When people choose the home loan that will finance their real estate purchase, they usually…
As of this writing, the average credit score in America has reached an all-time high of 711.
The FICO Scoring scheme is the most commonly used credit scoring model used by the three major credit bureaus: Experian, Equifax, and TransUnion. Chances are, you will have a credit score of at least 500 today because Experian shares that 99% of Americans have a FICO Score above this number.
Now that you’ve seen your credit report and found out that you have a credit score of 730, this is excellent news! Your score is considered above average, and you are eligible for all types of mortgage loans currently on the market. So whether you’re looking to buy your first home, an investment home, or a place to stay during the holidays, there are lots of choices you can consider.
This article will discuss different categories of home loans to give you the lowdown on the basics. It’s a whole world of mortgage loans and lenders out there, and we are honored to know you have come to us for advice! Read on!
730 Credit Score Home Loan Options
The primary way to categorize mortgages is by determining whether they are backed by the government or by a private lender. Though the federal government does not hand out the loans themselves, their assurance makes it easier for lenders to approve borrowers who would otherwise be rejected due to stringent loan requirements.
Government-backed loans only arrived in the last century, with the birth of the Federal Housing Administration in 1934. Government loans mainly require that you use the house as your primary residence for at least one year. After all, they aim to help provide a basic need.
Depending on the loan and how many units you will own, you may be allowed to rent out partially as long as you will be one of the occupants yourself. Borrowers cannot have multiple government-backed loans at the same time.
1 – FHA Loan
The Federal Housing Administration backs the most popular government-insured mortgage. It asks for a low minimum credit score of 500 to accommodate more first-time home buyers. (Take note, though, that this mortgage type is not exclusive to first-time homebuyers. As long as you satisfy the minimum credit score requirement, you are welcome to apply.)
This kind of mortgage was created because a 500 credit score is considered as bad credit. If you have a 500 credit score, this will most likely mean having several derogatory items in your credit history, like bankruptcy or a previous foreclosure. It is nearly impossible to get a mortgage from a private lender with this kind of credit score. Through an FHA loan, if you have enough funds for 10% money down, even if you only have a credit score of 500, you’ll be one step closer to owning your dream home.
Since your credit score is 730, you are eligible to pay a low 3.5% deposit because this is the minimum down payment for borrowers with credit scores 580 and above.
The interest rates are generally low, but this loan can be the most expensive out of this list due to the mortgage insurance you have to pay. If your deposit is less than 10 percent, you have to pay for mortgage insurance for the whole life of the loan. Pay 10 percent or more, and the insurance charge drops after eleven years.
In contrast, other types of loans charge much lower mortgage insurance or give you the option to forgo paying for mortgage insurance altogether.
2 – VA Loan
The Department of Veterans Affairs also backs their mortgage meant for active-duty service members and veterans. While they do not lend the money directly, the VA makes it easier for eligible borrowers to get approved by private lenders because 25% is automatically insured.
Through the VA loan, eligible veterans get 25% home equity from the start, so there is no need for private mortgage insurance. However, to keep the program running, they have to pay a minimal funding fee at closing. Some veterans are even exempt from paying this charge according to their circumstances.
Additionally, those who do not have enough savings have the option to forgo paying money down on this type of mortgage loan. Because of zero-down and the meager interest rates, the VA loan is increasing in demand.
3 – USDA Loan
Since the vast majority of Americans may not be eligible for VA loans, it’s good to know that they can still get the chance for a zero-down mortgage through a loan backed by the U.S. Department of Agriculture.
There is a caveat, though. The house you are buying must be located in a rural area recognized by the USDA. However, do not worry if you think you might be required to start a farm or similar. The USDA loan is strictly a residential loan.
One requirement that does make it a little more complicated for many borrowers is the household income cap. This is because every adult who will live in the house needs to declare their income for the loan application.
Since you have a 730 credit score, the ideal type of mortgage we would recommend is the traditional kind of home loan.
Conventional loans are a good idea, especially if you’re looking to buy an investment home, vacation house, or rental property. Unlike government-backed mortgages, you can have as many conventional loans as you want because there is no stay requirement for this type of loan. Whether you’re using the house as a primary or temporary residence will not matter for conventional loan lenders.
Each lender has its requirements and considerations, but the general idea is, the higher your score, the better mortgage rates and the higher loan amount you can borrow. Still, there are limits.
Conventional loans must adhere to the standards set by Fannie Mae and Freddie Mac. So if you need above the loan limits set by these institutions, you will get a jumbo loan. These jumbo loans are still considered conventional mortgages, but because they are a lot riskier for lenders, they cannot be guaranteed by Fannie Mae and Freddie Mac.
The minimum credit score typically required by jumbo loans is 680, so this is also something you can consider with a 730 credit score, especially if you want more space or live in a more expensive location.
Jumbo loan or not, though, conventional loans are still preferable to the government-backed FHA loan. This is because traditional loans are borrowed from private lenders, and this means that there will be private mortgage insurance charged to you every month, but only if you make a down payment of less than 20 percent. For conventional loans, you are allowed to make as low as 3% money down, but in doing so, you’ll have to keep paying for private mortgage insurance until you earn 20% home equity. Still, it’s a better deal compared to eleven years of paying mortgage insurance for FHA loans!
Adjustable-Rate vs. Fixed-Rate
We hope it’s now more apparent what best option you should take for a 730 credit score. But that’s not all! There’s another way we can describe the kind of mortgage you’ll be getting, and this goes for both government-backed mortgages and conventional loans.
If we are to group mortgages according to the kind of interest rate you’ll be getting, there are two types we can recognize: adjustable-rate mortgages (ARMs) and fixed-rate mortgages.
Fixed-rate mortgages are easy enough to understand. You either get a 15-year or 30-year mortgage. The interest rate does not change for a fixed-rate mortgage regardless of how many years you need to repay your loan. This is great because it protects you if interest rates dramatically rise.
On the other hand, ARMs are exactly as they sound. After an initial period of a fixed interest rate, the rate changes according to the flow of the market. Therefore, ARMs make a good option when you think that the interest rate still has a chance of decreasing. Unfortunately, if you decide to switch to a fixed-rate mortgage, this means getting a mortgage refinance later on.
Refinancing your home loan means paying another set of closing costs altogether since you’re technically getting another mortgage. So you’ll want to make sure you are getting the most bang for your buck and not creating further expenses for yourself.
Only a lifetime of healthy credit habits can lead to a 730 credit score. So you should pat yourself on the back!
However, your journey only begins here. Whether you are looking to close on a mortgage by next month or next year, you must maintain your good credit score by avoiding missed payments or hard inquiries on your credit history and doing credit score monitoring through free online tools such as Credit Karma.
There is no hard and fast rule for the best kind of mortgage. It honestly depends on your preferred loan terms and your situation.
Writing this today in 2021, though, we highly recommend going for a fixed-rate conventional loan and, as much as possible, paying at least 20% money down. This way, you avoid paying for that dreaded private mortgage insurance. You also lock in the lowest available interest rates that have only encouraged more people to invest in the real estate market today.
Furthermore, while you may not have a hard time finding a loan officer who will approve your application due to your good credit score, you will also get the opportunity to have lenders running after you for your business. After all, you’re still a customer!
Do your best to shop around for the best deal, and do not settle for the first offer you will hear. Don’t be one of the 47% of homebuyers who fail to compare lenders.
Know your worth. You’ve earned it!