Learn about the Major Home Mortgage Loan Types and other Home Loan Considerations

There are a great number of home mortgage loan types. Most of these fall into the "niche-loans" category and cover just about any home mortgage scenario known to man.

We will address the Major Types of home mortgage programs which apply to the vast majority of people shopping for a home mortgage.

Major Types of Home Mortgages

Fully Documented Home Mortgage: The most popular home mortgage choice. W2-type income earners will typically go Full Doc. A fully documented home mortgage generally results in the lowest mortgage rates of all home loan types. Income is required to be fully documented by submitting W2's, income tax returns, Social Security award statements, etc. You can qualify for most Full Doc home mortgage programs with credit scores of 600 and above for conventional home loans, and 580 and above for a FHA home mortgage. A full two-year work history is required with no gaps (longer than 30 days) in employment, and in the same line of work.

Stated Income Home Mortgage: This type of home mortgage is a popular choice for self-employed borrowers. Income is not documented. Self-employment is verified by submitting such documents as a business license, DBA, or CPA letter proving that borrower has been in business at least 2 years. A stated income home mortgage carries slightly higher mortgage rates as compared to Full Doc home loans. Also, a higher qualifying credit score is required relative to a Full Doc home mortgage. You will most likely need a 680 fico score and up, in order to qualify.

No Doc Home Mortgage: The "No Doc" home mortgage requires no employment, income, or assets verified. Your credit rating along with the value of your property, are the only factors used for qualification. This home mortgage program aids those with income that is difficult to verify. Mortgage rates are higher than documented mortgages and credit scores need to be in the 700 and up range at a minimum. No Doc loans may be hard to find at present as home mortgage lenders are choosing to avoid the risk associated with this loan type.

NINA Home Mortgage: The NINA (No Income No Asset) home mortgage program is similar to the No Doc home mortgage, except employment is verified. No income or assets are listed on the application. Self-employed borrowers will be required to submit a business license, DBA, CPA letter, or similar documentation for verification. As with a No Doc home mortgage, credit scores need to be in the 700 and up range and program availability is diminishing due to tightening lender standards.

Home Mortgage Considerations

Combined with a Full Doc, Stated, No Doc, or NINA refinance home mortgage program, a decision needs to be made on the home loan term (duration), and whether to choose fixed mortgage rates or adjustable mortgage rates.

Other consideration terms to be aware of are "interest only" home mortgage options, "balloon" loan options, and "teaser" mortgage rates.

Home Mortgage Term: The most common home mortgage "terms" are 10 year, 15 year, and 30 year. A fixed rate 30-year home mortgage will be paid in full after the 360th monthly payment.

Mortgage rates are lower on a 10 or 15-year mortgage terms, relative to a 30-year term. Shorter-term home mortgages have higher monthly payments, but also result in thousands of dollars of interest savings over the term of the loan relative to a longer-term home mortgage.

Fixed Mortgage Rates: Initial interest rate does not change for the entire term of the loan. Offers predictable, fixed monthly payments, and protection from rising mortgage rates.

This is a popular choice when mortgage rates are relatively low and the borrower plans to stay in the mortgage for at least 5 years.

Adjustable Mortgage Rates: Adjustable Rate Mortgages (ARM's) have lower mortgage rates to start, relative to a fixed rate. The interest rate is later adjusted at times based on the program's "index". The most common indices are the US Treasury Bills, California's 11 th District Cost of Funds (COFI), and the London Interbank Offered Rate (LIBOR).

Home mortgage lenders add a set margin to that index resulting in payments that can go up or down. ARM's usually have interest rate caps limiting the amount your loan's mortgage rates can go up or down each time it is adjusted, and the maximum rate up or down over the life of the loan.

ARM's are a popular choice for borrowers that do not plan to stay in the home mortgage for more than 5 years.

Interest Only Home Mortgage: With this mortgage, you only pay the interest on your loan for a specified set period of time, usually 5 to 10 years. Payments are typically based on a 30-year term.

Your monthly payment is lower than a traditional amortized payment, but the principal balance remains unchanged. After the initial set period, most choose to refinance or are required to either pay off the balance in a lump sum, or accept an adjusted mortgage rate.

An Interest-Only home mortgage can be a good fit for those expecting home appreciation and do not expect to stay in the home loan for more than 5 years.

Balloon Home Mortgage: Commonly comes due in a relative short term of 5 to 10 years, but the payment is based on a 30 year term.

A Balloon home mortgage usually qualifies for lower mortgage rates, but there is a risk to consider. The outstanding principal mortgage balance is required to be paid in-full at the end of the balloon term. The borrower must pay the balance in cash, refinance, or sell the home at term expiration.

Balloons are often considered by borrowers expecting an increase to income over the next few years, or anticipate a rising value in the housing market.

Teaser Mortgage Rates: "Teaser Mortgage Rates" are offered to attract borrowers to ARM's. The initial discounted interest rates can be as low as 2% or even lower.

The introductory mortgage rates are typically limited to a relative short period of a year or less.

Interest rates increase significantly and monthly payments can virtually double after the introductory rate period has ended. Teaser rate programs commonly lead to "negative-amortization" (negative equity) for the homeowner because the market-rate interest (as opposed to the "discounted" introductory mortgage rates) on the loan starts to accrue from the start, and monthly payments aren't enough to cover the interest, let alone pay down any of your principal.

Teaser-rate home mortgage programs commonly have large pre-payment penalties. Be very careful of home mortgage ads quoting super low mortgage rates.

Mortgage Pre-Payment Penalties

Be sure to ask your lender if a pre-payment penalty applies to your loan, before you apply for the home mortgage.

Pre-Payment Penalty: A financial penalty is incurred if you pay off your home mortgage entirely or refinance into another loan before the predetermined time period is up. There are many home mortgage lenders that do not impose prepayment penalties.

Pre-Payment Penalty Terms: Usually expressed as a percentage of the borrower's outstanding mortgage balance at the time of pre-payment, or a specified number of months of interest. Usually, the penalty time-frame is between 1 and 3 years, but can go as high as 5 years.

Borrowers typically get a lower interest rate if they accept a prepayment penalty. But, the major things to consider are what you are giving up, how large the penalty, and how long before the penalty goes away?

Another important consideration is whether the prepayment penalty only applies to refinancing. You don't want to be subject to a pre-payment penalty if you sell your house!

Home mortgage lenders often waive prepayment penalties if the borrower sells the home as opposed to refinancing. Also, numerous states have passed laws that prohibit or restrict the use of prepayment penalties.

Assuming a pre-payment period does apply to your particular home mortgage, always ask under what conditions, if any, will the prepayment penalty be waived.