Lew Sichelman
Homebuyers can secure financing with a credit score below 600. But they can save thousands – perhaps tens of thousands – if they can boost those all-important scores to 760.
It can take time to do that – maybe three years or more. But it will be worth the effort, according to a new report by AD Mortgage, a firm that funds loans originated by independent mortgage brokers.
Depending on the state, the report said that borrowers can save roughly between $10,000 and $46,000 in mortgage interest over the life of their 30-year loans by getting their credit score up to 760.
When measured against local household income, the affordability impact of a higher score becomes even more pronounced. In higher-cost states, savings from achieving the magic 760 number can exceed 40 percent of annual household income, the study found.
Why It Matters
A credit score is a snapshot in time of how well you demonstrate your ability to handle credit. The higher the score, the better the terms of the loan, particularly the interest rate. For homebuyers, a 760 score is the Holy Grail: the threshold for securing the most competitive mortgage rates.
The study “reinforces just how central credit preparation is to homebuying affordability,” said Max Slyusarchuk, AD Mortgage’s CEO. “Two borrowers with similar incomes can experience dramatically different buying power depending on their credit score and the state in which they purchase.”
“Even a 20- or 30-point difference in FICO can mean tens of thousands of dollars over the life of a mortgage,” he wrote in the report.
Credit scores are produced by a number of companies, but they are often referred to as FICO scores after the company that originated them, Fair Isaac.
Among the study’s most notable findings is the variation in savings by location.
In California, a state with notoriously high housing prices, borrowers who improve their scores to 760 can save approximately $42,753 over the life of a loan. In Texas, where prices are more reasonable, borrowers can save about $26,881.
In higher-priced states, even small improvements in interest rates translate into substantial savings. In lower-cost states, the penalty for not having top-tier credit is often proportionally larger, relative to loan amount and income.
For borrowers in lower-housing-cost regions, the study said, “the relative financial penalty for having suboptimal credit can be disproportionately high.”
In other words, big total savings don’t always mean big real-world benefit.
“In Hawaii, a borrower with a 760-plus credit score can save $46,000 over 30 years – compared to someone with the average FICO score in the state,” said the report. “But in Mississippi, the savings are smaller – $17,000 – yet still represent almost 30 percent of local annual income.”
In both cases, the savings matter, but their impact varies with income levels and home prices.
Three Questions to Ask
While it’s always advisable to improve your credit score – automobile dealers, insurance companies and other businesses also use it to make decisions – the rewards are diluted the longer it takes.
Your mortgage savings might still be worth it long-term, but in the meantime, you might do better to pay off high-interest debt or to invest in something else.
To really understand whether it’s worth focusing on credit improvement before buying a house, the study advises, borrowers should consider three questions: How long will it take to reach 760, how much interest can be saved, and what is that savings worth compared to your income?
Said Slyusarchuk, “Our analysis shows that the answers vary widely by state – and the most useful insights come when you look at credit, income and housing costs together, not in isolation.”
So, how do you raise your credit score? Here are a few ideas:
Check your credit records on a regular basis. If you find mistakes – accounts that aren’t yours, misspellings, accounts that are listed as open that you closed out long ago – dispute them with the three major credit repositories. By law, they have to respond.
Never be late with a payment. Payments that are not received on time result in major dings to your score. If you are late, or if you are going to be late, call your creditor and explain the reason. Many creditors will lift the late fee, extra interest you might owe and, best of all, not report you to the credit bureaus.
Keep your credit balances low: no higher than 30 percent of the limits of your accounts. This will show that you handle credit wisely and have enough room in the accounts to take care of any emergencies that may come your way.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
