Types of Loans
A conventional loan is not made by a government entity nor insured by a government entity. It’s what we refer to as a non-GSE loan. A non-government sponsored entity.
Conventional mortgage loans, although not insured by the federal government, must adhere to the mortgage guidelines set by the Federal National Mortgage Association, also known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, often referred to as Freddie. Unlike federally insured loans, conventional loans carry no guarantees for the lender in the event the borrower defaults.
Home buyers can take out an amortized conventional loan from a bank, a savings and loan, a credit union or even through a mortgage broker that funds its own loans or brokers them. Two important factors are the term of the loan and the loan-to-value ratio (LTV).
The LTV can be lower than 80%. It can be whatever is comfortable for a borrower. If the LTV is higher than 80%, lenders require that borrowers pay for private mortgage insurance. The term of the loan can be longer or shorter, depending on the borrower’s qualifications.
FHA mortgage loan types are insured by the government through mortgage insurance that is funded into the loan. First-time home buyers are ideal candidates for an FHA loan because the down payment and FICO requirements are minimal. It usually requires a minimum of 3.5% down payment with FICO scores of 640 or in some cases low 600’s.
This type of government loan is available to veterans who have served in the U.S. Armed Services and, in certain cases, to spouses of deceased veterans. The requirements vary depending on the year of service and whether the discharge was honorable or dishonorable. The main benefit to a VA loan is the borrower does not need a down payment. The loan is guaranteed by the Department of Veteran Affairs, but funded by a conventional lender.
Interest-Only Mortgage Types
Calling a mortgage loan type an “interest-only mortgage” is a bit misleading because these loans are not really interest only, meaning the borrower pays only interest on the loan. Interest-only loans contain an option to make an interest-only payment. The option is available only for a certain period of time. However, some junior mortgages are indeed interest only and require a balloon payment, consisting of the original loan balance at maturity.
Hybrid Types of Mortgage Loans
Option Arm Mortgage Loans
Option ARM loans are complicated. They are adjustable-rate mortgages, meaning the interest rate fluctuates periodically. Like the name implies, borrowers can choose from a variety of payment options and index rates. But beware of the minimum payment option, which can result in negative amortization.
Adjustable Rate Mortgages
Adjustable-rate mortgages (ARMs) are loans that the interest rates adjust to an index accordingly. The interest rate fluctuates. It can move up or down monthly, semi-annually, annually or remain fixed for a period of time before it adjusts.
Borrowers who want to pay a lower interest rate initially often opt for mortgage buydowns. The interest rate is reduced because fees are paid to lower the rate, which is why it’s called a buydown. Buyers, sellers or lenders can buy down the interest rate for the borrower.
Specialty Mortgage Loan Types
Streamlined-K Mortgage Loans
Like the 203K loan program, FHA has another program that provides funds to a borrower to fix-up a home by rolling the funds into one loan. The dollar limits for repair work are lower on a Streamlined-K loan, but it requires less paperwork and is easier to obtain than a 203K.
Bridge / Swing Loans
These types of mortgage loans are used when a seller has put a home on the market — but it has not yet sold — and the seller wants to borrow equity to buy another home. The seller’s existing home is used as security for a bridge (also called swing) loan.
Equity Mortgage Loan Types
Equity loans are second in position and junior to the existing first mortgage. Borrowers take out equity loans to receive cash. The loans can be adjustable, fixed or a line of credit from which the borrower can draw funds as needed.
Reverse mortgage are available to any person over the age of 62 who has enough equity. Instead of making monthly payments to the lender, the lender makes monthly payments to the borrower for as long as the borrower resides in the home. The interest rate can be fixed or adjustable.