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Defining Mortgage Loan Terms: Down Payment vs Credit History


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TERMINOLOGY

When shopping for a mortgage, you will notice that mortgage loan terms vary depending on the type of mortgage you are seeking, your credit and your down payment. The ideal borrower has great credit and lots of cash to put down. However, most borrowers do not meet these criteria. If you have high credit, you can usually put less down. If you have poor credit, you need more down. Each of these scenarios will change the terms of the loan you receive.

Federal Housing Administration

The FHA operates a little differently from a conventional mortgage. You can actually have low credit and a low down payment. The terms will not really differ with them since the interest rate is going to be the same regardless of credit or down payment. If your credit score is very low, you will be asked for 10 percent down. Anyone with a score over 620 can put down 3.5 percent. Each of these borrowers will receive the same rates and terms. The only way to get better terms with the FHA is to put down enough to not pay private mortgage insurance. This typically would require a 20 percent down payment.

Hard Money Lender

A hard money lender is commonly used in investment properties, but some residential home buyers use hard money lenders. These are for those who have a low credit score but high down payment. Credit is not important in a hard money loan. You can have bad credit or no credit at all. You will be required to put down at least 35 percent, however.

Conventional Loan

A conventional lender really likes a high down payment and high credit but will also grant a loan to someone with a low down payment and high credit. This would be a typical 30-year fixed-rate loan. In today's market, the least you can put down on a conventional loan is 5 percent. A conventional lender likes a credit score of 650 or higher. Your interest rate will be lower the higher your credit score is. Your terms will also change depending on your down payment. If you put down less than 20 percent, you will be required to pay private mortgage insurance. This insurance protects the lender in case of default. With less than 20 percent down, you are a bigger risk to the lender, and they will require this insurance. You will keep paying this insurance premium until you have paid off 20 percent of the loan or your house has increased in value 20 percent. This can be costly and is in addition to your homeowner's insurance. If you have a low credit score but still qualify for the loan, you will have a higher rate than someone with a good score. However, with a large down payment, you may be able to avoid private mortgage insurance (PMI).