Before they decide on the terms of your loan (which they base on their risk), lenders need to know two things about you: whether you can repay the loan, and your willingness to pay back the loan. To understand whether you can pay back the loan, they look at your income and debt ratio. To assess how willing you are to repay, they use your credit score.
Fair Isaac and Company developed the original FICO score to assess creditworthines. We've written more about FICO here.
Credit scores only take into account the information in your credit reports. They never take into account your income, savings, amount of down payment, or personal factors like sex race, nationality or marital status. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to consider only that which was relevant to a borrower's likelihood to repay the lender.
Your current debt level, past late payments, length of your credit history, and other factors are considered. Your score considers positive and negative items in your credit report. Late payments count against you, but a 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 history ensures that there is sufficient information in your credit to build an accurate score. Should you not meet the minimum criteria for getting a credit score, you may need to establish your credit history prior to applying for a mortgage.
At Tenby J. Dahman, we answer questions about Credit reports every day. Call us: 3038627760.