Types of Mortgage Loans The Basics

In the past, homebuyers more or less had limited mortgage loan options. These days, there are more options than ever, but here's a primer on the basics.

With the real estate market explosion over the last 10 years, a call has gone out for unique mortgage loan programs. Bankers have been more than happy to answer the call. For many borrowers, traditional mortgage loans still fit the bill. Here's an introduction.

1. Conforming Loans - Conventional loans "conform" to Fannie Mae or Freddie Mac guidelines. They have the lowest rates for two reasons: (1) they are for the most qualified borrowers; and (2) they are subsidized by the Government. Conventional Loans can be broken into two sub-categories: "Standard Conforming" for loan amounts up to $417,000 and "High Balance Conforming" for loans from $417,000 to $729,750. Interest rates for loans below $417,000 tend to be about 3/8 of a percent lower than high balance rates.

The vast majority of Conforming Loans are 30 year fixed rate mortgages, although there are some very competitive 5/1 and 10/1 ARMs available. A 5/1 ARM is an adjustable Rate mortgage that is fixed for the first five years before rolling over to an adjustable rate. When 30 year fixed rates are below 6%, near historical lows, it is highly advisable to permanently lock in such low rates.

2. Non-Conforming Loans - Known as "Jumbo Loans", these mortgages are written for loans that exceed the $360,000 cap mentioned previously. They tend to have slightly higher interest rates, but are readily available.

3. Bad Credit Loans - In the mortgage industry, mortgage brokers often refer to a borrower's "paper." This paper refers to people with less than stellar credit. "B" paper refers to relatively small problems, while "D" paper refers to bigger issues such as bankruptcy filings. The worse your paper, the more you can expect to pay in interest, points and down payment amounts. You need to carefully determine whether paying these extra penalties makes financial sense.

With each of the above loans, you'll have an option of going with a fixed interest rate or an adjustable rate. Fixed interest rates simply set a definitive interest rate that will be charged over the length of the loan. Adjustable rates typically start at a figure lower than fixed rates, but can be moved up to reflect changes in the cost of borrowing money. In many ways, you are betting whether interest rates will increase in the future.

Your Down Payment
Conforming Loans require a down payment of at least 5% of the purchase price if the loan amount is $417,000 or less in most areas (that 5% must consist of seasoned funds or savings). If a loan is in excess of $417,000, at least 10% of the purchase price will be required for a down payment. FHA financing, however, requires only 3.5% of the purchase price for a down payment.

Even better is that the entire down payment can be a "gift" from a relative. You do not need to have "seasoned funds" or savings for an FHA down payment. If you do need a gift, we recommend that you not get it now, as FHA guidelines require specific procedures for use of gift funds. Please Note that Conforming Loan financing that involves less than a 20% down payment will require "mortgage insurance". This insurance is equal to about 0.35% to 0.60% of the loan amount and it is paid on a monthly basis. The mortgage insurance rate is determined primarily by the loan-to-value ratio and your credit score. FHA financing always requires mortgage insurance, irrespective of down payment size.

For a great majority of people, basic mortgage loan options still suffice when it comes to borrowing money. Don't fret if you have problems qualifying for these loans. There are many other options on the market these days.