It doesn’t seem logical, or fair, but buying a house costs more for people with bad credit than it does for those with good credit. But a low credit score can indicate that a borrower is less able to pay, either because they do not make much money, they already have a lot of unpaid debt, they pay their bills late (or worse, not at all), or some combination of these. A bank that lends them money is taking a chance that they may never get paid back.
To make up for taking that risk, lenders will charge a higher interest rate on the loan. Even a small difference, for example, a rate of 5% instead of 3% can cost thousands of additional dollars every year. Multiply that by a 15- or 30-year mortgage, and over time, the house is much more expensive than the asking price.
Loans for people with bad credit (also called subprime loans) often come with additional costs. Private mortgage insurance (PMI) is required when a buyer can not afford a down payment of 20% of the purchase price. And the more debt someone has, the less likely they are to be able to scrape together a large down payment. PMI usually consists of an upfront payment of approximately 1.75% of the loan amount plus a premium of .7% to .85% annually.
Upkeep, homeowners insurance, and taxes for a home are no more expensive for someone with bad credit than with good credit. However, paying for it all can be more challenging for someone already struggling to pay off existing debt. And that is assuming there are no emergencies like a roof repair or a broken furnace.
First-time buyers or anyone with bad credit should be aware of these extra costs before deciding whether or not they are ready to become homeowners. Some people might decide to postpone a purchase while they pay down their debt, work on improving their credit rating, and save more for a down payment.