pay back the loan, and how committed you are to pay back the loan. To assess whether you can repay, they assess your income and debt ratio. To assess your willingness to repay, they use your credit score.
Fair Isaac and Company built the first FICO score to help lenders assess creditworthines. For details on FICO, read more here.
Credit scores only take into account the information contained in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when FICO scores were first invented as it is now. Credit scoring was developed as a way to consider solely that which was relevant to a borrower's likelihood to repay a loan.
Your current debt load, past late payments, length of your credit history, and a few other factors are considered. Your score considers positive and negative items in your credit report. Late payments count against your score, but a consistent record of paying on time will improve it.
For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of at least six months. This history ensures that there is enough information in your report to calculate a score. Should you not meet the minimum criteria for getting a credit score, you might need to work on a credit history before you apply for a mortgage.
At Real Property Finance, we answer questions about Credit reports every day. Give us a call at 310-379-5997.
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