A borrower with a “fair” credit score could pay $100,000 more over the life of a 30-year mortgage for the same home than an otherwise identical borrower with an “excellent” score would, according to a new Zillow analysis.
Today’s home shoppers can expect to pay around 62 percent more per month to buy a typically priced U.S. home than they would have a year ago, owing to higher prices and interest rates, so Zillow examined credit scores against current mortgage rates and found that monthly cost increases are exacerbated for millions of Americans with low credit scores or less than perfect credit histories.
A borrower with an “excellent” credit score – between 760 and 850 on the FICO scorecard – could qualify for a 30-year fixed-rate mortgage with a 5.099-percent interest rate when the data-crunching took place. For the same loan, a similar borrower with a “fair” credit score – between 620 and 639 – qualifies for a 6.688-percent rate.
This equates to a $288 difference in monthly mortgage payments and nearly $103,626 in interest over the life of a 30-year fixed loan, based on the current price of a typical U.S. home ($354,165).
“When you are thinking about buying a home, the best first step you can take is to fully understand your financial picture, what you can afford and your outstanding debts or obligations,” said Libby Cooper, Zillow Home Loans vice president. “If you find you have low credit, take realistic steps to improve your credit score by doing things like disputing possible report errors and paying down as much debt as possible.”
Fannie Mae and Freddie Mac recently adopted policies that include timely rent payments in their automated underwriting systems. Lenders and brokers can submit bank-account data (with borrower permission) to identify 12 months of prompt rent payments to help potential borrowers qualify for a mortgage.
“While inclusion of timely rent payments doesn’t change a borrower’s credit score, it can have a positive impact on how lenders view a borrower’s credit-worthiness,” Cooper said. “This move shows how effective policy changes can help consumers build a strong financial foundation that unlocks home-ownership.”