How much does your credit score affect a mortgage offer? In some cases, a credit score could make the difference between purchasing a home or being forced to rent instead.
That's especially true for millennials. Many entered the housing market at the worst possible time – amid the Great Recession. They dealt with a crumbling housing market, limited job options, and crushing student loan burdens. Do credit scores make a difference for millennial homeowners, and how do their borrowing habits compare with their renting counterparts?
LendingTree reviewed the credit records of over one million millennial users of their platform and verified that millennial homeowners do have higher credit scores compared to renters. Median credit scores were 671 for millennial homeowners and 582 for non-homeowners.
How much difference can a credit score make? Let's use an illustrative example.
Using the current median price of American homes sold ($230,100 according to Zillow) and a 20% down payment on a thirty-year fixed interest rate loan, the median homeowner score of 671 would earn a 4.34% annual percentage rate (APR) and result in $962 monthly payments and $145,424 in total interest charges.
Merely dropping to the 620-639 credit score range earns a 5.316% APR, $1,024 monthly payments, and $184,572 in total interest charges. At the median 582 score of non-homeowners, millennials may have trouble qualifying for a traditional home loan at all – and will certainly pay even higher interest rates if they do.
Once millennials become homeowners, they can use their mortgage loans to their credit advantage. Approximately a year after home purchases, credit scores are boosted by regular on-time mortgage payments. In turn, millennial homeowners can receive more credit with better terms, and put more credit accounts into use.
LendingTree's data implies that's just how millennial homeowners behave. Homeowners have an average of nine functioning credit accounts, compared to only four for non-homeowners.
Homeowners and non-homeowners have similar student loan debt burdens, with 37% of both populations having student debt and median student loan balances in the $20,000 to $23,000 range. However, homeowners are more likely to have credit card balances (92% to 64%), auto loans (72% to 50%), and personal loans (39% to 26%).
When balances are present, homeowner's balances are higher. They carry a median $6,633 balance on their credit cards compared to the $2,218 of non-homeowners, have a median $20,422 auto loan compared to $14,953 for non-homeowners, and carry $9,627 in personal loan balances compared to $3,592 for non-homeowners.
The typically lower credit score of renters causes other financial hardships.
Since they are less likely to have access to credit, non-homeowners usually have to use more of their available credit. The median credit utilization – the amount of credit you use compared to your credit limit – is 58% for renters. Generally, 30% or less is the credit utilization goal to keep your score high, and the 31% homeowner median falls much closer to that goal.
Millennial renters have higher late payment rates than homeowners (4.6% to 1.5%), with 87% having at least one late payment compared to 55% of homeowners. They also have more negative marks on their record (eight to three) and search for new credit sources more often (2.2 inquiries in the past six months compared to the 1.7 inquiries of homeowners).
In short, homeowners borrow more money because they can. They keep credit scores high by making all payments on time and keeping credit utilization as low as possible. Those are also the keys to getting a high credit score – sound advice whether you're a homeowner or a renter.
Says LendingTree Senior Research Analyst Kali McFadden, "Homeownership can be a sign of financial stability and goal orientation. It's possible that the overall healthier financial profiles of homeowners are thanks to a combination of prioritizing family goals over short-term personal lifestyle goals, and a few good breaks, like higher paying jobs and finding a life partner."
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