Simply put, a mortgage rider is an addition, also known as an addendum in legal terms, to a standard loan 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, their mortgage terms.
There are several different types of mortgage riders depending on the loan program, property type and other factors, 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. 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 rental income from the property 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. The mortgage qualification requirements for these properties are different than for a single family home, as outlined in the rider. For example, to qualify for a mortgage on a condo, you are required to provide additional documents and have different insurance coverage.
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 or construction-to-permanent (C2P) loan to build a property.
Review our Construction-to-Permanent (C2P Loan Guide
Adjustable Rate Mortgage Rider. This rider is required for an adjustable rate mortgage (ARM) and outlines how your interest rate and monthly payment are calculated over your loan term. This rider also covers the unique features and risks of an ARM, including that your rate and payment can change and potentially increase significantly.
Review How an Adjustable Rate Mortgage Works
Revocable Trust Rider. This rider is required if the property being mortgaged is purchased by a revocable trust.
The list above is not exhaustive and there are additional borrower, loan or property circumstances that require mortgage riders. Borrowers should work with their lender and closing agent to determine any riders that apply to them. Making sure that 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.