A loan product created by a lender and offered to borrowers. It has a specific set of features and costs, which must be disclosed to consumers before they can be bound by its terms.
A loan product created by a lender and offered to borrowers. It has a specific set of features and costs, which must be disclosed to consumers before they can be bound by its terms.
In mortgage lending, there are many programs available and many combinations of features and requirements. Mortgage loan programs can be defined in many ways. Here are the most common:
Government vs Conventional
Government-backed mortgages are guaranteed by government agencies if borrowers default, which protects lenders from losses. This allows lenders to make loans that they might otherwise consider too risky. Most mortgage loans requiring low down payments are government-backed. These loans have been designed to increase home ownership and make it available to those who might not otherwise be able to afford it. Examples are FHA, VA and Rural Housing loans from the USDA.
Fixed vs Adjustable
Fixed-rate mortgages come with interest rates that do not change over the life of the loan. They are less risky for borrowers but riskier for lenders (lenders can lose money if interest rates rise). Because of this added risk, interest rates for fixed mortgages are higher than they are for ARMs. Borrowers do face one downside – when interest rates fall, they have to refinance to take advantage of this; those with adjustable loans get an automatic reduction.
ARM mortgage rates come with introductory rates for a specified period, and once that period expires, their rates can change (reset) at regular intervals. If interest rates rise, borrower payments go up. However, if rates fall, their mortgage payment drops – refinancing is not required.
Jumbo vs Conforming
Conforming mortgage are those that meet guidelines set out by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. These mortgages can be sold to investors through the GSEs, making them less costly for lenders. Jumbo home loans are too large to conform to the GSE guidelines. They can be sold to investors or held by the lenders that make them. Jumbo mortgage rates can be higher than conforming rates because they often cost lenders more to originate and service.
Qualified vs Non-qualified
This is a fairly new distinction. In its efforts to make mortgage lending safer for borrowers and more transparent for investors, the government classifies mortgages as either qualified or non-qualified. All mortgage lenders are required to verify that the borrower has the ability to repay the loan before making the mortgage. The safest loans are called qualified mortgages or QMs, and lenders that make them are presumed to have met the ability-to-repay standard and are protected from certain kinds of lawsuits if the loans are not repaid as agreed, Non-QM loans are not necessarily bad, but lenders that make them don’t get the same automatic protection from litigation.