Before they decide on the terms of your loan, lenders need to find out two things about you: your ability to repay the loan, and your willingness to pay back the loan. To assess whether you can repay, they look at your income and debt ratio. To calculate your willingness to repay the mortgage loan, they look at your credit score.
Fair Isaac and Company formulated the original FICO score to help lenders assess creditworthines. We've written more about FICO here.
Your credit score is a result of your repayment history. 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 assess willingness to repay the loan while specifically excluding any other personal factors.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scoring. Your score comes from the good and the bad in your credit report. Late payments count against your score, but a consistent record of paying on time will raise it.
Your credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This payment history ensures that there is enough information in your credit to calculate a score. Should you not meet the minimum criteria for getting a score, you might need to establish a credit history prior to applying for a mortgage.
American Commerce Mortgage can answer your questions about credit reporting. Call us at 714-970-9700.