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If your home sits by the ocean, atop a fire-prone canyon or even in a not-so-nice neighborhood, you probably know you're paying more for homeowners insurance, but something even closer to home may be driving your monthly payments higher: your personal credit score.
Lower credit scores are widely known to impact mortgage availability and rates, but what most home buyers don't know is that they also increase the cost of homeowners insurance.
Homeowners with poor credit pay 91 percent more for homeowners insurance than people with excellent credit, according to a new report from Bankrate.com in conjunction with insuranceQuotes.com, part of Bankrate Insurance. Homeowners with median credit pay 29 percent more than those with excellent credit.
"This is another example of why credit is such an important part of your financial life," said Laura Adams, senior analyst with insuranceQuotes.com. "Maintaining a good credit history suggests that you're a less risky customer and can lead to several hundred dollars in annual homeowner's insurance savings."
Millions of Americans are still rebuilding their credit after the last recession, while younger potential home buyers are just building their credit for the first time. The widely use FICO credit score is used by about 85 percent of home insurers; three states, however—California, Massachusetts and Maryland—prohibit insurers from using credit scores in their insurance calculations.
"There is an undeniable correlation between credit information and insurance risk," said Anna Bryant, a spokeswoman for State Farm Insurance, which does use credit scores to determine individual homeowner insurance rates. "It is a correlation in terms of the frequency a person could have a claim and the severity of their claim."
Bryant added that State Farm does not look at the entire credit score, but just aspects of it to determine someone's rate. She could not provide information as to what scores correlate to specific increases or decreases in insurance rates.
FICO recently announced it would be implementing a new version of its credit score this fall, one that will not penalize people for medical debt or for late payments that have already been rectified. FICO scores run on a 300-850 point scale, and for most home buyers a score above 700 is required to get the best mortgage rates.
Banks are beginning to ease credit conditions for prime borrowers. Eighteen percent of banks in the latest Federal Reserve Senior Loan Officer Survey reported loosening prime mortgage credit conditions in the second quarter of 2014.
"This was the largest loosening in lending standards in the 24 year history of the data," analysts at Capital Economics noted.
Some argue, however, that credit conditions today are no worse than they were before the loose lending days of the last housing boom. Instead, housing demand is still weak because incomes and employment have not recovered enough to support home buying, even six years into the economic recovery.
"This is an income and assets story," said Logan Mohtashami, a Southern California-based mortgage lender. "It's pretty much been the strong middle class and the rich that are buying homes."
At the beginning of the recovery, it was all-cash investors at the very lowest, distressed end of the market fueling sales. As that supply of homes has dried up, and investors have moved out, the market is left to mortgage-dependent buyers, and that is why sales activity has shifted to the higher end of the market.
These buyers would be less affected by higher homeowner insurance costs. It is the potential buyers on the margins, the first-time home buyers, who are being priced out of home ownership due to lower credit scores and higher debt levels. They continue to rent, despite rising rental rates, because they do not qualify on an income and asset basis for a home loan. The vast majority of today's borrowers have higher FICO scores because they are simply more wealthy.
"I've looked at all my buyers, and if I gave them the worst pricing on mortgage insurance and raised their homeowners insurance costs, they would still be easily qualified to buy a home," Mohtashami said.