Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders need 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 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. Your FICO score ranges from 350 (high risk) to 850 (low risk). We've written a lot more on FICO here.
Credit scores only assess the information contained in your credit reports. They don't take into account income, savings, amount of down payment, or demographic factors like gender, race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was invented as a way to consider solely what was relevant to a borrower's likelihood to repay a loan.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score is based on the good and the bad in your credit history. Late payments count against you, but a record of paying on time will raise it.
To get 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 assign an accurate score. If you don't meet the minimum criteria for getting a score, you may need to establish a credit history before you apply for a mortgage.
At Tenby J. Dahman, we answer questions about Credit reports every day. Give us a call: (303) 862-7760.