Home buyers with lower credit scores pay an extra $104,000 in mortgage costs

Rhea-AI Summary

On July 28, 2022, Zillow analyzed the impact of credit scores on mortgage costs, revealing significant disparities in expenses. Buyers with a 'fair' credit score could pay $288 more monthly compared to those with an 'excellent' score, accumulating an extra $103,626 over a 30-year mortgage. The analysis emphasizes that better credit scores are crucial for affordable homeownership. Zillow also highlights that credit-related barriers disproportionately affect people of color, with Black applicants facing higher mortgage denial rates. The report underscores the importance of improving credit to enhance home-buying opportunities.

Positive

• Zillow's analysis highlights the significant savings potential for buyers with higher credit scores, promoting financial literacy and awareness.
• The inclusion of timely rent payments in mortgage qualification can increase access to homeownership, particularly for underserved communities.

Negative

• Buyers with 'fair' credit scores face higher mortgage costs, impacting affordability and increasing financial burden.
• The analysis reveals systemic barriers in homeownership for people of color, indicating a persistent racial disparity in mortgage access.

• 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

FAQ

How much more do buyers with lower credit scores pay in mortgage costs compared to those with excellent credit scores?

Buyers with 'fair' credit scores could pay up to $288 more monthly than those with 'excellent' credit scores, totaling an extra $103,626 over a 30-year mortgage.

What are the implications of poor credit scores for homeownership?

Poor credit scores lead to higher monthly mortgage payments, making homeownership less affordable and accessible, especially for people of color.

How does Zillow suggest improving access to mortgage loans?

Zillow recommends improving credit scores by disputing errors and reducing debt, which can enhance mortgage qualification chances.

What recent changes have been made to mortgage qualification criteria?

Fannie Mae and Freddie Mac now allow timely rent payments to be considered in mortgage applications, potentially aiding those with limited credit history.