The latest studies show that 29% of all Americans have credit scores of 580 or below. The FICO score is one of the principal tools used by lenders to determine ones worthiness to borrow. A low FICO score means that the borrower is risky, and will likely not repay a lown. Banks no longer lend money for home loans to people with bad credit. Essentially, this means that nearly one in every three Americans has deficient credit to purchase real estate.
Many of the low credit scores were caused by by people over extending themselves. Many people now have bad credit because they missed several housing payments, and or had a foreclosure. Some people allowed foreclosures to happen, and their credit to be destroyed, even though they were actually able to afford their house payments. These strategic defaulters owed far more on their homes than they were actually worth, and it was financially better for them to sacrifice their credit.
A long term negative effect of more people with bad credit, is that there will be less eligible home buyers in the future. Borrowers who have been foreclosed on, or even strategically defaulted, likely won’t be able to obtain mortgage financing for at least seven years. This indicates that the percentages of future home owners will be down. Less people will own homes, and more people will be renters or live with family. Home builders have been building more homes with “mother in law” apartments. The recession has created a higher percentage of multi-generational households.
Having less future buyers, will make it harder for people who need to sell their homes. This will result in a decrease in home prices from Homes in Kennesaw Georgia to Long Beach CA Homes . Lack of real estate appreciation will also slow down the overall economic recovery. Real Estate prices may not increase for a long time, in large part thanks to so many Americans with bad credit scores.