Before they decide on the terms of your mortgage loan (which they base on their risk), lenders need to discover two things about you: whether you can pay back the loan, and if you are willing to pay it back. To assess your ability to pay back the loan, lenders look at your debt-to-income ratio. In order to assess your willingness to repay the loan, they consult your credit score.
Fair Isaac and Company calculated the first FICO score to help lenders assess creditworthines. For details on FICO, read more here.
Your credit score comes from your repayment history. 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 FICO scores were invented as it is today. Credit scoring was developed as a way to take into account solely what was relevant to a borrower's likelihood to pay back the lender.
Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score comes from both the good and the bad of your credit report. Late payments count against you, but a record of paying on time will raise it.
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 calculate an accurate score. Some borrowers don't have a long enough credit history to get a credit score. They should build up credit history before they apply for a loan.
Channel Mortgage LLC can answer your questions about credit reporting. Call us: (718) 639-9500.