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What Home Loan is Right For You?

June 17, 2022
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Homes in Gig Harbor WA

One of the first things to consider before starting your house hunt is the type of loan you will choose. There are two primary types of loans: FHA and conventional loans. If you’re looking to purchase one of the new homes in Portland OR, it’s important to understand which loan is best for you.

Before starting the house hunt, you should know your budget and your credit score, as these two factors will play a significant role in the type of loan you will likely choose. A credit score that is in the range of 350 to 570 is considered poor and will make it harder for you to get a more affordable loan, while anything over 800 is considered excellent and will work in your favor.

In addition, it’s typical to put down 20% of the home’s value when purchasing it, but that can be a hard number to reach. This often results in the need for mortgage insurance, which is another cost to factor into your budget. Fortunately, there are options for those who don’t have perfect credit scores and don’t have enough money for the down payment.

FHA loans are insured by The Federal  Housing Administration. The benefit of these government-backed loans is that they have less stringent borrowing qualifications. This type of loan is better for those with a low credit score and not enough money for the typical 20% down payment. For an FHA loan, you can qualify with a score as low as 500. This is because the government backs the loan, leaving less risk for the lender. Usually, the lower your credit score, the more you have to put down, but with an FHA loan, if your credit score is at least 580, your down payment could potentially be as low as 3.5%. However, for those with scores of 500 to 579, you will need to put 10% down.

The other option is a conventional loan. These loans can have a fixed rate or an adjustable rate. The fixed rate is ideal if the interest rate is particularly low or if you don’t want to gamble with an adjustable rate, which could end up higher when it comes time to adjust. On the other hand, if rates are high, you may want the adjustable rate with the hope of rates dropping in the future. The government doesn’t back these; they’re insured by private lenders, and as a result, the requirements are usually stricter for a conventional loan. Conventional loans are most commonly 15- or 30-year mortgages. The minimum credit score for a conventional loan is 650, but most lenders prefer a higher credit score and as always, the lower your score, the more you’ll need for the down payment. While 20% is standard for a conventional loan, most people don’t necessarily have that much to put down. The result is that they’ll need private mortgage insurance to cover.

This gives you some of the basics of the differences in FHA loans and conventional loans. You should try to get pre-approval before house hunting, so that you’re in a better position to make a bid on one of the new homes in Portland OR. This means you’ve found a lender who is likely to work with you, which helps speed up the process and make sellers more comfortable in accepting your offer.

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This post was written by Garrette Custom Homes

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