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 pay back the loan, and how committed you are to pay back the loan. To figure out your ability to repay, lenders assess your debt-to-income ratio. To calculate your willingness to repay the mortgage loan, they look at your credit score.
The most widely used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.
Your credit score comes from your repayment history. They don't consider income or personal characteristics. 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.
Past delinquencies, payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scores. Your score considers positive and negative items in your credit report. Late payments count against you, but a consistent record of paying on time will improve it.
To get a credit score, you must have an active credit account with at least six months of payment history. This history ensures that there is sufficient information in your credit to generate an accurate score. If you don't meet the criteria for getting a score, you might need to work on your credit history before you apply for a mortgage loan.
At Churchill Mortgage Company, we answer questions about Credit reports every day. Give us a call at (703) 551-4107.