Here's Exactly How Much a Bad Credit Score Will Cost Homebuyers

By Nathan Hamilton Markets Fool.com

Credit scores are among the most important factors that mortgage lenders use to determine your mortgage rate. Lenders ultimately want to determine your risk as a borrower, and credit scores are helpful predictors.But how much will a bad credit score cost homeowners?

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In the video segment below, Motley Fool analysts Nathan Hamilton and Kristine Harjes answer that question so homeowners can be best prepared to save when buying a house or refinancing a mortgage.

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Kristine Harjes: Everybody knows that it is super important to have a good credit score when you apply for a mortgage, but I don't think everybody realizes just how important it is. Today, we wanted to put some numbers behind it.

Nathan Hamilton: Yeah, and I'm going to be reading off the screen that we ran the numbers on here, but looking at it in our example, essentially, a $309,000 mortgage is the average mortgage that was reported recently, 30-year fixed mortgage. I looked specifically in northern Virginia, where we're located. Looking at the numbers, it's actually pretty significant. [With a] 760 plus credit score, you're going to be paying about $531,000 for that sample mortgage I talked about. Now, bump that credit score down a little bit. If you're in the 680 to 699, which is the average American's credit score range, you're looking at an additional cost of about $12,000. Just for having a different credit score and maybe not managing it as wisely, you're looking over the term of that loan, $12,000.

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Now, where the disparity gets a lot bigger is when you look at the variable credit scores falling into that fair or poor category. If you are in the range of 600 to 619, you're looking just shy of $40,000 in additional interest cost, just for having a lower credit score. How that's essentially worked into the cost is in the interest rate and in terms of what you get with the mortgage.

Harjes: If you look at the difference in monthly payments there, for the person with a score of 760 or above, that's a month payment of $1,475. Compare that to the person with the score between 600 and 619, and they're paying $1,583. This is a pretty big figure that will continue to ding you month after month after month.

Hamilton: In that example, it seems small, $100 difference, but if you...

Harjes: But monthly, over the life of a mortgage...

Hamilton: Twelve months, 30 years, if you add it all up, if you look at, OK, why am I not able to get ahead with my finances, part of it may come down to your credit score and your mortgage.

Harjes: It is essential that, as soon as you realize that you're looking to buy a home, you get your credit score in tip-top shape.

Hamilton: Yeah, preferably beforehand, as well.

Harjes: Yeah, it's always important. There are plenty of things that you can do to try to boost your credit. If you're looking for some tips, you can find them at fool.com/mortgages with our free guide, Five Tips to Increase Your Credit Score Over 800.

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