5 Year Balloon Conventional Home Loans and Mortgages

The 5 year balloon home loan is a fixed rate hybrid mortgage that offers a low fixed rate for the first 5 years with payments amortized over 30 years.  At the end of 5 years, the remaining balance of the loan must be paid in a lump sum (called a balloon payment) or refinanced into another loan.  

The main advantage to this type of loan is that it offers a lower interest rate which translates into a lower monthly payment that are fixed for a specific period of time.  However if the borrower needs the mortgage for more than 5 years, he/she will incur the costs to refinance the loan or will be required to have the remaining principal balance to make the balloon payment.  Furthermore, if the borrower must refinance the loan, the interest rates could be higher than the original mortgage which may result in a higher monthly mortgage payment. 

The following are highlights of this loan program:

Down Payment Requirements:  The minimum down payment required for this type of loan is 20% of the sales price for owner occupied and second homes.  Real estate investors and non-owner occupied buyers are not eligible for this type of loan. 

Income and employment:  There are no limitations placed upon income requirements. As for employment, there are no limitations on a specific length of time at a particular job. However, a 2 year history is required, preferably in the same line of work (education can be counted towards this 2 year history if it is for the same profession the borrower is currently in).  

Eligible properties and occupancy requirements: Single family attached and detached homes, 2 to 4 unit properties, planned urban developments (PUDs), and Freddie Mac approved condominiums.

Closing Costs:  Closing costs and prepaids may be paid by interested parties (i.e. seller) as long as they are considered in the contribution limitation.  For primary and second homes, the seller may contribute up to 6% of the sales price.

Assumability:  This type of loan is not assumable.

Pre-payment Penalty:  Not applicable.

Cash Reserves:   The borrower is required to have a minimum of two months cash reserves in the bank by the close of escrow.  

Gift Funds:  Gifts are allowed on owner occupied and primary residence transactions only. 

Credit Scoring:  Generally Fannie Mae and Freddie Mac require a minimum credit score of 620 for owner occupied and second homes.  

Co-Signors (Non-Occupant Co-Borrowers):  Not allowed.

Qualifying Ratios:  Fannie Mae and Freddie Mac limit a borrower's monthly payment not to exceed 28% of their gross monthly income. A borrower's total debt (proposed monthly payment plus monthly payments towards credit cards, student loans, car payments, and other installment and revolving credit) cannot exceed 36% of their gross monthly income.  If compensating factors are present or if the borrower has an above average credit score, the stated ratios may be exceeded.

Mortgage Insurance:  Required for all purchases with a down payment less than 20% of the purchase price.  

The above guidelines are subject to change and should not be considered as exact rules for qualification.  Other factors may allow a borrower to compensate for deficiencies or to exceed the stated guideline.  You should talk with your loan officer about your specific situation to see if you qualify.