5 States Where Low Credit Scores Can Cost Homeowners More on a Mortgage

Credit scores can determine the amount of financial freedom you have especially when it comes to making big decisions, such as buying a home.

It turns out several Sun Belt states are home to residents with the lowest average credit scores in the United States, according to a WalletHub study.

The state of Mississippi comes in last with an average credit score of 669. This is followed by Louisiana (673), Alabama (677), Texas (677), and Georgia (678).

For perspective, WalletHub says the average credit score in the U.S. is 702.

The higher the credit score when applying for a mortgage, the better the chances of securing a lower mortgage interest rate. Lenders view credit scores as one way to see if a borrower will make the monthly payments on time. The difference of a few points in your credit score could make a huge difference in your monthly mortgage payment.

A good credit score ranges from 700 to 749. Residents in at least 29 states have average credit scores above 700.

Minnesota residents have the highest average credit score—723, just 27 points below the excellent credit score range. This is followed by: New Hampshire (721), Vermont (720), Wisconsin (718), and Washington state (716).

"Moving to one of the top states may help you increase your own credit score, as they tend to have high average incomes, low unemployment rates, and other positive economic factors that make it easier for residents to pay their creditors on time and limit their borrowing," explains WalletHub analyst Chip Lupo.

WalletHub found Minnesota has the seventh-highest average income in the country.

New Hampshire, the second best state for average credit score, was found to have a low rate of debt delinquency. Vermont's good credit score was attributed in the report to residents having good budgeting skills. It also states Vermont has one of the lowest unemployment rates in the country.

Home loan scores

The most commonly used mortgage loans are conventional loans, such as a 30-year fixed mortgage. Usually this requires a minimum credit score of 620. These loans are not insured by a government agency and follow certain standards set by the government-sponsored entities Fannie Mae and Freddie Mac.

If a credit score is low, government-backed loans allow for more leeway. A Federal Housing Administration loan requires a minimum credit score of 500, if you make a 10% down payment on your home purchase. If you put down less than that, the minimum credit score required is 580.

USDA and VA loans do not have a minimum credit score set by the federal agencies, but lenders may require a score of 580 to 620 or higher.

Improving your credit score

Financial experts point out it's important to know your credit score.

"It's important to be aware of where your credit score stands because it directly impacts your ability to purchase a home or a car and determine what rate you may get through a lender or mortgage broker," Jessica Vance, real estate agent and mortgage broker, tells Realtor.com.

"Check your credit score to make sure it’s where it should be, and there isn’t any information [on your credit report] that needs to be disputed," Melanie Musson, finance expert at Clearsurance, tells Realtor.com.

Paying off debt will help improve your debt-to-income ratio, Musson advises.

Financial experts say paying bills on time should be a priority. Payment history accounts for 35% of your credit score. Late payments stay on your credit report for seven years.