Mortgage Options To Consider

Buying a house is the largest financial undertaking most people take.  Many people are now trying to get a mortgage loan before the Federal Reserve raises rates.  The Federal Reserve controls the interest rates at which banks are able to “borrow” money from it, which in turn impacts the rates people pay on home mortgages.  When interest rates rise, so too will mortgage rates, but this may cause a cooling off in housing prices.  This is because when rates go up, it drives up the monthly payment on a mortgage, and thus reduces the potential pool of buyers able to afford a given property.  Whether the reduction in housing prices will make housing markets more or less affordable on balance given increased rates is anybody’s guess. Here are some of the various financing options, even if you have less than perfect credit.

Conventional Mortgage

Often referred to as “Fannie/Freddie” loans, conventional home mortgages conform to standards which enables them to be purchased by the quasi-government organizations Fannie Mae and Freddie Mac.  The minimum score to qualify for a conventional mortgage is usually 620 or better.  While 620 may be on the “high” side of “bad credit,” any mortgage loan to borrowers with a 670 or lower credit score is considered subprime.  Minimum down payment requirements range from 5% to 15% depending on a number of factors, though a typical mortgage down payment is 20%.  People who put down less than 20% have to pay private mortgage insurance, which can be costly, so it is a good incentive to pay the standard 20% down.  Loan limits differ depending on the market, ranging from $647,200 up to $970,900; anything larger is a “jumbo” loan.

FHA Loan

FHA Loans are government-backed loans for first time home buyers.  They reduce the credit score requirements, as well as reduce the potential down payment you need to make.  Properties must be approved by FHA-approved appraisers, which reduces the potential pool from which you can purchase.  For example, condos in buildings with too many units that are rentals will not be considered as qualifying properties for FHA loans.  FHA loans are only for primary residences, so they cannot be used for investment properties or second homes.  FHA loans require a minimum of 3.5% down if you have a credit score of 580 or greater.  Borrowers with worse credit scores, in the sub-580 range, must make a 10% down payment.  You can typically qualify with a score as low as 500.

Other Kinds of Loans

There are other kinds of loans, such as VA loans for veterans and USDA loans for properties which qualify in rural areas.  Despite sharing its name with the stamp on a package of beef, you do not need to be a farmer to qualify for a USDA loan.  USDA loans require no down payment (if you qualify), have low interest rates (as low as 1%), and even allow borrowers to qualify with subprime credit.  The rub is the loans are typically only for rural locations, though some suburbs may apply.  You are not allowed to make too much money if you are getting a USDA loan; they are intended for low-income people who make no more than 115% of a given area’s median income.  This fact, combined with the location requirements, makes USDA loans helpful to low-income people in rural areas.

In Conclusion

Buying a house can be an intimidating experience.  If you have less than perfect credit – as do more than half of Americans – be sure to look into FHA and USDA loan options (as well as VA loans if you are a veteran).