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Consumer Credit Trends & Monthly Mortgage Payments

A new Zillow analysis of consumer credit shows that, nationally, buyers with "Fair" credit could be paying up to $288 more on their monthly mortgage payment than those with "Excellent" credit. The study found that 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 rate. For the same loan, a similar borrower with a "Fair" credit score—between 620 and 639—qualifies for a 6.688% 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).

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 scores

"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 VP. "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."

As Zillow notes, 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,” added Cooper. “This move shows how effective policy changes can help consumers build a strong financial foundation that unlocks homeownership.”

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.
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