Not necessarily, but it will certainly help. It is possible to get a conventional mortgage with a FICO credit score as low as 620, and you can obtain an FHA mortgage with a score as low as 580. However, be advised, the lower your score, the higher your interest rate will be. On a $250,000 mortgage, the difference between a 620 credit score and an “excellent” 760 could add $85,000+ in interest savings over the life of a 30-year loan.
You can get a conventional mortgage with as little as 3% down, an FHA loan with 3.5% down, and a VA or USDA loan with no money down at all. However, with a conventional or FHA loan, you may have to pay private mortgage insurance, aka PMI, if your down payment is less than 20% of the home’s sale price. Those payments won’t be a permanent fixture in your monthly payments, however. Once the loan-to-value ratio on your mortgage falls to 80%, you can ask your lender to drop them. And even without your request, lenders are required to cancel PMI when the loan-to-value ratio drops to 78%.
The term “closing costs” refer to all of the charges you’ll need to pay before your loan is completed. This can include origination fees, title insurance, prepaid escrows, and more. Closing costs can vary significantly, but generally, on a purchase expect to pay around 2% to 3% of the home’s price in closing costs.
When interest rates are historically low, as they have been in 2020 and 2021, a fixed-rate mortgage makes good financial sense. Not surprisingly, the vast majority of mortgages originated today are fixed-rate. In fact, only about 3% of buyers are choosing adjustable-rate loans. That said, while a fixed-rate mortgage is the best choice for the majority of homebuyers, there are some circumstances where an ARM may be better. For example, if you expect to sell the house before the fixed-interest period ends and the rate starts to float, an ARM could end up saving you thousands of dollars. Or, during periods of falling interest rates, an ARM can allow you to get a low initial rate and will save you money later if rates drop further.
A rate lock means that you’re guaranteed the mortgage interest rate on that particular day and time for some predetermined period, typically 30 to 60 days. If interest rates have been trending upward, it’s generally a good idea to lock in your rate. While the prevailing mortgage rates don’t generally make huge moves in a short period of time, it’s certainly possible.
There are several different types of mortgages to choose from. While a conventional mortgage can be considered tougher to qualify for credit-wise, an FHA loan can be costlier. If you’re a veteran, a VA loan could be the best option for you, and if you plan to buy a home in a rural area, a USDA mortgage could give you a no-money-down option.
Discount points equate to money you pay up front on your mortgage in exchange for a lower interest rate. One “point” is equal to 1% of the loan amount, so on a $200,000 mortgage, one discount point would be $2,000. Discount points are tax-deductible (consult with your CPA,) and mathematically, if the interest savings over the life of the loan is greater than the points paid, it can be worth it. A mortgage calculator can help you determine whether discount points are a good idea by comparing the effect of various interest rates on your mortgage.