Types of Real Estate Loans

Posted by admin on February 9, 2010 under Real Estate License Basics | Be the First to Comment

When you first took your real estate license exam the basics of the available mortgage types was something that was covered briefly, but to be the trusted source your clients look to for real estate information, you should be able to explain enough about the most popular types of mortgages available to them. Conforming or non-conforming, fixed or adjustable rates, you should know enough about available mortgage products to explain them to your clients.

Primarily mortgages can be broken down into conventional or government loans. Any loan secured through the Federal Housing Administration, Department of Veterans Affairs, or Rural Housing Service is considered a government loan. Any mortgage that is not insured by one of these government agencies is considered to be a conventional loan.

Conventional loans can be broken down into conforming and non-conforming loans. Conforming loans follow the guidelines set forth my Freddie Mac and Fannie Mae. For those clients who do not meet the credit criteria required to qualify for a conforming loan, there is the option of the non-conforming loan. These loans will generally require more money down and/or a higher interest rate and closing costs, but the more lenient credit standards make it easier for those clients with credit challenges to qualify.

The interest paid on the mortgage can be locked in at either fixed or adjustable rates. A fixed interest rate is one rate of interest that you agree to pay for the life of the loan. Individual loan programs may have prepayment penalties for a period of time, but until the loan is paid in full or refinanced, you will pay the same interest rate regardless of the market.

Adjustable interest rates start out at on rate for a predetermined period of time and then they adjust. The amount of adjustment is dependent upon a combination of the terms of the individual loan agreement and the current interest rate. There are several types of adjustable interest rate programs available.

There are two step loans that have an interest rate that adjusts only one time. For a period of time, usually 5 or 7 years, the loan will be at one fixed interest rate, then the rate will adjust to the current market and remain fixed at that rate for the remainder of the loan. A convertible adjustable rate is similar; you can convert the adjustable rate to a fixed rate during a predetermined period of time for a nominal fee. Fixed period adjustable rate mortgages allow for a fixed rate for a period of time before the first interest rate change. After the first change, the interest rate will change each year thereafter for the life of the loan.

There are benefits and disadvantages to all of these types of mortgages, but being able to present your buyers with the information that they need when they need it will increase your credibility, and ultimately, your commissions. The more knowledge you can offer your clients, the more valuable your real estate license will be.