Breakdown of traditional and Non-traditional Loans
Qualifying for a loan on an investment character can be difficult for several investors, considering the rules and regulations required to meet, financial concerns for a down payment or credit ratings to qualify for a particular loan, so as you continue on in this article find out the difference and breakdown of traditional and non-traditional loans to give you a better sense of what to expect as you apply for a home loan.
traditional loans are any mortgage loan that is not guaranteed or insured by the federal government however they are considered to be mortgage loans that follow the guidelines of government sponsored enterprises (GSE), such as Fannie Mae or Freddie Mac. The traditional loans are then broken down into conforming or non-conforming loans.
Conforming loans follow terms and conditions set by Fannie Mae and Freddie Mac.
Non-Conforming loans do not meet the requirements of Fannie Mae or Freddie Mac, but nevertheless considered traditional loans.
The traditional loan is typically recommended if the investor is unsure of their credit score or not financially stable to make a meaningful down payment. This loan is ideal for investors who need flexible payment options or looking to receive low closing costs.
Requirements of a traditional Home – The home buyer must invest in at the minimum 5% -20% of the sale price in cash for the down payment and closing costs. For example, if the sale price is $100,000 the home buyer is required to invest in at the minimum $5,000 – $20,000.
Eligibility – This loan can be used to finance dominant residences, second homes and investment similarities, along with capabilities to buy warrantable condos, planned unit developments, modular homes, family residence of 1-4 and manufactured homes.
traditional Programs Offer the Following Loans –
Fixed rate loans – Most often traditional Mortgages are fixed-rate mortgages and typically your interest rate will keep the same during the complete loan period. Of course in a fixed rate traditional Mortgage you will always know the exact amount on your monthly payment and how many payments keep.
Adjustable rate loans – The initial interest rates and monthly payments for an adjustable rate mortgage (ARM) are comparatively low, but can change throughout the life of that loan.
The non-traditional loans are just the opposite of traditional loans, as there can be several surprises appearing not to mention taking into consideration the adjustable rate mortgage (ARM) on this kind of loan. The surprises of non-traditional loans are particularly directed towards those who are under in their mortgage. If you are considered to be one of those homeowners underwater in your mortgage find out if you’re required to any of the following:
1. Change in future interest rates
2. Loans of interest and principal never go down
3. Large payment due at the end of loan
4. Lender has authority to change amount you pay if certain instances occur.
The adjustable rate mortgage (ARM) begins with a rate that may start off low and could go lower, or higher, depending on several factors. This is the unknown for how much you will pay on the future of this loan. Two other types popular unconventional loans include interest only loans, and loans with a balloon payment (a big payment at the end of the loan period).
Requirements of a Non-traditional Loan – According to Mortgage311, federally backed non-traditional mortgage loans frequently come with low or already no down payments in addition as lower credit score requirements. For example, down payment requirements for FHA-insured mortgage loans can be as low as 3.5 percent. Qualifying credit scores for non-traditional mortgages, however, can be as low as 540, though lenders typically require a 640. Depending on the non-traditional mortgage loan product, interest rates may be higher than traditional mortgage rates.
Eligibility – Applicants for this loan will need to meet requirements, as not every loan product insured or guaranteed by the federal government is open to every homebuyer. For example, VA mortgages are only eligible to military veterans or family members. Mortgage loan products offered by the USDA typically are obtainable to low-income rural homebuyers. The federal government’s main non-traditional loan product, the FHA loan, is open to almost all first-time homebuyers.
Whichever loan you choose or are required to apply for, be sure to do your research and understand the benefits, consequences and requirements before you become a home buyer. This breakdown of traditional and Non-traditional Loans should help prepare you for the “surprises” before unexpected interest rates rise or large payments are due at the end of your home loan.