Types of Mortgage Loans – The Basics

Understanding Mortgage Loan Options

In the past, homebuyers had limited mortgage loan options. Today, the variety of available mortgage products is extensive. Here’s a primer on the fundamental types of mortgage loans and key considerations:

Mortgage Loan Types

1. Conforming Loans Conforming loans adhere to the guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that purchase and sell mortgages from lenders. These entities impose limits on the loan amounts they will buy; for single-family homes, this cap is typically around $360,000. However, in high-cost areas such as San Diego, where average home prices exceed this cap, conforming loans may not be sufficient.

2. Non-Conforming Loans (Jumbo Loans) Non-conforming loans, often referred to as "Jumbo Loans," are for amounts that exceed the conforming loan limits. Jumbo loans typically have slightly higher interest rates compared to conforming loans. Despite this, they are widely available for borrowers needing larger sums.

3. Bad Credit Loans In the mortgage industry, borrowers with less-than-ideal credit are often categorized based on their credit profile.

• “B Paper”: Refers to borrowers with minor credit issues.

• “D Paper”: Refers to borrowers with significant credit problems, such as bankruptcy.

The worse your credit profile, the higher the interest rates, points, and down payment amounts you may face. It’s important to carefully assess whether these additional costs are manageable and if they make financial sense for your situation.

Interest Rates

When choosing a mortgage loan, you will generally have the option between a fixed or adjustable interest rate:

• Fixed Interest Rates: Offer a stable rate that remains constant throughout the life of the loan. This predictability can be advantageous for budgeting and long-term planning.

• Adjustable Interest Rates: Initially lower than fixed rates, adjustable rates can fluctuate based on changes in the market. This means your monthly payments could increase or decrease over time, reflecting shifts in borrowing costs. Choosing an adjustable rate involves evaluating the risk of future interest rate increases.

Conclusion

For many borrowers, traditional mortgage options such as conforming and non-conforming loans are sufficient. If you face difficulties qualifying for these loans, remember that there are numerous other mortgage products available. Explore your options with a mortgage broker to find the best solution for your financial situation.