Before they decide on the terms of your mortgage loan, lenders must find out two things about you: your ability to repay the loan, and how committed you are to repay the loan. To assess your ability to pay back the loan, they assess your income and debt ratio. To assess how willing you are to repay, they use your credit score.
The most commonly 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). We've written a lot more on FICO here.
Credit scores only consider the information in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as bad a word when FICO scores were first invented as it is in the present day. Credit scoring was envisioned as a way to take into account only what was relevant to a borrower's willingness to repay the lender.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scoring. Your score is calculated from both the good and the bad in your credit report. Late payments lower your credit score, but establishing or reestablishing a good track record of making payments on time will improve your score.
For the agencies to calculate a credit score, you must have an active credit account with six months of payment history. This payment history ensures that there is sufficient information in your report to generate a score. Some folks don't have a long enough credit history to get a credit score. They may need to spend a little time building up credit history before they apply for a loan.
Southwest Funding #841 can answer questions about credit reports and many others. Call us at (512) 291-6100.