When you apply for a mortgage, there are many things a lender will look
at. Your credit scores is one of the most important factors in deciding
whether or not you qualify for a mortgage,
what rate of interest you can get on your loan, and how much money you
can borrow. Generally, the lower your credit
score, the more interest you will have to pay. Similarly, the better
your credit score, the lower your interest rate will be.
The reason your credit score is so important is that it helps lenders evaluate the risk involved in financing your mortgage. The higher your credit score, the lower the risk to a lender. In his eyes, your higher credit score gives him confidence that you can pay your mortgage on time; therefore, he can justify charging a lower interest rate. The lower your credit score, the higher the risk to a lender. A lower credit scores means that there is a greater chance that your monthly payments will not be made on time and that the loan could possibly go in default. Because of the added risk to him, the lender will give you a mortgage, but at a higher interest rate.
Even a small difference in interest rate—as little as 1 or 2 percent—may not seem like a big deal, but in the long run, it will cost you thousands and thousands of dollars. Remember, you may qualify for a loan whether your credit score is good or bad, but your credit score will affect the interest you pay.