Yes, you can get a mortgage even with less-than-stellar credit. But it does cost more. Indeed, it costs quite a bit more, over the life of a 30-year loan.
A recent study estimates that mediocre or bad credit can cost borrowers anywhere from $50,000 to $130,000 more over the span of a 30-year mortgage.
But that was using nationwide numbers, assuming a mortgage of $250,000. Here in Hawaii, where the average single-family home is now selling for around $800,000, the cost is even higher. It’s therefore even more important for Hawaii residents to pay attention to their credit histories and pay bills on time.
So what does “good credit” look like?
According to the Fair, Isaac Corporation – the company that sells credit data to the major credit bureaus, a good credit score runs from about 670 up – and a “very good score” would be anything above 740.
Lenders know that only about 2 percent of borrowers with credit scores in the 740-799 range are likely to default. That probability is just 1 percent for borrowers with credit scores of “exceptional” credit of 800 or more. So these are the borrowers that qualify for the best rates.
For those with credit scores lower than about 670, you’ll probably see interest rates that are a little higher than those with the stratospheric credit scores are paying. And below about 580, you may have some trouble finding a lender, unless you’re bringing something extra to the table like a large down payment.
Hawaii Credit Facts
The average credit score in Hawaii is 693.
The average credit score of a homebuyer, nationwide, is 728.
Only 6.28 percent of all homebuyers had credit scores below 620.
Source: Experian State of Credit Report – 2017
What does it take to get a loan?
Generally, FHA mortgages require a credit score of 580 or greater to qualify for their low 3.5 percent down payments, but you can theoretically qualify with a credit score as low as 500 if you have 10 percent to put down. In practice, though, individual lenders usually overlay their own criteria and are looking for scores a little higher than the bare minimums allowable for the FHA.
To be competitive for most other loans, including USDA loans, conventional mortgages and FHA 203(k) loans (for homes needing significant work) you want to be applying with a score of about 620 or better.
‘A’ohe pu’u ki’eki’e ke ho’a’o ‘ia e pi’i.
“No cliff is so tall it cannot be climbed.” –Hawaiian proverb
For VA loans, there’s no formal minimum credit score, but you’ll get the best results with a credit score of at least 640.
This isn’t to say it’s impossible to get a mortgage even with weaker credit scores. It isn’t. But you will probably have fewer options, and you’ll have to pay a higher interest rate to compensate lenders for the risk.
So what’s the cost of mediocre credit?
Well, estimates vary. But one study in early 2018 found that borrowers with scores of 620-639 paid an average of 0.75 percentage points (basis points) more than borrowers with credit scores of 760 or above (i).
Borrowers with scores of 680-719 paid 30 basis points more.
So at the time of the study, in December 2017, the average interest rates on new loans actually originated was as follows:
TABLE 1. Average mortgage interest rates, by credit score, 30-year loans
|FICO Score||Average APR||Spread|
|760 or better||4.26%||—|
|720-759||4.31%||5 basis points|
|680-719||4.56%||30 basis points|
|640-679||4.88%||62 basis points|
|620-639||5.01%||75 basis points|
Prevailing interest rates are a little higher now, so the rates in the table above are not what you’d probably qualify for today at any given credit score. But the “spread” is still instructive – it represents the benefit of having a great credit score, and the monetary penalty that market forces demand from borrowers with imperfect or even bad credit.
A basis point is equal to 1/100th of 1 percent. And when it comes to your mortgage, 50 basis points equates to a monthly difference of about $30 per month per $100,000.
So if you have a $600,000 mortgage (not uncommon at all here in the islands), paying half a percentage point more on your mortgage translates to a monthly difference of $180. In other words, a mortgage of 5 percent will run roughly $2,160 per year more than a mortgage of 4.5 percent.
If you keep it up for 30 years, and never refinance, you will pay an additional $64,800 in mortgage costs over the life of the loan.
So let’s run a few calculations on a $600,000 mortgage to illustrate the difference between different 30-year loans at these spreads:
Table 2: Monthly payments, total interest and total payments over the life of a 30-year loan (assuming monthly, not bi-weekly payments)
|Rate||Monthly Payment||Interest Over Life of Loan||Total Payments|
For this purpose, we’re leaving out PMI, taxes and insurance costs and just dealing with the mortgage itself.
So at these rates, that extra 75 basis points you may have to pay coming in with weak credit would have the following costs:
$273 per month
$98,319.73 interest payments over the life of the loan.
The extra monthly cost also means you’ll have fewer choices when it comes to buying a home, because you won’t be able to qualify for some homes that someone with excellent credit will be able to buy, no problem.
Moreover, the cost of bad credit isn’t limited to home mortgages. Poor credit scores routinely affect your auto insurance rates, credit card interest rates and even your job prospects. But as you can see here, poor credit can easily cost $100,000 or more at today’s high home prices here in the Islands.
Weak credit? It’s still better to own than to rent.
Does this mean you shouldn’t even try to buy a home? Not at all. In the long run, owning is significantly better than renting in most markets, even for people with less-than-perfect credit. We have great loan programs available for people with all types of credit!
But it behooves you to make sure your credit is as good as you can reasonably make it when it comes time to apply.
Then, once you have bought your home, continue to work on your credit score so you can qualify to refinance at a great rate – and save even more.
To read our post on how to improve your credit rating , click here.
Not-so-great credit? Read about how to buy a home in Hawaii with bad credit here.
And most importantly, to get pre-qualified and pre-approved for a great home loan, click here.
Or call us today at (808) 891-0415. We look forward to hearing from you!
(i) Lending Tree Mortgage Offers Report, December 2017.