Mortgage Lenders Low Credit Scores – The Cost of Bad Credit

Mortgage Lenders Low Credit Scores

Mortgage Lenders Low Credit Scores – The Cost of Bad Credit

Getting into credit trouble can happen to the best of us. One missed payment on a high-limit credit card quickly adds up to a damaged credit score. While you may not think bad credit is all that important, your credit plays a critical role.  Primarily when it comes to how well you’re able to move forward with a home purchase.  Put simply, bad credit costs you significantly in the short- and long-term. Especially when mortgage loan officers and brokers deal with the requirements of mortgage lenders low credit scores.

Dollars and Costs

Mortgage Lender Risk – What is the Standard?

Risk-based lending, is defined as the practice of offering different interest rates and repayment terms based on risk for default. This definition is the standard for the majority of mortgage lenders. Most mortgage lenders view you as a high-risk borrower when your credit is less than perfect.  Late payments, accounts in collections, maxed out credit cards, or a bankruptcy all signal a red flag for mortgage lenders. To offset this risk, mortgage lenders and brokers must comply with conditions of mortgage lenders low credit scores requirements. Translation, you’ll pay more for a mortgage financing.

Low-risk borrowers are more likely to receive more affordable repayment terms on a mortgage loan given their solid financial history. If you fall into the high-risk category, the cost of borrowing, or the interest rate, will be far higher. In fact, high risk borrowers that fall below the standard could have their mortgage loan application declined .

By reviewing factors not related to your credit score, mortgage lenders may work with you if your credit is poor . They may evaluate your income and the stability of your job.  They may also look at  assets to repay a debt, or education history if you’re just starting out.

While not the standard, additional factors can help in getting you the mortgage loan you need.  However, when it comes to qualifying for a mortgage loan, a strong credit history should be priority number one Ways How to Improve Your Credit Score.

Higher Payments… on Everything

The total cost of mortgage borrowing is the most harmful way bad credit troubles you. With a lackluster credit history, a mortgage loan could come with a much higher interest rate. You’ll realize an even higher cost for the same amount borrowed when the loan numbers get bigger.

A mortgage for $200,000 at a 3.75% interest rate would equate to a $946 principal and interest payment each month. With a total cost of $340,427 over the life of the loan. Bump that interest rate up to 6% and your monthly payment jumps to $1,199. With a staggering total repayment of $431,676 over the same 30-year period.

cost written out on chalk board

To make matters worse, you’ll also experience higher interest rates on credit cards and personal loans.  These accounts are higher in cost because there is no asset to back them up in the case of default. The national average rate for a borrower with good credit is 15.07%, for a bad credit is 22.73%. These numbers are staggering, making credit for a new home out of reach for those with a bad financial history.

In addition, home insurers may look at your credit to determine how much of a risk you may be. Insurance companies use your credit score as well as previous claims to decide how much your  home premium should be. With bad credit, you’re far more likely to pay unnecessarily high homeowners insurance costs.

Reduced Borrowing Power

Putting monthly costs aside for a moment, bad credit also directly impacts your borrowing power in a variety of ways. With poor credit, even if the interest rate is high, mortgage lenders often limit the amount of available credit. In fact, the amount of available credit can be limited .

Whether that is for a home purchase or a cash flow boost when financial emergencies happen. Similarly, insurers may reduce the coverage you have on your home if your credit is lacking. Lessening total coverage means they are taking on less risk in the event you make a claim. Reduced borrowing power when something goes wrong may leave you out of luck when it come to credit availability. Reduced borrowing power is limited when loan personnel evaluate what mortgage lenders low credit scores requirements are.

meter showing less power

When it comes to home financing, bad credit impacts your total overall costs.  Bad credit not only limits the amount of new credit, but also higher interest rates.  Home insurers work in a similar manner, focusing on protecting their bottom line more so than yours. To avoid the high cost of bad credit, control spending, make on-time payments, and check the accuracy of your credit.

 

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4 Comments

  1. Hi Patrick

    I never knew that a bad credit score can impact so materially on your cost of borrowings! In fact I didn’t think that by missing one credit card payment that could also affect your credit score! Aren’t banks and other financial institutions meant to let you know to get your house in order before they give you a bad credit rating?

    In any case thanks so much for sharing this information and providing me with much needed advice around debt and credit!

    Best regards
    Gina

    • Hi Gina – Thanks for commenting on the post.

      Yes, unfortunately a bad credit score can actually limit your ability to do many things like buy a car or a house.

      If you miss payments that can be damaging as well.  Credit card companies report monthly your payment activity to the credit reporting agencies.  Lots of missed payments will ding your credit score and limit your borrowing power.

      Banks and other financial institutions are in the business of making loans and taking deposits, so it’s up to you maintain good credit.

       It’s best to monitor your score regularly and pull a credit report each year.  Make sure you review it for mistakes as those can be removed from you report by contacting the credit reporting agencies.

      Here is link to a post on our site that may be of more assistance.  It provides links to other sites that provide your credit score for free and a link to the free annual credit report portal.

      https://creditsquared.com/how-

      Hope this helps some.

      Best of luck,

      Creditsquared

  2. Hi Patrick,

    This is very well written article! A lot of people do not realize the long term consequences of missing payments will do to their Credit Score. 

    It would be very difficult to get approved for loans if our credit score is too low. Banks and financial institutions simply can’t trust high risk consumers with low credit scores to approve their loan requests. So it’s very important that we pay our bills on time every month. 

    • Hey Wilson – It’s nice to hear you enjoyed the article.

      It’s true, may consumers do not understand the consequences of not making their payments on time every time. It damages their credit score and limits their ability to get the best credit offers available from lenders.

      It’s particularly important when it comes to financing a loan with a mortgage lender.  A low credit score will translate into a higher interest rate that can cost the consumer thousands of dollars over the life of the loan.

      A one percent difference in interest rate between 4% to 5% will cost a consumer on a 30 year mortgage loan close to $43,000 more over the loan term.  So the cost of bad credit can be very expensive.

      So watch your credit and do all the right things that will help you maintain a good credit score.

      If you’re interested here is a post I wrote that  provides some additional tips on how to improve your credit score.

      https://creditsquared.com/best

      All the best,

      Patrick

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