A Brief Description the Basic Types of Mortgage Loans

Conventional Mortgage - This mortgage, which is also known as a fixed-rate mortgage, is the one that is thought of when most people think about buying a home. These types of mortgages can run from 10 years to as much as 50 years, in some cases. They are completely amortized, or paid in full, at the end of the contract period.
In today’s market most of these loans require between 20% to 30% cash down payment depending on the credit score of the borrower. Closing costs add to the amount of cash that a fixed-rate mortgage will require. Usually this will run about $3,000.00 to $5,000.00 for the average loan. This is above and beyond the down payment.

FHA Insured Mortgage - The FHA doesn’t make loans or build houses. It only insures loans offered by private lenders. Mortgage insurance protects lenders against losses that result from defaults on home mortgages by the buyers. This insurance makes it possible for a buyer who cannot qualify for a conventional loan to still be able to buy a house or condominium. Townhouses and condos must be in a HUD approved complex to qualify for FHA insurance. Currently a little over one third of all home purchases in the U.S. are backed by an FHA loan.

The FHA loan programs normally require 3.5% down although in some cases a down payment as low as 0.0% can be worked out. Closing costs are quite low and in some cases no closing cost will be required. The maximum loan amount will vary and will depend on what state and county the property is located - check the FHA website to see the loan limitations for your state – www.fha.gov .

A common misconception is that the FHA buyer assistance programs are only for first time buyers. This is not the case. Any prospective home buyer can use an FHA insured loan as long the buyer doesn’t have a current FHA insured loan in their name. If they do have an FHA insured loan in their name that loan must have a Loan-to-Value (LTV) ratio of 75% or less. To find your LTV ratio divide the total amount of money that you owe on your home by the appraised value of your home.

A buyer can qualify for an FHA insured loan with a much lower credit score than a conventional loan requires. FHA rules governing credit scores state that any application made after October 4, 2010 where the applicant has a credit score of 580 or above is eligible for the maximum amount of FHA financing available. Borrowers with credit scores of 500 – 579 are eligible for 90% LTV.

VA Backed Mortgage - The main advantage for using this loan program is the 0.0% down payment that is required by the VA. It should be noted that the lender can require a down payment at his discretion. This determination is usually based on the borrower’s credit score. A down payment can also be required if the loan is made with graduated payments or if the purchase price of the home is more than the reasonable value of the property as determined by the VA.

There are limitations on the amount of closing cost that the lender can charge. As this is subject to change please check the VA website, http://VA.Gov , for the current status.

Applicants with other than honorable discharges will usually require further investigation by the VA. This is necessary to determine if the separation from active duty was under other than dishonorable conditions. To see a complete list of eligibility requirements please check the VA web site.

Interest Only Mortgage - Labeling a mortgage as “Interest Only”, in most cases, is a misnomer. These loans are usually not really a loan in which the borrower only pays the interest and nothing more. “Interest Only” loans normally have a provision to let the borrower make an interest payment(s) at a specified time(s). There are some of these loans that let the borrower make only interest payments for the life of the loan and then require a balloon payment of the original loan amount at the end of the payment schedule. This type of mortgage is not a good option for most borrowers.

Adjustable-Rate Mortgage - There are many pitfalls to these types of home loans. With this loan the borrower does not know what the monthly house payment will be in the future. If interest rates go down the payment will go down but if rates go up so does the payment. As it is impossible to gauge what interest rates will do over the life of a 30 year mortgage this is quite a gamble.

Just one example - A home bought for $300,000.00 on an ARM with a starting interest rate of 4% will have payments of about $1,432.25 per month to cover principal and interest. If the interest rate adjusted to 6.5% the payment would go up to $1,896.20 and if interest went to 9% that payment would jump to $2,413.86. Not many people can afford a $1,000.00 a month jump in house payments so be cautious of ARMs.

FHA 203K Program - When a borrower wants to purchase a house that needs repairs or modernization he/she will usually have to obtain financing first to purchase the home and then additional financing to do the repairs. They will then have to obtain a permanent mortgage when the work is completed to pay off the interim financing. Often this financing, the purchase and repair loans, can involve relatively high interest rates and short payoff periods.
The FHA 203(k) program was made to address this situation. The borrower can get one mortgage, at a long-term and competitive fixed rate, to finance both the purchase and rehabilitation of the property. To provide funds for the repairs, the mortgage amount is based on the projected value of the property with the repairs done and taking into consideration the cost of the work. This is a great program if the buyers are buying a “Fixer-Upper”, they want to make any special needs renovations or any other repairs or upgrades that the buyer requires or desires.

Specialty Type Mortgages

Combo or Piggyback Mortgage - This is actually 2 separate loans used to purchase 1 home. These are harder to come by in today’s mortgage market. To pull off a piggyback mortgage package the borrower must have an excellent credit history. He/she will take out a 1st and 2nd mortgage on the property at the time of purchase. These mortgages can be conventional or ARM or a combination of both. One of the reasons to use a piggyback type mortgage program is to try and eliminate the requirement for mortgage insurance when the borrower has less that 20% down payment.

Equity or Second Mortgage - These are nothing more than a second or junior mortgage. They are in addition to an original mortgage and are in a lesser position. They use the equity in a home to secure a loan. These loans can be fixed rate, ARM or even a line of credit. To qualify for this type of loan most borrowers need to have equity in their home of a greater amount than the loan they are applying for.

Bridge or Swing Loan - These loans are used when a borrower wants to buy a home while an excising home is on the market but not yet sold. Equity in the borrower’s current home is used to secure the bridge loan. This loan is typical paid off with proceeds from the sale of the current home.

Reverse Mortgage - These are available to anyone over the age of 62. The home owner must have enough equity in his house to meet the lenders requirements. These vary from lender to lender so the borrower will have to contact the lender to see if their home equity will meet the lender’s requirements.

These are a mortgage where the lender makes monthly payment to the home owner as long as the home owner lives in the mortgaged home. The interest that is paid by the home owner can be fixed-rate or adjustable.

The advantage with this program is that, unlike a second mortgage, there is no payment due until you vacate the home or it is sold. The interest is only charged on the money you have received not a lump sum.

Interest rates on all these mortgage options are subject to rapid change and therefore are not quoted. Check with a lender, broker or agent to get the latest rates.

In general there are 3 basic types of dwellings that qualify for these mortgages. These are all Single Family Real Estate Homes (SFR) - they include Manufactured Homes (Mobile Homes), Condominiums or Townhouses and Public Urban Developments (PUD). It should be noted that to acquire a FHA or VA mortgage for a Condominium or Townhouse the Condo or Townhouse must be in a HUD approved complex or community.

This article was based on guidelines at the time this article was written – May 12, 2012. Please check with the applicable agent or agency to ensure that they are still current before making any buying decisions.