As anyone who has watched silly commercials about people with poor credit being doomed to drive hoopties or make their living in costume at a Renaissance fair knows, a bad credit score costs you! You may be denied the card you want, a gas card, a job, or an apartment plus embarrassment, with or without costume.
If your credit score is low and you want to buy a home, how much will those credit-card funded dinners and shoes of the past cost you? The results are amazing.
According to Credit Technologies, who spoke at a recent National Association of Mortgage Brokers seminar, the difference between having a credit score over 720 vs. 620 is an interest rate of 5% versus one of 8.75%. As the chart shows, a differing interest rate on a 30 year mortgage can have a big impact on the payments for a $125,000 mortgage, including taxes.
|Total Amount Paid||Monthly payment|
If your household income is about $35,000 a year, a house with $125,000 mortgage might put your monthly cost for a house at about 25%, so a payment of $853.32 might be just about right. If your credit rating is over 760, the payment would be right there. The lower your credit score is, the higher your payment will be. If your score is only 620, your payment would be $200 higher. If is it 580, your payment will be nearly $300 higher.
Needless to say, the total amount paid for mortgages also increases with the combination of a low credit score and higher interest rates. Most people do not think about that in our mobile society where people move about every seven years, but the $127,000 difference from the highest to the lowest rating is staggering.
The most obvious thing about these numbers is that a lower credit score can put an “affordable” home based on income, out of the range of affordability. To keep the payment around $850 dollars per month if you have a 620 score, you could only afford a mortgage of $105,000. If your rating was under 550, you could only afford a mortgage of $87,500.
Why is this? Banks maintain that the chance of delinquency increases as the credit score decreases. According to BCS Alliance, a person with a 780 score has 576 to 1 odds of becoming delinquent by 90 days; a 700 score has a 288 to one chance. At 630, the odds are 17:1; after that the likelihood increases rapidly: 616 score, 9:1 odds, 600 score 4:1 odds, and 585 score 2:1 odds.
If your card score is low, you may have the best intentions in the world, but it will be a hard sell to find a reasonable mortgage rate. This is why it is important to start getting your credit report in order before you start looking for a home. If you have one that is costing you too much in interest and payments, this could be a good time to sell your home and get your credit straight before taking on home ownership again.