You Can Buy a Home With Poor Credit-It Just Costs More

By
Real Estate Agent with Coldwell Banker D'Ann Harper REALTORS® TX License #0566780

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.

Default Rate by FICO Segment


Credit scores provide lenders a quantifiable means to measure a potential borrowers risk or stated another way, the likelihood that a loan will bepoor credit, it's a burden but can be handled 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.

Payments and FICO Score Impact

    *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.

 

Comments (17)

Tim Lorenz
TIM LORENZ - Elite Home Sales Team - Mission Viejo, CA
949 874-2247

Yes it will.  I like the bicycle delivery guy.  Have a great day.

Mar 23, 2014 03:02 PM
Bob Crane
Woodland Management Service / Woodland Real Estate, KW Diversified - Stevens Point, WI
Forestland Experts! 715-204-9671

Interesting info Wayne, I generally don't put much stock in credit scores, I have met far too many exceptions.

Great picture, it is always impressive what some people will do to make a living in countries were they don't have the luxuries that we have in our country.

Mar 23, 2014 04:06 PM
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Good morning Wayne. You are right about rates being high for those with lower credit scores. I have been able to get lower rates for clients even with the lower scores.

Make it a great week!

Mar 23, 2014 06:40 PM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Wayne, I have heard more lenders are jumping into the secondary market and providing loans to those with lower scores.

Mar 24, 2014 12:42 AM
Potranco Realty
Potranco Realty - San Antonio, TX
"Sold with Potranco Realty"

Hello Wayne, consumers often don't realize that a credit score is important when buying real estate and how their rates are determined especially first time home buyers. I like your charts and explanation in your post.

Mar 24, 2014 02:41 AM
Wayne Johnson
Coldwell Banker D'Ann Harper REALTORS® - San Antonio, TX
San Antonio REALTOR, San Antonio Homes For Sale

Tim-Thanks, that is a hard worker. 

Bob-I agree that credit scores are not the end all, but they do allow for a means to evaluate risk. 

Mar 24, 2014 12:42 PM
Wayne Johnson
Coldwell Banker D'Ann Harper REALTORS® - San Antonio, TX
San Antonio REALTOR, San Antonio Homes For Sale

Joe-You know the rules so I'm not surprised you know how to help your clients. 

Joan-Yes, they are, and as the risk goes up so do costs. 

Bob-As with many issues we usually don't know what we don't know until it's too late. 

Mar 24, 2014 01:11 PM
Roy Kelley
Retired - Gaithersburg, MD

This is good information for prospective home buyers. Consumers with poor credit will have to pay a premium when borrowing funds.

Mar 24, 2014 11:51 PM
Noah Seidenberg
Coldwell Banker - Evanston, IL
Chicagoland and Suburbs (800) 858-7917

This is true Wayne. Pay on time and do a Refi later. Great post.

Mar 25, 2014 12:34 AM
Rose King
David Tracy Real Estate - Friendswood, TX
Friendswood / Pearland / Houston Bay Area

Great informatioin, Wayne. I like buyers who have both a high credit score and little or no debt. (Don't we all!) I have seen some buyers with decent scores declined for a loan because of their debt-to-income ratio.

Mar 25, 2014 03:39 AM
Robert Bob Gilbert
Berkshire Hathaway HomeServices Anderson Properties - Katy, TX
Your Katy TX ( West of Houston) Real Estate Expert

Wayne, 

This is all excellent information for all buyers and actually all consumers as what their FICO scores does to the cost of funds. I use to be in Corporate credit and this FICO score in my pinion has so many holes in it but we all have to figure out how to live with it and improve this magical score.  

Mar 25, 2014 08:10 AM
Jennifer Fivelsdal
JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571 - Rhinebeck, NY
Mid Hudson Valley real estate connection

Wayne that graph is very powerful.  This is an informative consumer post.

Mar 25, 2014 02:33 PM
Wayne Johnson
Coldwell Banker D'Ann Harper REALTORS® - San Antonio, TX
San Antonio REALTOR, San Antonio Homes For Sale

Roy-I agree.

Noah-That's a two-step that can work well.

Rose-The score is not be-all, and DTI does come into play too.

Bob-Agree, no system is without flaws.

Jennifer-Thanks.

Mar 25, 2014 11:46 PM
Kwee Huset
Kwee Huset Realty - Venice, FL
Venice Florida Homes For Sale

Hi Wayne, great illustration with charts and photograph, for the result of a poor credit.

Mar 26, 2014 01:53 AM
Dale Baker
Baker Energy Audits and Commercial Properties Inspections - Claremont, NH
New Hampshire Relocation Real Estate Information

Howdy and afternoon Wayne

Wayne my AR friend, this sure is an outstanding subject to post info about. Folks sure are going to both learn alot from your mighty helpful post, and appreciate you for taking the time to write and post it.

Happiness sure is Homemade
Have a good one
Dale in New Hampshire

Mar 26, 2014 03:38 AM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Wayne, we are seeing more and more sub-prime lenders entering the market again, but plan on paying!

Mar 31, 2014 06:02 AM
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hi Wayne -- excellent graph and a terrific photo that definitely conveys the point of this post.   If this doesn't get your message across, I'm not sure if anything will.  

Apr 16, 2014 01:43 PM