You Can Buy a Home With Poor Credit-It Just Costs More
You can buy a home with poor credit scores but you pay more for the privilege. There is a FICO score, 620, below which most lenders will not go.
Lenders have lots of data obtained over the years that shows the relationship between credit scores and default rates for borrowers. The correlation is not absolute which is to say that not everyone with a FICO score of between 600 and 649 will default, but 27% of people in that segment range have defaulted.
See the chart below to see the % default segmented by FICO score.
Credit scores provide lenders a quantifiable means to measure a potential borrowers risk or stated another way, the likelihood that a loan will be paid as agreed. Poor credit scores are a burden. As this photo describes, the burden can be handled, but it is a struggle.
I took a look at published interest rates by credit score segment from last Friday. The chart below is a rough illustration of the affect credit scores have on payments for three loan amounts. This is a rough illustration only covering principal and interest. A loan officer would provide a more precise estimate of all charges and fees associated with a specific loan.
This chart uses $150,000, $250,000, and $417,000 as loan amounts and estimates monthly payments based on those amounts. The average home loan in the San Antonio area is around $200,000, and jumbo loans begin at $417,000. Chart below is for a thirty-year mortgage.
*Payment Chart-Principal and interest only for illustrative purposes
The monthly difference shows the difference in rates at the extremes. The seven year number is an artificial construct taken for this example since some studies estimate the likelihood of a home sale every seven years.
Again this example is for principal and interest only. Other expenses and fees involved in the home purchase will be additional (property taxes, HOA fees) and are not affected by credit scores. It is my understanding that insurance companies do take credit scores into account for rate making purposes. I do not have any information on how they use the credit scores in establishing rates. Check with your insurance agent or the state insurance commission..
I'll be happy to work with you on your home search and if you have credit issues with which you need help, I can make a referral to reputable credit counselors. In some cases it may be better to boost your credit scores before seeking a loan for your next home. You can buy a home with poor credit, it just costs more.