A mortgage loan is secured by the home you are going to buy. Lenders are willing to offer a secured loan as it is backed by collateral and there exist a wide range of mortgage loans to cater to different needs of borrowers. These loans can be grouped under some basic types, which help distinguish them on the basis of some common characteristics.
Conforming vs. Non-Conforming Loan
The most important distinction between a conforming and non-conforming loan is whether or not the loan fulfills the underwriting requirements set forth by a GSE, such as Fannie Mae or Freddie Mac. A conforming loan must not exceed the loan limits set by these institutions, which is currently $417,000.
If your loan amount exceeds this limit, your loan would be classified as a non-conforming one, which is usually referred to as a jumbo loan. Your interest rate will definitely be higher in case of a jumbo loan.
A non-conforming loan is often sold on the secondary market to private investors or held in the lender’s portfolio as an asset.
Conventional vs. Government Loan
A conventional loan, which can be conforming or non-conforming, is a private sector loan and is not guaranteed or insured by the U.S. government.
A government loan, on the other hand, is insured by institutions like FHA and guaranteed by the Department of Veterans Affairs (VA), or the Rural Housing Service (RHS).
Fixed-Rate vs. Adjustable-Rate Mortgage
A fixed-rate mortgage is characterized by the interest rate and payments that remain the same throughout the life of the loan.
On the other hand, an adjustable-rate mortgage (ARM), which is also known as a variable-rate mortgage (VRM), does not have a fixed interest rate, but a rate that changes based on the index rate. Your payments may go down or up depending upon the changes in the rate of interest over the life of the loan.
First Mortgage vs. Second Mortgage
Sometimes you need to take another loan to pay for the cost of mortgage that you have been approved. These two loans are usually termed as First and Second mortgages. The loan that enables you to buy the home is the first mortgage and it has the first priority in case of a default.
The second mortgage can only be paid after the first mortgage has been paid, making it riskier for the lender. It is not unusual to find a second mortgage with a higher interest rate.
Assumable vs. Non-Assumable Mortgage
An assumable mortgage can allow you to transfer the mortgage to the new buyer when you decide to sell your home. A fee may be charged by the lender for the assumption. ARM loans in the adjusted period, VA and FHA loans are some of the examples of assumable mortgage.
Some mortgages contain a due-on-sale clause, which makes your mortgage non-transferable. Such loans are classified under non-assumable mortgage, which requires you to pay the entire balance that is due when you decide to sell the home.
Prime vs. Sub-Prime Mortgage
Loans offered to people with the highest credit scores are classified as prime loans. On the other hand, “B” Loan or “B” Paper with FICO scores from 620 to 659 and “C” Loan or “C” Paper with FICO scores from 580 to 619 are classified as sub-prime loans. Sub-prime lenders offer mortgages with less stringent credit and underwriting terms and conditions. However, borrowers need to pay higher interest rates and fees.
Insured vs. Non-Insured Mortgage
Lenders are protected with insured mortgages, so they insist on having an insurance policy when you fail to pay down as required by them. Note that the insurance protects the lender if a borrower defaults on the loan.