Roughly 30% of American consumers have credit scores that are so bad they wouldn’t be able to get a mortgage today, even if they managed to scrounge together a down payment of 20%.
The estimates come from the Zillow Mortgage Marketplace, which analyzed some 25,000 loan quotes and purchase requests from early September and announced its findings today, including:
Borrowers with credit scores under 620 who requested purchase loan quotes for 30-year fixed, conventional loans were unlikely to receive even one loan quote on Zillow Mortgage Marketplace(1), even if they offered a relatively high down payment of 15 to 25 percent. Nearly one-third of Americans, or 29.3 percent, has a credit score this low, according to data provided by myFICO.com.
By contrast, nearly half of Americans (47%) had excellent credit scores (720 or higher), and it was these folks who were eligible for mortgages with historically low interest rates: an average low APR of just 4.3% for a 30-year fixed mortgage.
What about the folks in the middle, with credit scores decent enough to qualify for mortgages but not good enough to get the best interest rates? Well, their middling credit scores mean the interest rates they’ll pay would likely range between 4.44% and 4.73%, and the difference will wind up costing them a bit over the course of their mortgage. The Zillow release explains:
For those with mid-range credit scores of 620 to 719, improving one’s credit score can mean a significant savings in interest over time. For each 20-point credit score increase, the average low APR declines 0.12 percent, which for a $300,000 home, with a 20 percent down payment, equates to a savings of $6,400 over the life of a 30-year loan.
The moral? Irresponsible spending can hurt you in two ways: immediately, and in the long run. First, it does the obvious: Your disposable income is disposed of quickly, your finances are strained, and the chances you’ll go into debt and won’t be able to pay it off will increase. Second, as you struggle to pay off your debts, your credit score will decline, and therefore you won’t be eligible for the best interest rates, potentially costing you thousands more over the years.
And if your credit score is really bad, you might not be eligible for a mortgage at all nowadays—which, come to think of it, maybe isn’t such a bad thing.