- Improving your credit score can save hundreds a month on
your mortgage
- A borrower with a "fair" credit score could pay $103,626 more over the life of a 30-year mortgage
for the same home than an otherwise identical borrower with an
"excellent" score would
- Barriers to housing that result from credit issues are often
more profound for people of color
SEATTLE, July 28,
2022 /PRNewswire/ -- Elevated home prices and rising
interest rates are feeding into housing affordability woes for
potential buyers, especially those with lower credit scores. A new
Zillow analysis shows that, nationally, buyers with "fair" credit
could be paying up to $288 more on
their monthly mortgage payment than those with "excellent"
credit.
Today's home shoppers can expect to pay around 62% more per
month to buy a typically priced U.S. home than they would have
a year ago. Zillow examined credit scores against current mortgage
rates and found that such 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 — can qualify for a 30-year fixed-rate mortgage with a 5.099%
interest rate1. For the same loan, a similar
borrower with a "fair" credit score — between 620 and 639 —
qualifies for a 6.688% rate1. 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)2.
"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. This could increase the amount of home loan you qualify
for."
The chart below illustrates how a buyer's credit profile plays
an important role in how much a home ultimately costs. Buyers who
make raising their credit score part of their initial steps in the
home-buying process typically have more buying power and lower
monthly payments.
The cost of buying a typically priced U.S. home based on
credit scores3
FICO®
Score
|
Estimated Annual
Percentage Rate1
|
Monthly
Payment
|
Total Loan
Cost
|
760–850
|
5.099 %
|
$1,538
|
$553,743
|
700–759
|
5.321 %
|
$1,557
|
$567,739
|
680–699
|
5.498 %
|
$1,608
|
$579,014
|
660–679
|
5.712 %
|
$1,647
|
$592,782
|
640–659
|
6.142 %
|
$1,725
|
$620,882
|
620–639
|
6.688 %
|
$1,826
|
$657,369
|
There is a direct correlation between credit security — having a
strong credit history and structural access to credit offerings —
and higher homeownership rates. The homeownership rate is lower in
counties that are more "credit insecure," meaning they are home to
high numbers of residents with poor or no credit history. That cuts
off millions — particularly Black and Latinx residents — from the
wealth-building advantages of homeownership. Additionally, Black
applicants are denied a mortgage at a rate 84% higher than white
applicants, and credit history is the most common reason cited for
those denials. Limited traditional financial services in Black
and other communities of color are a significant factor in the lack
of credit history and the inability to build a high credit
score.
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. This move shows how
effective policy changes can help consumers build a strong
financial foundation that unlocks homeownership," said Cooper.
About Zillow Group:
Zillow Group, Inc. (NASDAQ: Z and
ZG) is reimagining real estate to make it easier to unlock life's
next chapter. As the most visited real estate website in
the United States,
Zillow® and its affiliates offer customers an on-demand
experience for selling, buying, renting or financing with
transparency and ease.
Zillow Group's affiliates and subsidiaries include
Zillow®, Zillow Offers®, Zillow Premier
Agent®, Zillow Home Loans™, Zillow Closing Services™,
Zillow Homes, Inc., Trulia®, Out East®,
ShowingTime®, Bridge Interactive®,
dotloop®, StreetEasy® and
HotPads®. Zillow Home Loans, LLC is an Equal Housing
Lender, NMLS #10287 (www.nmlsconsumeraccess.org).
1 Based on the FICO Loan Savings
Calculator on myfico.com. Rates current as of July 26, 2022.
2 According to the Zillow Home Value
Index.
3 Loan calculations assume a 20% down
payment on a home cost of $354,165
with a 30-year fixed mortgage. Total loan cost includes the loan
value and interest cost over the life of the loan.
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SOURCE Zillow