The 2 biggest factors that go into mortgage rates are equity and credit scores.  For conventional loans especially, rates are largely driven by how much home equity your mortgage loan is tapping into.  Higher LTV loans (loans using a lot of home equity) tend to have higher rates than lower LTV loans.  Other aspects of equity come into play as well.  Have a 2nd mortgage?  Conventional mortgage loans have rate adjustments for that.  Using that home equity to take cash out of your home rather than just seeking out a reduced rate?  You guessed it – rate adjustments!

Many factors determine mortgage rates, but there are some things that can put you in the best position to get a great rate

On top of the amount of equity used, credit scores play a huge factor in many loan products, especially conventional loans.  A rate for a borrower with a 620 FICO score can be vastly different than a borrower with an 820 FICO, even with all other loan details being equal.  The highest rates for conventional products tend to be for borrowers seeking high LTV loans with low FICO scores.  The best rates tend to be offered to high FICO scores with large down payments or large amounts of equity.

On top of those 2 factors, there are various other things that determine rate – borrowers seeking alternative (nonQM) loans like bank statement products or investment property products that qualify on debt-service of a property will generally see higher rates.

Government loans (FHA, VA, USDA) are great programs that can offer competitive rates that are not as sensitive to LTV and rate.  While rates will vary depending on credit score, they don’t vary as much because many of the rate adjustments present on conventional loans do not exist in government lending.  So for someone with less than perfect credit, this type of loan product may still offer an extremely competitive rate.

Rates vary substantially from lender to lender and borrower to borrower, but in general – better credit, larger down payments, government loans (VA mortgage loans usually offer extremely competitive rates), and full doc (income derived from W2s and paystubs instead of alternative documentation) loans tend to offer the best rate.

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One of the biggest mortgage misconceptions is how much money is needed as a down payment when purchasing a new home.   One rumor that won’t  die is that to buy a home, you need a large down payment.  So many people believe they need 20% down to buy a home.  In reality, that’s about 20% more than most people need to buy a home.

With the resurgence of low- to no-down payment products and programs, getting a mortgage for a new home requires very little in the way of down payment.  Below, you can read about

MasonMac can help bring you home with low and no down payment loan options

several programs that require little or no down payment, along with some info on when it’s a good idea to have or use a larger down payment, if possible.

The VA Loan program

For qualified veterans, the VA loan program allows a veteran and their spouse to purchase a new home with 0% down payment required (in most cases, as long as they have full eligibility and are buying a home using a VA loan under or equal to the VA mortgage limits for their area).

The VA loan has 0% down required, no monthly mortgage insurance, tremendous interest rates, allowances for sellers to pay closing costs, and flexible underwriting requirements for borrowers with less than perfect credit.  You do have to be a qualifying veteran to take advantage of this program, but if you can get a VA loan, it’s one of the best low/no down payment mortgage options available.

The USDA Loan program

USDA loans are available to low-moderate income buyers (low-moderate is subjective, but determined by county numbers, so those in high priced markets can have higher income than those in low priced markets), and require 0% down payment for qualified buyers.

USDA loans are available in rural areas (by definition, but many USDA-eligible areas are quite close to metropolitan areas), require $0 down, are flexible with credit requirements, allow sellers to pay closing costs, and have low monthly PMI.  Rates tend to be great on this product, too, so for those who can get a USDA loan, it’s a great product option for buyers without a lot of money for a down payment.

The FHA Loan Program

FHA loans generally have a down payment requirement, but it’s far less than 20%.  With just 3.5% down, a buyer can use the FHA mortgage program to obtain a great fixed rate.  To add to that, FHA allows buyers to use local or national down payment assistance programs to cover the gap between a true $0 down loan and FHAs 3.5% requirement.  There are many products and programs locally and nationally to help buyers with their down payment, and many will cover most or all of the down payment and closing cost requirements.

FHA loans have PMI, but it’s not that expensive, and the low rates and low down payment requirements, even with less than perfect credit, help to offset that cost.  Add in the fact that sellers can contribute to paying closing costs, and FHA becomes one of the best low down payment mortgage options out there.

Conventional Loans

This one is probably the biggest mystery, and also where the 20% down misconception comes from.  In order to get a conventional loan without PMI, a buyer needs to either have 20% down or get creative with a first and 2nd mortgage (commonly referred to as an 80-10-10 or 80-15-5).

Conventional loans, though, can be obtained with as little as 3% down.  There are also products for 5% down, 10% down, and 15% down under the conventional mortgage umbrella.  Conventional loans are priced (both the loan rate and mortgage insurance, or PMI, rates) based on down payment and credit score, so a buyer with great credit and 15% down will see a lower monthly payment than someone with less than good credit and 5% down, but that doesn’t mean a conventional loan isn’t possible to get.  With low fixed rates, PMI that can be cancelled when enough equity accrues, and an easy loan process, conventional loans with less than 20% down can be a great choice for many buyers.

Bottom line is that if someone wants to buy a home with less than 20% down, they have a tremendous amount of loan options at their disposal.  Rates, mortgage insurance, and other factors will determine which loan program is best for a buyer, and a great loan officer can share all of the available options, along with their positives and negatives.  So if a down payment is what’s holding you back from owning a home, please reach out to one of our Mason-McDuffie Mortgage professionals.  Chances are, you’ll be able to call yourself a home owner a lot sooner than you think.

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