For Home Buyers with Lower Credit Scores, a Higher Cost of Ownership

Home buyers with a lower credit score pay thousands of dollars more for the same home than a buyer with an excellent credit score, said Zillow Inc., Seattle.

The Zillow analysis said nationally, under current market conditions, a borrower with an “excellent” credit score could get a mortgage with a 4.50 percent annual percentage rate. A similar borrower with a “fair” credit score could get a 5.10 percent rate. Over the lifetime of a 30-year mortgage, this means a buyer with a fair credit score can end up spending $21,000 more than a buyer with an excellent credit score for the typical U.S. home.

Zillow Senior Economist Aaron Terrazas said that disparity is magnified in expensive markets, where the penalty for a lower credit score tends to be higher in more expensive areas. For eample, in San Jose, Calif., where the median home value is $1.3 million, a buyer with a lower credit score can end up paying $129,000 more than a buyer with an excellent credit score over the full life of the loan.

Homebuyers with excellent and fair credit scores in Pittsburgh see the smallest difference in mortgage rates, and as a result, also see the smallest difference in lifetime mortgage costs among the country’s 35 biggest markets. A buyer with a fair credit score would pay about $9,000 more on the median Pittsburgh home than someone with excellent credit.

The analysis noted even if a homeowner doesn’t pay out the full 30-year term on a loan, the annual costs of a fair credit score add up. A buyer with a fair credit score could pay $700 more every year on the typical U.S. home than someone with an excellent score.

“When you buy a home, your financial history determines your financial future,” Terrazas said. “Homebuyers with weaker credit end up paying substantially higher costs over the lifetime of a home loan. Of course, homeowners do have the option to refinance their loan if their credit improves, but as mortgage rates rise this may be a less attractive option.”

The analysis said one-third of all buyers said determining how much home they could afford was a challenge, making it the most frequently named financing concern during the home buying process. Beyond the list price of a home, other costs such as mortgage interest, property taxes and homeowners insurance can add up, impacting the overall affordability for buyers.