Summary: Buying a home is a big endeavor and one that you certainly want to do armed with all the up-to-date information you can get. You should know that you have many options in terms of home loan programs. Knowing what these options are can help you choose the one that works best for you. In this article, we’ll go over what these options are to help you determine which is ideal for your situation.
When it comes to mortgages in Washington State, you have several mortgage products and programs to choose from. Let’s take a look at what these loan options are that are most commonly used by home buyers in Washington.
Overview of Washington Home Loan Programs
You want to make sure that you select the best mortgage program for your situation, and to do that, you’ll want to get more familiar with the key features of each. You’ll also want to weigh the pros and cons of each to help make your decision an easier one. This will afford you the best chance of selecting the best financing option for you in Washington.
Some of the most popular Washington mortgage programs and loan types include:
- Federal Housing Administration (FHA) loans
- Conventional home loans
- 30-year fixed-rate mortgages
- Hybrid ARM loans
Securing a mortgage can be difficult for many borrowers who may struggle to come up with a sizable down payment amount to buy a home in cities such as Seattle, Bellevue, Kirkland, Redmond and Federal Way. It may also be tough for borrowers to meet specific minimum credit score requirements that are needed to get approved for a conventional mortgage. FHA loans may help to solve these issues thanks to their more lax lending criteria in terms of down payments and credit requirements.
The FHA loan program is one of the more common Washington mortgage programs, especially for first-time home buyers. These types of loans are attractive to Washington home buyers who may not have the funds needed for a hefty down payment. This program allows qualified borrowers can buy a home with low down payment amounts. In fact, as little as 3.5% of the purchase price of the home is needed to secure this type of loan program, if qualified.
Minimum credit scores are also lower for FHA loans compared to conventional loans. While conventional loans require credit scores of anywhere from 620 to 640 to qualify, FHA loans may be obtained with scores as low as 500. That said, those who wish to take advantage of a 3.5% down payment may need to have a credit score of at least 580.
The drawback of this loan program is that mortgage insurance will need to be paid. This will increase monthly payment amounts. This insurance policy is designed to protect the lender in the event that the borrower defaults on the loan.
More specifically, there are two insurance premiums that the majority of FHA home buyers will have to pay, including the following:
- Upfront mortgage insurance premium (MIP) – The premium paid is 1.75% of the loan amount.
- Annual MIP – The premium for this insurance can vary, but it’s most often 0.85% of the loan amount.
Despite these potential drawbacks, the benefits of FHA loans outweigh the downfalls for many home buyers in places like Tacoma and Lynnwood.
Conventional Mortgage Loan Programs
Unlike FHA loans that are backed by the government, conventional loans are not. That’s what makes these loan types different from the former. Conventional loans are given by private entities and are insured by private insurance firms. More specifically, “private mortgage insurance” (PMI) is the name given to the insurance policy that borrowers must pay if their down payments are less than 20% of the purchase price of the home.
Washington home buyers who are able to come up with a down payment of 20% typically go with a conventional mortgage, especially in an effort to avoid additional payments in the form of PMI premiums.
That said, many Washington home buyers are not able to come up with a 20% down payment, which is why PMI is required. Again, this type of insurance policy is meant to protect lenders, despite the fact that it is the borrower who is paying for the premiums. Having said that, this type of insurance makes it possible for many buyers to purchase a home that otherwise wouldn’t be able to qualify for a mortgage. In this case, PMI can be seen in a favorable light.
30-Year Fixed-Rate Mortgages
The 30-year fixed-rate mortgage is the most commonly used loan programs and products in Washington and the country. That’s because it offers predictability in rates and mortgage payments and makes monthly payments more affordable because of the longer-term period.
The two key features of this loan type are the term and the rate structure. The term is for 30 years and the rate is fixed throughout the term. With this mortgage program, the interest rate remains the same throughout the entire 30-year term of the mortgage. Thus, monthly mortgage payments will remain unchanged month-to-month, which is helpful for borrowers who prefer some predictability to help better manage their budgets. In fact, this is the biggest perk of this Washington loan program.
It should be noted that both conventional and FHA loans can have 30-year fixed-rate terms, so you have options if a longer-term mortgage is something that appeals to you.
15-Year Fixed-Rate Mortgages
15-year fixed-rate mortgage programs are similar to 30-year fixed-rate mortgages in regards to the interest rate that remains fixed throughout the loan term. For this type of loan program, borrowers have 15 years to repay their loan.
Borrowers who are able to afford higher mortgage payments can save tens of thousands of dollars or more in interest over the life of the loan. They can also pay off their mortgage faster since they are paying off their mortgages in half the time compared to 30-year fixed-rate mortgages.
Similar to FHA loans, VA loans are backed by the government and are offered to veterans and military members who qualify. Those who qualify for such loans may find them very beneficial, especially when it comes to the more lax credit requirements and the potential to take advantage of a zero-down payment option.
FHA and conventional loans have limits when it comes to the amount that homebuyers can borrow, and such limits are based on each county in the state where a home is being purchased. When the loan amount exceeds these limits, the loans are considered “jumbo loans.”
Jumbo loans are used when a home being bought is too expensive for a conforming mortgage amount to cover. In Washington, the 2020 conforming loan limit is currently $510,400 for most counties, and the 2020 FHA loan limit ranges from $331,760 to $741,750 for 1-unit properties, depending on the county.
Hybrid ARM Loans
Adjustable-rate mortgages (ARMs) are yet another loan option for Washington home buyers. That said, they are not as common as fixed-rate loans because there is some level of uncertainty and unpredictability when it comes to fluctuations in interest rates. However, these types of loans may be able to save you money in certain situations, though you would have to get familiar with how they work to save money.
In today’s current mortgage environment, the majority of Washington ARM loans are considered “hybrid” mortgages because it has traits of both fixed and adjustable mortgages. During an introductory period, the interest rate remains fixed. Once that period ends, the rate will adjust at various intervals.
Perhaps the most common example of a hybrid ARM is the 5/1 ARM. With this Washington home loan product, the interest rate remains fixed for the first five years (which is why the first number is “5”). Once that time frame expires, the rate will adjust once a year (which is why the second number is “1”).
Other types of ARM loans exist in addition to the 5/1 ARM, such as the 3/1 or 7/1 hybrid ARM. In these cases, the initial rate period would be 3 years or 7 years, respectively.
Which Washington Loan Option Is Best for You?
While the above-mentioned loan programs are the more commonly-used programs in Washington, they are not the only ones available. This article was meant to help you get familiar with some of the more popular loan programs in Washington and to encourage you to do some homework on what options you have.
Ready to Apply For a Mortgage in Washington?
Are you are thinking of buying a home in Washington State? Then you’ll want to work with the experts in mortgages to get the right mortgage for you. At Sammamish Mortgage, we provide the borrower with many mortgage programs in Washington, as well as in Oregon, Idaho, and Colorado. Get in touch with Sammamish Mortgage today to apply for a mortgage or to have any of your questions answered.