Learn What You Need to Consider When You’re Ready for a Home Purchase
If you are looking to purchase a new home, unfortunately, it isn’t as simple as anyone ever hopes it will be. That being said, you can definitely avoid a lot of mistakes and setbacks if you do your research beforehand. The loan process can be quite strict and there are both loopholes and deterrents that you will want to be aware of as you start the home-buying process.
When you set out to purchase a new home, one of the first decisions you are going to have to make is whether you want a fixed-rate or an adjustable-rate mortgage. While there are pros and cons to each of the choices it is important to understand your options down the road once you have made a decision. There are actually many different factors to consider when making this choice, but as it pertains to credit, it is important to understand that choosing an adjustable-rate mortgage to save money on payments in the beginning in hopes to refinancing into a fixed-rate down the road, isn’t a guaranteed option. If your credit score takes a hit for any reason during the initial phase of your ARM, refinancing at a lower fixed-rate might not be possible. The best thing to do is to consult with your lender about how long you plan to stay in the home in order to help determine your best option.
Once you have made a decision on adjustable vs. fixed-rate, you’ll then have to determine whether you fit better into a government-insured (FHA, VA, USDA/RHS) loan or a conventional “regular” loan. This decision is slightly more cut and dry in the sense that you’ll most likely fit right into one option rather than the other based on your current financial/credit situation. One thing to keep in mind with this option is that conventional loans are not insured by the federal government, whereas the government-insured loans are, hence the title. If you are trying to determine which type of loan, here are some requirements you will need to be aware of in terms of credit acceptance:
- FHA (Government-Insured): There are several benefits of going the FHA route including, but not limited to, a smaller down payment requirement, easier approval, more flexible credit guidelines along with several other benefits that don’t pertain as much to your credit score. That being said, in order to qualify for an FHA loan your credit score must be a 500 or higher in order to qualify. However, if you want to qualify for the option of the 3.5% down-payment, you are required to have a 580 or higher. Now those are the FHA guidelines, but you’ll also have to meet your lenders guidelines too. This can come to a surprise to many during the pre-qualification process, but there are still many lenders out there that will require a 620 or higher even though FHA requires a 500. This may seem like a setback, but in reality, it is still a heck of lot easier to qualify for an FHA loan rather than a conventional loan.
- VA (Government-Insured): The credit requirements for a VA loan depends on the lender, but a 620 or higher is typically what you will need in order to qualify. In addition to a qualifying credit score, you will also need sufficient income and a Certificate of Eligibility (COE). One of the greatest benefits of a VA loan is that there is no down-payment requirement.
- USDA (Government-Insured): A USDA loan is not as common as the other government-issued loans. One of the reasons being that it is only available in rural areas. The credit requirements for a USDA a slightly higher than other loans, where most lenders are looking for a 660 score or higher.
- Conventional: A conventional loan requires a 640 credit score or higher. These loans are initiated in the private sector and have no government backing or approval. The main reason for choosing to go with a conventional loan is to avoid the cost of mortgage insurance. However, this is only an option if you are able to put 20% or more down on the home. If you have less than 20% to put down on the home, you’ll be required to pay PMI, at which point you have to determine the difference of this cost versus the extra mortgage insurance cost with an FHA loan. PMI is typically much less, but you’re also putting a lot more than 3.5% down on the home. Generally speaking, if you can’t put down 20% or more, the FHA typically pans out to be the better option.
Regardless of what type of loan you are looking to qualify for, it is important to remember that the higher your score is, the more you are going to save on interest in the long-run. That being said, getting the bare minimum score might get you into your home, but it is not saving you any money or putting you in a better situation for all of your future financing. TruPath Credit is here to help you get a qualifying score and to take you to the next level of your credit potential. Give us a call today at (385)419-0878 to learn how to get started and qualified as quickly as possible.