Before they decide on the terms of your mortgage loan (which they base on their risk), lenders want to find out two things about you: your ability to repay the loan, and if you are willing to pay it back. To figure out your ability to pay back the loan, they look at your debt-to-income ratio. In order to assess your willingness to pay back the loan, they look at your credit score.
Fair Isaac and Company developed the first FICO score to assess creditworthines. We've written a lot more on FICO 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. "Profiling" was as bad a word when FICO scores were first invented as it is now. Credit scoring was developed as a way to take into account solely that which was relevant to a borrower's likelihood to pay back the lender.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and the number of credit inquiries are all considered in credit scores. Your score considers positive and negative items in your credit report. Late payments will lower your credit score, but consistently making future payments on time will improve your score.
For the agencies to calculate a credit score, you must have an active credit account with a payment history of at least six months. This history ensures that there is sufficient information in your report to calculate a score. Should you not meet the criteria for getting a score, you might need to work on a credit history before you apply for a mortgage loan.
Channel Mortgage LLC can answer your questions about credit reporting. Give us a call: (718) 639-9500.