Types of Mortgages: What's Right for You?
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Types of Mortgages: Find What’s Right for You
If you are in the market for a home, improving your credit score will be a priority. If your credit score is too low, you may end up with a high interest loan or you may not get approved at all.
You will always be able to find a lender that will approve you, but that doesn’t mean you will be getting the best rates or terms possible. Applying for the right loan will help ensure this.
This article will take a look at how credit scores affect the mortgage you get and the low credit loans that may be right for you.
FHA Loans
FHA or Federal Housing Administration loans are a good option for buyers who have low credit scores. They require lower down payments and lower credit scores than many conventional loans.
Currently, you can borrow up to 96.5% of the value of your home with an FHA loan. This means you will only need to make a 3.5% down payment. To qualify, you will need a credit score of 580. If your credit score falls between 500 and 579, you can still get an FHA loan, but you will need to make a 10% down payment.
FHA loans typically come with rates that are .125% to .25% higher than conventional loans.
VA Loans
VA or Veterans Affairs loans are a good option for military borrowers. They require $0 down and are backed by the Department of Veterans Affairs. The agency guarantees a quarter of the amount making lenders feel more confident making loans despite low credit scores and no down payment. They usually have lower interest rates than conventional loans.
USDA Loan
USDA or United States Department of Agriculture loans are designed for low income families who may not have access to proper housing. Applicants should have a credit score of 640 or above. Those with a lower credit score may be subject to more stringent underwriting requirements.
Because the USDA backs the loan, homeowners do not need to make a down payment. It also yields lower interest rates.
Fannie Mae Loans
The Federal National Mortgage Association (FNMA) or Fannie Mae loan is designed to stimulate the housing market by making mortgages available to low income borrowers. The organization does not provide the mortgages, but it purchases and guarantees them through the secondary mortgage market. Borrowers are able to make low down payments of 3%.
The loan is available to those with low credit scores although those with credit scores of 620 or more will get better pricing. Interest rates on these loans tend to be low.
Freddie Mac Loans
Freddie Mac is similar to Fannie Mae and it is another option worth looking into if you would like to buy a home with low credit. The main difference is that Fannie Mae purchases home loans from big banks whereas Freddie Mac works with small banks and lenders.
Fannie Mae and Freddie Mac are the two biggest mortgage ‘investors’, buying on the secondary market. They demand strict loan criteria in order for the loan to qualify. If you don’t fit into one of their programs, you will need to look into other options.
If you are thinking of buying a home, getting your credit in shape is a priority. However, the options in this article make homeownership possible if your credit isn’t quite where you would like it to be or you have other financial restrictions.