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Monday, May 11, 2009

What Are the Three Main Types of Loans?

There are three main types of mortgage loans you might consider when buying a home. These three types are conforming, non-conforming, and bad credit loans. Let's briefly discuss each...

Conforming loans are loans that conform with certain terms and conditions set by Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae are stockholder corporations that purchase most of the mortgage loans issued by lenders in the United States. These conforming loans are limited in terms of the amount of money a borrower may qualify for, based on their credit rating and level of income. These loans generally require a down payment, and the property being bought must be valued prior to loan approval. The limits on conforming loans change every year.

Nonconforming loans do not adhere to the guidelines set forth by Fannie Mae and Freddie Mac. These loans are often called 'jumbo' loans because the limit is usually much higher than the allowed amount of a conforming loan. Jumbo loans usually have a higher interest rate, a higher monthly payment, and a higher closing cost. However, these loans allow families to purchase large and more expensive homes.

Bad credit loans are designed for people with imperfect credit. The main benefits of bad credit loans is to allow people to purchase a home, despite having a poor credit score. Home owners have the opportunity to re-establish their credit by paying their mortgage payment on time, every month. However, a person with bad credit who qualifies for a home loan often has to pay a higher interest rate than someone with good credit. The monthly payments on such a mortgage will be higher than normal and the closing costs on the home will be higher. A person with bad credit may also have to come up with a larger than usual down payment. Bad credit loans may also have prepayment penalties that may cost thousands of dollars if you pay off the loan before a specified amount of time.

Conforming, non-conforming and bad credit loans will generally have different interest rates. In each case, the interest rate may be fixed or adjustable. Any of these three types may be 'interest only' too. An interest only loan is where interest comprises 100 percent of the monthly payments, with the principal to be repaid by the end of the loan term.

A fixed loan is often popular in uncertain times, as the payment will remain the same each month and a percentage of each monthly payment will be applied to the principal balance of the loan. An adjustable rate means the monthly payment may change from month to month and the amount of the payment applied to the principal balance will change too -- based on the prevailing interest rate.

As you can see, you have a number of options when it comes to getting a home loan. Ideally, consult with your mortgage planner about which of these (or any) loans is best for you, based on your aims and situation.


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