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According to a new study, elevated mortgage rates and housing prices are creating further barriers to entry for homeownership for homebuyers with lower credit scores.
The study released Thursday by the online listings portal Zillow, found lower credit scores add to affordability woes for buyers showing buyers with “fair” credit scores potentially paying up to $288 more a month on a 30-year mortgage. This results in up to an extra $104,000 in mortgage costs over a lifetime, making homeownership more difficult to attain.
“When you are thinking about buying a home, the best first step you can take is to fully understand your financial picture, what you can afford and your outstanding debts or obligations,” Zillow Home Loans Vice President Libby Cooper said in a statement. “If you find you have low credit, take realistic steps to improve your credit score by doing things like disputing possible report errors and paying down as much debt as possible. This could increase the amount of home loan you qualify for.”
The biggest barrier to entry in the current housing market is already affordability with homebuyers paying 62 percent more per month to buy a typically-priced home than they did a year ago.
The report outlined exactly how much users with lower credit scores may pay for the typically-priced U.S. home when pegged at mortgage rates between 5.099 and 6.688 percent.
The disparity in loan costs most effects communities of color which are more likely to be credit insecure — meaning they have high levels of residents with poor credit histories or no credit history, the report notes. Black mortgage applicants are denied mortgages at a rate 84 percent higher than white applicants, with poor credit cited as the most common reason for denials — cutting off millions from the wealth-building capabilities of homeownership.
With Fannie Mae and Freddie Mac recently adopting policies that include timely rent payments in their underwriting guidelines, buyers also have the option of submitting their bank account data to show a timely rent payment history.
“While inclusion of timely rent payments doesn’t change a borrower’s credit score, it can have a positive impact on how lenders view a borrower’s credit worthiness,” Cooper said. “This move shows how effective policy changes can help consumers build a strong financial foundation that unlocks homeownership.”