RealEstateBuySellExchange.com has assembled the most common loan types and given a brief explanation on each type.
Listed below are government issued loans and loans from mortgage lending institutes. Most of the loans listed below have many variations and within a city rates and options may vary significantly.
RealEstateBuySellExchange.com provides this information for you to become familiar with the loan differences. We suggest you contact your attorney, accountant and real estate advisor to help you choose the right loan for your needs. Two key items to consider in selecting a loan type is length of time you plan to live in the home and the monthly payment you can afford.
1. Government Loans : The next three agencies offer government-insured loans and the properties must meet certain standards to apply.
Federal Housing Administration (FHA), is part of the United States Department of Housing and Urban Development (HUD). FHA loans allow for a smaller down payment, usually 3-5%, and generally are easier to qualify than conventional loans. FHA loans have a statutory limit, see yearly loan limits, click here.
This loan is designed to help qualified veterans and service persons to obtain home loans with favorable terms and no down payment. VA Loans are guaranteed by the United States Department of Veterans Affairs. VA Loans have a limit of $203,000. The VA determines eligibility, qualifies applicants and issues a certificate of eligibility.
Rural Housing Service (RHS) is part of the United States Department of Agriculture. These loans are for low to moderate income households who live in small towns / rural areas. RHS loans have minimal closing costs and no down payments.
2. State & Local Loans
Many cities, counties and state housing agencies offer special programs for the first time buyer. These low to moderate housing finance programs have down payment assistance and generally are more lenient on the qualification guidelines. One example of this type of loan would be Mortgage Credit Certificate (MCC) which permits you a tax credit for part of your interest payment. Usually these programs are fixed rate loans with lower than current market rates.
3. General Loan Types
Two types of conventional loans exist, and they are conforming and non-conforming. All conforming loans have conditions and terms that follow the guidelines set forth by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac purchase loans complying with the guidelines from mortgage lending institutions, then they package the mortgages into securities and sell the securities to investors. Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous stream of affordable funds for home financing resulting in the availability of mortgage credit for Americans. Guidelines set by Fannie Mae and Freddie Mae consist of maximum loan amount, credit and income requirements, down payment, and suitable properties. The guidelines / limits are announced and adjust each year. Click here for the historical limits for first mortgages.
All loans not meeting the borrower credit requirements of Fannie Mae and Freddie Mac are called 'B', 'C' and 'D' paper loans. Loans conforming to credit requirements are referred to as 'A' paper. These loans are designed to assist persons who have had a bankruptcy, foreclosure or late payments on the credit report. The rates and interest vary depending on the credit history and borrower's financial situation.
As the name states, jumbo loans are larger loans above the maximum loan amount established by Fannie Mae and Freddie Mac. Jumbo loans usually have slightly higher interest rates because institutions buy and sell less quantity each year than conforming loans.
4. Fixed Rate Mortgages: Interest rate and mortgage monthly payments remain fixed for the period of the loan
Fixed Rate Mortgages are available for 10, 15, 20, 25, 30 and 40 years. Usually, the shorter the term of the loan, the interest rate is lower. The most common selected length of FRM Loan is 15 and 30 years. Obviously the shorter the term of loan, the less interest is paid for the life of the loan.
For those looking for a lower fixed monthly payment with a lower interest rate than a FRM Loan, a Balloon Loan may be for suitable. The difference is a Balloon Loan is usually for 3, 5 or 7 years, however this type of loan has a lump sum payment at the end of the term. Some Balloon Loans have refinancing options at the end of the term to convert the mortgage to a FRM, if certain conditions are met. These options loans are often referred to as 5/25 Balloon or 7/23 Balloon.
4. Adjusted Rate Mortgages: Interest rate and monthly payments, fluctuate over the period of the loan
Variable or Adjustable Rate Loans
These loans (ARM), Variable or Adjustable, have fluctuating interest rates and monthly payments over the life of the loan. Periodic adjustments, predetermined in the loan structure, create up or down adjustments based on a defined index. Therefore, interest rates will be adjusted causing the monthly payment amount to adjust. Most ARM's, the interest rate can adjust every month, every three or six months, once a year, every three years, or every five years, depending on the original contract. Usually Adjustable Rate Loans have a lower initial interest rate than fixed rate loans.
Negatively Amortizing Loans
When a loan has a payment cap but has no periodic interest rate cap, it may become negatively amortized. On a Negative Loan it is possible to have the loan balance increase rather than decrease. How this happens is when the interest rates rise to a level the monthly mortgage payment does not cover the interest due, any unpaid interest will get added to the loan balance.
Combined (Hybrid) Loans
A Hybrid loan is a combination of a Fixed Rate Mortgage (FRM) and Adjustable Rate Mortgage (ARM). These loans come in many different varieties.
A Two-Step Loan has a fixed rate for a predetermined time, usually 5 or 7 years, and then the interest rate adjusts to the current market rates. After the adjustment period, the loan remains at the new rates for the balance term of the loan, 25 or 23 years.
Graduated Payment Mortgages
Graduated Payment loans start with a low monthly payment and gradually increase the monthly payments at predetermined times. This loan usually allows a person to qualify for a larger loan amount. Please note, the loan will be negatively amortizing when the payment years are low, then reduces the principal during the higher payments years.
A Buydown Loan starts with a discounted interest rate and then gradually increases to an agreed upon fixed rate, usually this takes place within the first one to three years. This type of loan allows people to purchase a more expensive home and have lower initial monthly payments. To qualify for this loan type a lump sum payment to the lender at the beginning is needed. Options do exist and in some cases the lender can adjust fees with a raise in interest rates. The most popular Buydown Loan is called a 2-1 buydown.