Before they decide on the terms of your loan (which they base on their risk), lenders want to know two things about you: your ability to pay back the loan, and how committed you are to pay back the loan. To figure out your ability to repay, lenders look at your debt-to-income ratio. In order to calculate your willingness to pay back the loan, they look at your credit score.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (very high risk) to 850 (low risk). You can learn more on FICO here.
Credit scores only assess the info in your credit reports. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was developed to assess a borrower's willingness to pay while specifically excluding other irrelevant factors.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scores. Your score results from positive and negative items in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will improve your score.
Your credit report should 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 history ensures that there is sufficient information in your credit to assign a score. If you don't meet the minimum criteria for getting a credit score, you may need to work on your credit history prior to applying for a mortgage.
Omni Mortgage Corp. can answer your questions about credit reporting. Call us at 718-441-7000.