Having a ‘fair’ credit score in this housing market is costly

Photo (c) jayk7 - Getty Images

An industry report shows that buyers with fair credit could pay hundreds more per month

The importance of having an excellent credit score has never been more apparent than it is in today’s housing market, where home prices are still rising and mortgage rates have nearly doubled this year.

While the average 30-year fixed-rate mortgage is now around 5.7%, it is much higher for homebuyers with only “fair” credit – which translates to a FICO Score of between 580 and 669. The experts at Zillow estimate that someone with “fair” credit would pay nearly $104,000 more over the life of a loan than a buyer of the same house who had “excellent” credit.

Of course, most buyers either sell or refinance their home well before 30 years. On a monthly basis, a buyer with less-than-perfect credit would pay an extra $288 in interest every month they had the loan. In some cases, that extra expense might prevent them from being approved for a mortgage.

Zillow estimates that today's home buyers can expect to pay around 62% more per month to buy a typically priced U.S. home than they would have a year ago. Researchers examined credit scores against current mortgage rates and found that monthly costs are much higher because lenders charge higher interest rates for borrowers with low credit scores or less than perfect credit histories.

Understand your financial picture

Currently, someone with an "excellent" credit score — between 760 and 850 — can qualify for a 30-year fixed-rate mortgage with a 5.099% interest rate. However, a borrower with only “fair” credit could expect to pay 6.688%.

"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. 

Other ways to raise your credit score

Cooper says it will pay off to proactively raise your credit score before applying for a mortgage. There are several steps to achieve that goal, but the most fundamental is to make sure you pay every bill on time every month.

Analyze your credit card balances. Credit agencies look at how much of your available credit you are using and ding your credit if you are using too much. For example, if you have a $4,000 balance on a card with a $5,000 credit limit, your “credit utilization” is 80%. Work on paying down the debt while asking the credit card lender to raise your credit limit. That combination will lower your credit utilization percentage.

There’s a shortcut that can also lower your credit utilization. If a family member has a credit card with a high credit limit and a low balance, ask to be added as a user on the account. Without ever making a purchase, your credit utilization profile will improve.

“Take realistic steps to improve your credit score by doing things like disputing possible report errors and paying down as much debt as possible,” Cooper said. “This could increase the amount of home loan you qualify for."

Take a Financial Relief Quiz. Get matched with an Authorized Partner.