Your credit score is a testament to your creditworthiness. Decades ago, there was a time when people in small towns knew each other and could get loans and credit based on simple understandings and the fact that people knew and trusted one another. For most of western civilization, those days are long gone. Credit scores have been implemented to give lenders and banks an idea of who you are as a person and how likely you are to keep your financial promises. So, when you walk into a financial institution to get a mortgage rate, it doesn't matter how you dress, what you say, or how friendly you are. Your credit score is going to tell the lender everything he or she needs to know to qualify or deny you for a loan.
Your credit score is going to be used to calculate how much money you can borrow, the interest rate of the money you borrow, and other factors. If your credit score is 750 or higher, there is a better chance you can borrow more and have a lower interest rate. Granted, how much you can borrow will likely depend on your income as well. If your credit score is low, say in the 500s or 600s, there is a greater risk of being denied a loan. Even if you can secure a loan, you'll most likely pay higher interest rates, which could cost you tens of thousands of dollars over the life of your mortgage.
Banks look at you as a risk. They are putting up hundreds of thousands of dollars over several decades in hopes of seeing their investment returned with interest applied. Are you worth the risk? Your credit score will contain a variety of information that tells lenders whether or not you're worth the risk. Do you pay your bills on time? Do you have a low or high debt-to-income ratio? What is your credit utilization score? Have you defaulted on any loans? Do you currently or have you ever had any outstanding debts? Lenders will look for answers to these types of questions in your credit report.
Before you apply for a mortgage, it's best to understand how the lenders think. You'll want to clean up your credit and get your score as high as possible before applying. When you do apply, you'll have what's known as a hard inquiry on your credit report, which can lower your credit score. You have to give your explicit permission before any lender runs a hard inquiry, so be sure not to give permission too often. Ultimately, this means that you want to have your credit in excellent shape before the hard inquiry is pulled. This way, you will receive the best interest rate.
Your credit score is how banks see you when you apply for a mortgage loan. The last thing you want is for them to see you in a poor light. A low credit score of about 650 will raise your interest rate, affect your private mortgage insurance or PMI, impact your closing costs, and essentially make owning a home a difficult experience. Fixing your credit before you buy can change all of this for the better, which is why it's a good idea to start working on making these positive changes today.