For the Right People, Conventional Mortgage is Best
For people that meet certain requirements, the conventional mortgage loan can be the best way to purchase a home. It is important to understand what the requirements are and to see if you fall in the conventional loan category.
While it is possible for people to get approved for a conventional loan with a score of 640, they would be better off pursuing an FHA loan. It financially makes more sense. People with high credit scores, usually above 740, are better served by the conventional loan. Why is this so, you may ask? Because of private mortgage insurance. Look at the following examples and see how private mortgage insurance increases with lower credit scores.
|Credit Score||Private Mortgage Insurance Rate (PMI)||Mortgage Amount||PMI Monthly Payment|
The chart illustrates that the lower credit score commands a much higher PMI rate, adding over $80 to the monthly mortgage payment. In 6 years, that is $5,760! In this situation the borrower would be better off putting more money down on the home or waiting until their credit score improves.
Improving Credit Scores
Thankfully, it is possible to increase credit scores with a bit of time and the right actions.
- First, make sure to pay every bill on time each and every month.
- Second, do not close out any existing loans, especially credit cards.
- Third, pay down credit card balances but leave the credit card open. The available credit on charge cards can drastically increase credit scores.
- Fourth, don’t let any account go to collection status.
- Fifth, do not charge more on a credit card than the available limit. Going over the limit on a credit card can drop a score by 50 to 100 points.
If you have a credit score of 720+, or you can reach that score within a few months, then a conventional loan could be your best option. It is also important to remember that you will need a 3%-5% down payment as well.