As I suspected, our credit score was low. In fact, too low for the kind of loan and interest rates that people with good credit get. But, the lender explained that nonprime loans, loans for people with credit problems, might be available. The lender discussed three potential loan options we might qualify for:

• A loan that would reward us by lowering the interest rate on the loan after we made our mortgage payments on-time for a year or more. While the starting interest rate and monthly payments would initially be higher than we anticipated, the interest rate will be reduced by a predetermined percentage each year following 12 consecutive months of timely payments. And the good thing is, when the interest rate goes down, so does our monthly payment. Programs like this typically allow for a maximum of four possible annual reductions in the interest rate.
• An adjustable rate loan, which is a loan where the interest rate adjusts periodically according to an index, would allow us to have lower monthly payments at the beginning of the loan, but the payments could increase when the adjustment time rolled around. It’s not uncommon for adjustable rate loans to have a prepayment penalty. Our lender informed us that many borrowers who plan to be in their homes for years to come choose to include this option because it enables them to receive a lower interest rate, however; individuals less sure about how long they will be in their home select a loan without a prepayment penalty.
• A hybrid loan that would start out with a fixed interest rate for three years, then change to an adjustable rate thereafter. After the initial fixed period the interest rate may go up or down every 6 months until the interest rate reaches the cap stated in the loan (caps limit the amount the interest rate can increase to over the life of the loan).