Homebuyers with lower credit scores incur additional mortgage costs

Homebuyers with lower credit scores incur additional mortgage costs of more than $100,000.

According to a recent Zillow survey, homebuyers nationwide may spend up to $288 more per month for their mortgage than those with "excellent" credit.

A typical priced U.S. home today will cost home buyers about 62 percent more each month than it would have a year ago. Zillow compared credit scores to current mortgage rates and discovered that for millions of Americans with poor credit or imperfect credit histories, such monthly cost increases are made worse.

A 30-year fixed-rate mortgage with an interest rate of 5.099 percent is available to borrowers with "excellent" credit scores, which range from 760 to 850. A similar borrower who meets the criteria for the same loan and has a "fair" credit score (between 620 and 649) is eligible for a rate of 6.688 percent. Based on the current price of a typical U.S. home ($354,165), this translates to a difference of $288 in monthly mortgage payments and close to $103,626 in interest over the course of a 30-year fixed loan.

"The best first step you can take when thinking about buying a home is to completely grasp your financial situation, what you can afford, and your ongoing debts or responsibilities," said Libby Cooper, vice president of Zillow Home Loans. "If you discover that your credit score is poor, take practical actions to raise it by challenging any potential report inaccuracies and making as many debt repayments as you can. Your ability to borrow more money for a property may grow as a result."

The graph below demonstrates how a buyer's credit history affects how much a home will ultimately cost. The buying power and monthly payments of buyers that include improving their credit score in their initial home-buying procedures are often higher.

Using credit ratings, the price of a typical American home

Higher homeownership rates are directly correlated with credit security, which includes having a solid credit history and structural access to lending options. In counties that are more "credit insecure," or have a large population of people with bad or no credit histories, the homeownership rate is lower. That denies millions of people — especially Black and Latinx residents — access to the benefits of homeownership for accumulating wealth. Additionally, Black applicants are turned down for mortgages at a rate that is 84% greater than that of White applicants, and the most typical justification given is poor credit history. Lack of credit history and inability to establish a high credit score are both directly related to the limited access to traditional financial services in Black and other communities of color.

This article was contributed on Aug 02 2022