Credit Scores Weren’t Built for Insurance, But They’re Quietly Derailing Home Loans

Borrowers with low credit scores pay on average $1,996 more per year in home insurance premiums compared with borrowers with excellent credit, according to a Consumer Federation of America August report.

Higher insurance premiums tied to low credit scores create hidden risks and pressures that ripple back to lenders. Lenders assessing debt-to-income (DTI) ratios may underestimate the borrower’s true financial burden if they don’t account for higher insurance premiums. That gap can skew risk modeling.

And as these insurance premiums rise, especially for borrowers with fair or poor credit, lenders may be walking away from loans they could otherwise close.

Mortgage professionals know DTI ratios can make or break a loan, especially in today’s high-rate environment. But most don’t realize how often homeowners’ insurance costs — driven by credit score algorithms — become the hidden deal killer.

An example of this is how a lender rejected a home loan application on the spot when a borrower with a credit score in the mid-600s saw their insurance premium jump by $1,200 after filing a claim for a small water damage issue.

That increase drove their debt-to-income ratio beyond the lender’s limit, said John Espenschied, founder of Insurance Brokers Group based in St. Charles, Missouri.

Pricing risk with credit scores may be legal — but increasingly looks like an unfair practice with unintended ripple effects in housing finance, according to independent reports by Axios and Bloomberg.

In some states, low-credit policyholders pay as much as $4,100 more than high-credit homeowner insurance policyholders, according to their findings.

Sometimes it’s more expensive to have a low credit score than to live in a high-risk climate zone, the Bloomberg report pointed out, raising serious questions about how well insurance pricing signals actual risk.

Credit Scores Were Never Built for This

“Credit scores were designed to predict how likely someone is to repay a loan, not how likely they are to make an insurance claim,” said Andreas Jones, a Certified Financial Education Instructor (CFEI) and founder of personal finance blog, KindaFrugal.

“Using them to price homeowners’ insurance has always been controversial because while there is some statistical correlation with claim risk, it raises concerns about fairness,” Jones told us.

That fairness problem becomes an underwriting challenge when insurance premiums distort affordability. Two borrowers with identical mortgage performance and claims histories may face very different outcomes — based only on how their credit score is applied in contexts it wasn’t built for.

“Credit history often plays a bigger role in the total premium than prior claims do. That’s the part many borrowers and even some lenders underestimate,” said Espenschied.

“The algorithm treats a less-than-stellar credit score as a bigger risk signal than a single claim, which can send the insurance quote — and the DTI ratio — into dangerous territory.” 

“Insurance costs have become the hidden deal killer.” — John Espenschied, Insurance Brokers Group

According to a 2024 Federal Reserve and Philadelphia Fed paper, borrowers with scores below 620 were charged 30% higher premiums than borrowers with scores above 720, even after risk adjustment.

The findings support a Consumer Federation of America report and challenge insurers’ claims that online quote data produces biased results.

Credit-based insurance scores closely mirror traditional credit scores. But in high-risk states like Florida, their use only worsens the burden of already expensive insurance markets.

First-time homeowners and retirees are both getting priced out by algorithms that confuse credit stains with risk behaviors.

Lenders Feel the Squeeze But Lack a Playbook

Lenders respond inconsistently to these pricing dynamics. “Some dissect every dollar, others just want a policy in place,” Espenschied said. But as rates and premiums rise, the DTI threshold gets squeezed from both sides.

Homeowners insurance premiums, which are credit-based, can easily destroy the prospects of a borrower obtaining a loan, said Faraz Hemani, founder of Iron Storage and a commercial property investor.

“The credit score is a poor home insurance pricing tool and does not refer to the real risk determinants, such as neighborhoods and homeownership experience,” he said, adding that deals fall apart when otherwise qualified buyers get hit with unanticipated premiums.

Mortgage lenders working with subprime or near-prime borrowers have enough complexity to manage. When insurance quotes get factored in late in the game — or not at all — the resulting surprises can stall the pipeline and muddy closing timelines.

The ripple effect hits originators, brokers, and servicers, especially when they’re already under pressure to maintain volumes.

Better Models Could Untangle the Risk

There’s no push to ban the use of credit scores in insurance altogether. But experts increasingly support reforming how they’re applied. “Future developments like use-specific scores could help to separate repayment risk from other types of risk and avoid this kind of unintended friction,” Jones said.

Cliff Auerswald, president of All Reverse Mortgage Inc., agrees. “Use-specific credit scores promise to alleviate friction by aligning risk assessments with the particular requirements of each sector,” he said.

For housing, that may mean incorporating rent history, utility payments, or even neighborhood-level data. For insurance, it could mean using claims patterns and home features rather than third-party credit proxies.

“Striking the right trade-off between predictive accuracy and procedural fairness requires using data smartly and conscientiously, but not mindlessly,” Auerswald added.

“Using (credit scores) to price homeowners’ insurance has always been controversial because while there is some statistical correlation with claim risk, it raises concerns about fairness.” — Andreas Jones, KindaFrugal

Fairness and predictive accuracy can coexist in a well-calibrated model. But the current system arguably subsidizes wealthier homeowners with good credit while punishing lower-income families.

As Bloomberg reports, insurers are posting some of their strongest profits in years — even as premiums rise and millions of homeowners face growing gaps in coverage due to underinsurance.

And without change, more borrowers could end up losing deals they should qualify for.

Final Thoughts

The widening gap between insurance pricing logic and mortgage eligibility standards is too big to ignore. Mortgage lenders — not just regulators — have reason to care. Each failed deal costs revenue, each lost borrower reduces future volume potential, and each misaligned scoring framework leaves everyone guessing.

If lenders hope to grow access while controlling risk, they need a clearer-eyed view of what’s defining borrower eligibility in ways lenders can’t foresee.

“Insurance costs have become the hidden deal killer,” Espenschied said. Perhaps it’s high time mortgage professionals lift the hood.