Before they decide on the terms of your loan (which they base on their risk), lenders must find out two things about you: your ability to pay back the loan, and if you will pay it back. To understand your ability to pay back the loan, they assess your income and debt ratio. To assess your willingness to pay back the loan, they consult your credit score.
The most commonly 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 more on FICO here.
Your credit score comes from your history of repayment. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was envisioned as a way to consider solely what was relevant to a borrower's willingness to repay the lender.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scoring. Your score considers both positive and negative information in your credit report. Late payments lower your score, but establishing or reestablishing a good track record of making payments on time will improve your score.
To get a credit score, you must have an active credit account with a payment history of six months. This history ensures that there is sufficient information in your report to generate a score. Should you not meet the criteria for getting a credit score, you might need to establish a credit history prior to applying for a mortgage.
AmeriBest Mortgage can answer questions about credit reports and many others. Give us a call at (321) 777-7277.