Want a quarter-million-dollar house? You’d better have phenomenal credit.
When you’re looking for a home loan, one of the top concerns is the interest rate, and the better your credit is, the lower that rate will likely be. But your credit score can have a lot more to do with your mortgage than loan approval and interest rates — it also impacts how much you can borrow.
Consumers with the best credit scores can borrow about 33% more on average than borrowers with scores in the next-best credit tier, according to data from the Experian-Oliver Wyman Market Intelligence Reports. Super prime borrowers (those with the best scores) obtained mortgages nearly 60% greater than those opened by deep subprime borrowers in the third quarter of 2013, the most recent data available. Using Experian’s Intelliview tool to analyze the average sizes of mortgages opened in that quarter, it was clear that credit scores have a strong impact on the amount you can borrow.
And the disparity is growing. Home prices rose about 12% from third quarter 2012 to third quarter 2013, according to the CoreLogic Home Price Index, so it makes sense that those with the best credit borrowed more in 2013 than they did in 2012. But among consumers in the lowest three credit tiers — which Experian says consists of 64% of Americans who have a credit score — the average size of mortgages opened in the third quarter of 2013 declined from the previous year.
A quick overview of VantageScore: The model used in this data is an earlier version of VantageScore that works on a spectrum from 500 to 990, and the tiers break out like this:
- Super prime: 900 to 990
- Prime: 800 to 899
- Near prime: 700 to 799
- Subprime: 600 to 699
- Deep subprime: 500 to 599
Those super prime borrowers can get a lot more house than their friends with lower credit scores: The average amount of a mortgage opened by someone with excellent credit was $293,698 in the third quarter. Prime borrowers took out an average of $197,627. Near prime, subprime and deep subprime borrowers averaged $168,477, $135,797 and $121,034 mortgages, respectively.
That makes sense, when you consider the purpose of a credit score: It assesses how risky it is to lend money to someone, and a less-risky consumer is likely to be trusted with more money. But mortgage approval relies on much more than a credit score.
A borrower’s ability to repay the loan plays a huge part in getting a home loan, especially after the mortgage crisis several years ago. With that in mind, someone with more disposable income — perhaps someone with more money in general — is more likely to get approved for a large home loan. However, it’s important to note that income isn’t factored into credit reports or the scores on which they’re based, and you don’t need to make a lot of money to have a good credit score.
Before you start considering what you think you can afford to borrow, make sure you know where your credit stands. Even if you’re looking for an inexpensive home, you’ll want to apply for the mortgage with the best credit score you can manage so you qualify for the best interest rates and loan amount. Before buying a home, you should check your free credit reports for errors, and you can get two free credit scores with a Credit.com account.
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