For most people, the purchase of a home will require a mortgage. In fact, a report released in 2022 by the National Association of Realtors revealed that more than three-quarters of homebuyers are financing a home purchase — a ratio that is actually significantly lower than the previous year.
All of that is to say, mortgages are incredibly common. But, within the world of home financing there is a diversity of elements, from down payment requirements to credit score minimums to options related to mortgage types. It can be dizzying to keep track of what option or options may be right for you.
Finding the best way to finance a home really depends on the buyer. But there are a few key variables homebuyers should keep in mind when exploring all of the mortgage options that are available. Here’s a round-up of what to consider when financing a home in Phoenix.
Mortgage options. In general, there are two different avenues for buyers when it comes to mortgages — either conforming or nonconforming loans. Conforming loans, which include conventional loans, fixed-rate and adjustable-rate mortgages, are eligible to be purchased by one of two real estate investment companies. Nonconforming loans include government-backed loans, such as VA or FHA loans, and jumbo loans often used for luxury purchases. Each of the two avenues have their own unique benefits and ideal circumstances for when they would appeal to a buyer.
For example, a fixed-rate mortgage offers buyers the same monthly payment for the life of the loan. But, when interest rates are high at the time of purchase, it also means that the buyer is stuck with that rate for the life of the loan — unless the buyer refinances. An adjustable-rate mortgage fluctuates with the market, after a set introductory period, which may appeal to a buyer who isn’t planning on keeping a property or loan for longer than the introductory phase of the loan.
Credit score. Requirements for credit score minimums vary depending on which mortgage option is being used. Conventional loans, which are the most common type of mortgage, require a minimum credit score of 620. Government-backed loans have lower thresholds. While VA loans usually require a score of 620, that may be fluid, and FHA loans require between 500 and 580 depending on the size of the down payment. Jumbo loans typically require a considerably higher credit score, near the 700 range.
Down payment. Just as requirements for credit scores fluctuate depending on the loan type, the same can be said for down payment requirements. When it comes to conventional loans, minimum down payment requirements float between 3% and 25%, sliding higher for second homes or investment properties. Jumbo loans for luxury properties typically require at least 10% down, while FHA loans require 3.5% to 10% down, depending on a buyer’s credit score. VA loans and USDA loans, specifically for designated rural properties, offer zero-down payment financing options.
Mortgage insurance. It is important to remember that the size of a down payment can impact the probability of a loan being saddled with private mortgage insurance (PMI) or mortgage insurance premiums (MIP). These fees are tacked on to a buyer’s monthly payment when a down payment falls below 20%. That said, the National Association of Realtors found that the median down payment in 2022 was 13%.
One final variable to remember, when considering mortgage options and down payments, is closing costs. They generally come in at 2% to 5% of the principal of the mortgage. So, closing costs are minimized by a lower threshold of borrowing — which means, borrow less and save and closing costs.
With so many options and variables when it comes to mortgages, it is highly important to find a trusted mortgage professional who will strategize with you to create the best loan scenario for you – not just to shop online for the best rate. Oftentimes, the best rate on the internet comes at the expense of getting the best loan program for you.
If you’re considering a home purchase or sale, the team at Halpern Residential is ready to help and introduce you to our array of trusted lender partners. We keep an eye on market trends so you don’t have to. Moving or investing in real estate is an exciting time of transition, and we’re ready to help you with it. Contact us today so we can learn more about how we can support your needs.
Author: Trevor H. Halpern, J.D. is the #1 independent agent at Phoenix-based North&Co. and the CEO of Halpern Residential. As a Phoenix native, Halpern’s deep knowledge of both people and property has allowed him to create client success in all areas of town.