Low Credit Scores Keep Homeownership Out of Reach for 1/3 of Americans

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Date:September 27, 2010 | Category:Mortgages | Author:

For many Americans, now could be great time to buy a house. Homes are more affordable than they’ve been in years and mortgage rates are at historically low levels. But, as banks have tightened standards after the fallout from the foreclosure crisis, it’s also harder than ever to get a loan. Exactly how hard, we now know.

We analyzed more than 25,000 loan requests on Zillow Mortgage Marketplace, along with credit score data provided by myFICO.com, to figure out who is getting the best rates, and who is even eligible to get a loan.

The news is great for the 47% of Americans with credit scores of 720 or above – those borrowers get the best interest rates and have the most choice in loans.

But the news is not good for the nearly one-third (29.3 percent) of the population with scores below 620. For them, getting a mortgage is likely out of reach. Even if with a healthy down payment of 15 to 25%, they are rarely offered even one conventional loan quote by lenders.

For those with credit scores in between 620 and 719, the Annual Percentage Rate (APR) decreases steadily as credit score increases (see chart below). We uncovered some additional information for borrowers in that bucket, as well. For each 20-point improvement in credit score, the average low APR declines by 0.12%, which for a $300,000 house, equates to a savings of $6,400 over the life of a 30-year loan.

A little more about our analysis: Zillow Mortgage Marketplace receives more than 300,000 loan requests each month from borrowers, who can anonymously request mortgage quotes from hundreds of lenders across the country. Lenders then submit loan quotes customized to each borrower’s financial situation. This analysis looked at the number of quotes and the average lowest APR for 30-year fixed, conventional mortgages that were quoted to borrowers who intended to purchase a home with down payments between 15 and 25 percent.  The analysis took into account more than 25,000 quotes submitted between September 1 and September 15, 2010.  See today’s press release for more information and check out the interactive tool for exploring the data on Zillow Real Estate Research.

Of course, it’s always a good idea to find out your credit score before shopping for a mortgage. myFICO.com, who provided us with data for this analysis, is a good resource.