Types of mortgage loans

There are basically 3 major types of mortgage loans which we will look into in the following sections.

1. Conforming Loans

These loans adhere to the requirements fixed by the 2 GSEs which buy & sell mortgage loans from lenders, Freddie Mac & Fannie Mae. The GSEs have set caps on the mortgages that they buy for various types of mortgage loans such as single-family home loans and other type of home loans.

2. Non-conforming Loans

Non-conforming loans are also called as Jumbo Loans. These mortgages are for loans that exceed the conforming loan limits and normally have slightly higher rate of interest.

3. Bad Credit Loans

In mortgage sector, borkers refer to a loan applicant's "paper". Here paper means a borrower who has less than perfect credit. "B" papers means a borrower with relatively minor problems and "D" means the applicant has serious problems like bankruptcy filings. The lower your paper, the more you should expect to pay in terms of interest, down payment & points.

What borrower needs to apply for a mortgage

In this article we look at the documents borrower would be required to have at the time of applying for a mortgage -

1. Investment statements for the last 3 months.
2. Pay stubs for last thirty days.
3. Statements for bank accounts for last three months.
4. Documented proof of other incomes; stock dividends, alimony payments etc.
5. Tax returns for last 2 years.
6. Statement to explain the source of down payment for the home.
7. W-2 Forms for the past 2 years.
8. If selling another home, estimate of proceeds from that home.
9. Bankruptcy filing details, if any.
10. Document to show value & ownership of other high value assets.

Type of mortgage to select

At the time of selecting a type of mortgage borrower has to take into consideration certain points which help in selecting the most suitable mortgage.

If the borrower wants to keep the house for a long period of time then opting for a frm will save him money. In addition to it if his income is not going to change appreciably over the next few years then choosing a fixed rate mortgage gives borrower the security that interest payments & mortgage principal remain the same.

On the other hand if borrower knows that his income will increase over time & he wants to get approved for a large mortgage then adjustable rate mortgages should be selected.

While selecting adjustable rate mortgage, borrower needs to be certain that -

• He will be able to afford higher payments if interest rate increases on the ARM.
• He plans to live in the house for less than five to seven years.