Homeownership may remain a fantasy for nearly thirty percent of Americans because they are unlikely to qualify for a mortgage. What’s holding them back? A three digit number known as a FICO, or credit score.
A person’s FICO score is an important tool used by lenders to determine risk. A poor credit score can result in significantly higher annual percentage rates (APR). Those with extremely low scores may even find themselves denied for a loan. However, borrowers who have proven they are responsible with money are considered to be of little risk by creditors and get the lowest APRs.
Zillow Mortgage Marketplace data from the first half of September reveals that those with a FICO score of 620 or less were unlikely to receive a mortgage quote in their marketplace. Zillow chief economist Dr. Stan Humphries says that in a post-housing bubble world, lenders are looking at FICO scores with more scrutiny.
“We are in an era of historically low mortgage rates, reaching levels not seen in decades. Coupled with four years of home value declines, homes are more affordable than we’ve seen for years,” says Humphries. “But the irony here is that so many Americans can’t qualify for these low rates, or can’t qualify for a mortgage at all.”
However, Zillow data reveals that almost 50 percent of Americans have a credit score of 720 or higher, making them eligible to receive an average APR of 4.3 percent for a 30-year fixed mortgage.
Those with less than stellar credit should take the time to review their finances and boost their FICO score. Zillow says that the average APR fluctuates 0.12 percent for each 20 points a person’s credit score edges upwards or downwards.
The aforementioned Zillow data shows the importance of having good credit when applying for a mortgage. A high credit score is similarly important when applying for a car loan or personal loan. Regardless of the type of loan, an insurer will review credit patterns to determine risk and interest rates.
One of the easiest ways to improve your credit score is quite simple: pay your bills on time. A FICO score can drop due to late payments and other actions that make issuers question your ability to properly manage and pay back borrowed money.
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