Before they decide on the terms of your mortgage loan (which they base on their risk), lenders want to know two things about you: your ability to pay back the loan, and how committed you are to pay back the loan. To assess your ability to pay back the loan, they 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 were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (high risk) to 850 (low risk). You can find out more about FICO here.
Credit scores only assess the information in your credit reports. They never take into account income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when FICO scores were first invented as it is now. Credit scoring was invented as a way to take into account only what was relevant to a borrower's likelihood to repay a loan.
Your current debt level, past late payments, length of your credit history, and a few other factors are considered. Your score results from positive and negative information in your credit report. Late payments count against your score, but a consistent record of paying on time will raise it.
For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of six months. This payment history ensures that there is enough information in your report to build a score. Should you not meet the criteria for getting a score, you might need to establish your credit history prior to applying for a mortgage.
Channel Mortgage LLC can answer questions about credit reports and many others. Give us a call at (718) 639-9500.