What is a rider for a mortgage and when is it required?
Simply put, a mortgage rider is an addition, also known as an addendum in legal terms, to a standard mortgage document. Riders are usually used when the mortgage has a non-standard feature. So if your mortgage is anything other than a fixed rate loan on a single family home that you live in, your mortgage likely requires a rider. In short, the rider is used to highlight a unique or unusual loan feature to make sure you understand it. It also provides legal protection for the lender in the event borrowers claim they were unaware of, or did not understand, the loan feature outlined in the rider. There are several different mortgage riders, depending on the loan, and we summarize some of the more common riders below. While mortgage rider documentation should be relatively standard, be sure to check with your lender and carefully review your loan documents to make sure you understand the specific terms for your loan.
1-4 Family Rider. A 1-4 Family Rider is typically required for multifamily investment properties with up to four units or two-to-four unit properties that are owner-occupied. This type of rider permits the lender to collect rent from the property if you default on the loan. Any rent the lender collects goes to pay down the outstanding loan balance until the default is cured by the borrower. If you pay your mortgage on time and do not default on your loan, a 1-4 Family Rider should never be an issue. If you default on the loan, the rider provides protection for the lender because it can use property rental income to pay the mortgage.
Condominium, Co-Op or PUD Rider. This rider is required for mortgages on condos, co-ops and PUD (planned unit development) properties. These properties are different than single family homes and apply different qualification requirements as outlined in the rider.
Second Home Rider. This rider is required for a mortgage on a second home or vacation home.
Construction Loan Rider. This rider is required if you are obtaining a construction loan on a property. We provide a comprehensive overview of construction loans on FREEandCLEAR.
Adjustable Rate Mortgage Rider. This rider is required for adjustable rate mortgages (ARMs). The rider outlines the unique features and risks of an ARM, including that your mortgage rate and monthly payment can potentially change and increase significantly. Review how an adjustable rate mortgage works on FREEandCLEAR.
Revocable Trust Rider. This rider is required if the property being mortgaged is purchased by a revocable trust.
There are additional borrower, loan or property circumstances that require mortgage riders. Borrowers should work with their lender and settlement agent to understand any mortgage riders that apply to them. Making sure you fully understand your loan terms is an important part of the mortgage process and helps you avoid unnecessary surprises over the course of your loan.
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