Before lending you money, creditors - including mortgage lenders - need to determine how likely you are to pay it back. One way to do that is by examining your past use of credit, which is recorded on your credit report.

When you apply for a mortgage, the lender will evaluate your credit history to see how you have managed credit in the past, and then use that information to determine how likely you are to keep up with payments in the future. By predicting how well you will manage your debt, the mortgage company can measure the risk involved with lending you money. Everything else being equal, someone who has consistently made payments on time is a lower credit risk than someone who has not. Because lenders usually offset risk with higher financing charges, having a better credit history generally means getting more favorable loan terms. And, because some loan options are riskier than others, good credit may give you more flexibility in structuring your mortgage.