Conventional loans are crème de la crème of home mortgage market. This loan type offers the best possible terms and fees along sustainable long-term affordability. Little equity and credit blemishes can make your mortgage more pricey. What to know…
Mortgages originated by banks, lenders and brokers across the country and sold on the primary mortgage market to Fannie Mae and Freddie Mac make up conventional loans. These loans offer the best terms and rates due to their mass appeal and large scale availability. This mortgage type contains what is called in banking as risk based pricing charging a premium commensurate with the risk of the consumer’s financial picture.
The biggest driver of costs on a conventional mortgage loan is credit score.
These additional cost adjustments apply if you’re credit score between is 620-679:
- refinancing to reduce payment
- loan sizes bigger than $417,000
- loans bigger than 80% loan to value financing
Factors that affect the price and rate of a mortgage quote include: occupancy, credit score, property type, and loan-to-value and loan program. Let’s say you’re financial picture looks like this:
Single Family Residence
630 Credit Score
417k Loan Size
It would not be uncommon to see an interest rate on this type of scenario approximately .375% higher than the average 30 year primary mortgage rate. Additionally, expect a mortgage insurance premium of approximately 110% of the loan amount on an annualized basis. That’s $4587 per year, $382 per month in mortgage insurance based on a loan size of $417,000. Staying status quo, if your credit score was say 700, the interest rate you can expect to get would be .25% higher than the primary market rate and the mortgage insurance premium would be approximately $3127 per year or $260 per month. This is why it pays to have a good credit score when applying for a conventional loan.
Alternatives To Reduce Mortgage Costs
*The majority of the time your credit score can be raised by simply paying down credit cards. Ask your mortgage professional if they offer a complimentary credit analysis with their credit provider. Most brokers and direct lenders offer this value added service. By having the mortgage company run this analysis, you can see how much more your credit score credit increase by taking specific actions. Generally, a good rule of financial thumb is you keep your credit cards to no more that 30% of the total allowable credit limits per credit account.
*Putting more money down when buying a home to help offset a lower credit score can also help.
*Changing gears and going with a different mortgage loan program such as switching from a conventional loan to loan insured by the FHA could be another viable route in keeping monthly mortgage costs affordable
A loan insured by the Federal Housing Administration (FHA) used to be most expensive mortgage available. That dynamic changed in early 2015, when the FHA announced they were reducing their annual mortgage insurance premiums to fixed .80 premium, no matter the loan size, or credit score.
Comparing an FHA Loan, to our conventional mortgage loan scenario above, the FHA does not discriminate on credit score the way a conventional loan does s and the mortgage insurance premium on FHA loans is constant. There is no sliding scale based upon credit score like there is on the conventional side. The FHA in our above-referenced scenario on the loan size of $417,000 would generate a monthly PMI payment at $278 per month, a whopping $100 dollars per month lower than the conventional loan.
Granted, an FHA Loan does charge an upfront mortgage insurance premium of 1.75% usually financed in the loan, but the effect of the payment would only change by approximately $30 per month meaning the FHA loan is really $308 month, making the FHA Loan a lower cost monthly alternative.
- FHA is not specifically geared towards first-time home buyers
- FHA loans can be used to purchase a home or refinance a home
If you are the market for a mortgage and are trying to refinance a home or purchase a home, work with your loan officer to qualify on as many loan programs as possible upfront. Taking this approach will also allow you cherry pick what loan is most suitable for you considering your payment, cash flow and home-equity objectives your within your affordable capacity.
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