Home > 2014 > Credit Score

What Will a Bad Credit Score Cost You on a Home?

Advertiser Disclosure Comments 0 Comments

You’ve heard mortgage professionals and personal finance experts practically harp on you to check your credit well in advance of getting a mortgage and you may or may not have taken their advice.

But what if you knew that better credit could save you enough to pay for your kid’s college education — or even two of them? Or that you could buy a new car or two, for cash, with the money you saved? Would that motivate you enough to make sure your credit is as accurate, and as strong, as possible?

Those are very real savings that can be achieved today. Here’s an example.

Based on recent mortgage rates, let’s say that someone with poor credit (620 – 639) may be able to get a 30-year fixed rate loan at 5.481% APR. But with above-average credit (680 – 699) they are quoted a 4.974% APR. With excellent credit (740 and above), though, the best available rate is 4.025% APR. (Since mortgage rates change frequently, make sure you get an up-to-date rate quote if you are shopping for a loan.)

The differences in those rates may seem small, but they really do add up. On a $200,000 mortgage loan for example, here is the difference:

Mortgage Chart

click to enlarge

As you can see, a high credit score not only saves this borrower more than $100 a month, over the lifetime of the loan the savings adds up to tens of thousands of dollars! For the person with above-average credit, boosting their credit scores could save them enough money to pay for an in-state four-year college education in many parts of the country. For the person with poor credit, moving up to the excellent credit category could save them enough money to pay for the educations of two children.

A higher credit score can also open up more options. You may be eligible for loan programs that you wouldn’t be with a lower credit score, and it may be faster and easier to complete the loan process since you don’t have to explain or resolve issues like unpaid collection accounts, tax liens or previous mortgage delinquencies, for example.

“A higher interest rate loan as a result of a low credit score carries two major hurdles to overcome,” says Scott Sheldon, a senior loan officer with Sonoma County Mortgages and a contributor to Credit.com. “Paying thousands of dollars more in interest by virtue of having poor credit, as well as needing more income to offset the higher payment. The real cost of poor credit means you’ll need to earn more money, buy less house or put more cash down.”

How to Check Your Credit for a Mortgage

Keep in mind that when you are shopping for a mortgage, virtually all lenders will review your credit reports from all three major credit reporting agencies: Equifax, Experian and TransUnion. That means you should review your credit reports with all three as well, to make sure they are accurate and up-to-date. If you haven’t done so recently, request your free annual credit reports at least two months before you start actively shopping for a loan to give yourself time to correct mistakes. Checking your credit reports this way does not affect your credit scores.

In addition to reviewing all three credit reports, mortgage lenders will typically request your credit scores as well, and rely on the middle of the three scores for determining which programs you may qualify for. For couples applying jointly, the lender will look at the lower of the two middle scores.

Checking your own credit scores for free (which you can do through Credit.com) will help you understand what factors in your credit are strong, and which ones might be an issue. Just remember that there are many different scoring models lenders can use, so the number you see when you check your credit scores may be different than the scores obtained by your mortgage lender. If you are hoping to become a homeowner in the next few years, check your credit reports and scores, and if they are anything less than excellent, work on building better credit.

“Whatever a consumer can do to improve their credit score prior to buying a home will save them thousands of dollars in extra interest,” Sheldon says. “The best thing a consumer can do is to find out specifically what their credit score is, as well as what their credit history shows, and work on improving it to save on a future house payment.”

As you see, the payoff can be huge.

More on Mortgages and Homebuying:

Image: spectrumblue

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team