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Loans that do not meet the standard underwriting guidelines of Fannie Mae or Freddie Mac are called 'B', 'C' and 'D' paper loans vs. 'A' paper conforming loans. Non-conforming loans (also known as sub-prime) loans are offered to borrowers that may have recently filed for bankruptcy, foreclosure, have had late payments on their credit reports or have high debt-to-income ratios. Their purpose is to offer temporary financing to these applicants until they can qualify for conforming 'A' financing. The interest rates and programs vary, based on many factors of the borrower's financial situation and credit history. Most non-conforming loan programs offer a lower interest rate on ARM programs as opposed to their fixed rates. As the majority of borrowers who take these loans are not in the term for more than 2-3 years, it makes sense to take a 2 or 3 year adjustable over a fixed rate. It's important to note the prepayment penalty on the loan - make sure that your prepayment penalty period does not exceed the length of your fixed rate period: if you are taking a 2 year ARM take a 2 year prepayement penalty, not a 3 year prepayment penalty. You can usually "buy down" your prepayement penalty by paying points, which can be more cost-effective than paying the penalty,
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