Buying a home can be an important step toward long-term financial stability. But for the millions of Americans with rocky credit histories and low scores, achieving that stability can be a whole lot more expensive.
A U.S. borrower with a credit score between 640 and 679 (often considered “fair”) could ultimately pay roughly $720 more per year in mortgage payments than if their credit were “excellent,” according to a Zillow analysis of Annual Percentage Rate (APR) terms offered to borrowers on Zillow Mortgages. Put another way, a borrower with a fair score will pay 7 percent more over the life of a 30-year mortgage for the same home as an otherwise identical borrower with a credit score above 760 (widely considered “excellent” credit).
Over the course of a typical 30-year mortgage, that adds up to almost $21,000 more paid by a borrower with fair credit buying the nation’s median home than a borrower with excellent credit – roughly equal to one year’s tuition costs for an out-of-state student at a public university, or the cost of a new car.
Location, Location
Of course, it can’t be said enough: All real estate is local, and home prices (and therefore, mortgage amounts) vary widely nationwide, so the consequences of lower credit inflate the final bill more in pricier markets. Furthermore, the APR offered to a borrower with worse credit also varies across regions as lenders offer different rates based on location.
For example: In recent weeks, a buyer with an excellent credit score in Los Angeles earning the area’s median income and purchasing the typical L.A. home would have expected to be offered an average APR of 4.50 percent, according to our model. Assuming a 20 percent down payment, over the life of a 30-year, fixed-rate mortgage, she would spend $31,000 a year, or $942,000 total, on a $645,000 home. But if she purchased that home with a credit score roughly 80 points lower, in the “fair” territory, her APR could have been 5.12 percent – and her yearly cost would be $2,300 higher. If she stayed with that mortgage for the life of the 30-year loan without refinancing, she could end up spending almost $70,000 more than her excellent-credit peer.
If that same L.A. buyer improved her credit score to between 680 and 720, a range around the national average (According to FICO last year’s average was 700), she would only pay an extra $17,000 more over the life of the loan. Under these same assumptions, the total additional costs over the life of a 30-year loan on a typical local home for those with fair credit compared to excellent credit range from $129,000 in San Jose to around $9,000 in Pittsburgh among the larger metros.
Use the tool below to explore how credit scores impact APRs and total borrowing costs for home buyers with excellent, good and fair credit scores nationwide and in several large markets.[1]
Interestingly, though maybe unsurprisingly, in relatively low-cost housing markets like Cincinnati, homes are not only considerably less expensive, but the relative penalty for lower credit is also less severe. Having excellent credit in might save up to $12,000 over the life of a loan on the typical home in Cincinnati, while having fair credit increases the total cost by only 5.2 percent, with an APR .45 percentage points higher. In Los Angeles, that gap is 7.4 percent and .62 percentage points
Lasting Impacts
Important note: These estimates likely represent the maximum impact of fair versus excellent credit, because credit scores aren’t set in stone – they can be improved over time and by making regular payments on the mortgage itself. It is also often possible to secure a lower APR on a mortgage by paying more up front. Few buyers see a 30-year loan through to the end, and homeowners often have the option to refinance their loan to more favorable terms should their credit improve and/or interest rates fall.
However, the impact of bad credit may soon be more enduring than it has been in the recent past. As mortgage rates rise and refinancing becomes less attractive, more homeowners might hold onto their original purchase loan longer, even as their credit improves – potentially leaving many homeowners stuck a lot longer with the high cost of low credit.