Understanding Covered Loans: What You Need To Know

A covered loan is a cost-effective way to access funds while leaving your savings untouched. It is a consumer loan where the original principal balance does not exceed the current conforming loan limit for a single-family first mortgage loan. This type of loan is secured by property located within the state and is considered a mortgage under the Home Ownership and Equity Protection Act of 1994. Covered loans are also defined in the Standard & Poor's Glossary, where they are categorised as high-cost loans and are subject to anti-predatory lending laws in specific states or jurisdictions.

Covered loans are a type of consumer loan

Covered loans are also known as mortgage loans, and they are categorised as "covered" pursuant to the Standard & Poor's Glossary for File Format for LEVELS(R) Version 5.7, Appendix E, revised July 1, 2006. A covered loan is a consumer credit transaction secured by property located within a specific state. This property must be considered a mortgage under section 152 of the federal "Home Ownership and Equity Protection Act of 1994".

In the case of a covered loan, the total points and fees paid by the obligor at or before closing must exceed six percent of the total loan amount. If the transaction meets the other requirements, such a loan shall be deemed to be a covered loan. The original principal balance of the loan must not exceed the most current conforming loan limit for a single-family first mortgage loan established by the Federal National Mortgage Association.

A "consumer loan" is a consumer credit transaction that is secured by real property located in the state and is used, or intended to be used or occupied, as the principal dwelling of the consumer. This is usually improved by a one-to-four residential unit. It is important to note that a "consumer loan" does not include a reverse mortgage, an open line of credit, or a consumer credit transaction that is secured by rental property or second homes.

They are secured by property located in the same state

A covered loan is a consumer loan secured by property located in the same state. This means that the loan is backed by property, such as a house or land, that is located within the same state as the lender or borrower. In the context of covered loans, "consumer loan" specifically refers to a consumer credit transaction that is secured by real property used, or intended to be used, as the principal dwelling of the consumer. This means that the loan is for the purpose of purchasing or improving a residential property, typically with one to four units, that will serve as the primary residence for the borrower.

The definition of a "covered loan" can vary depending on the specific laws and regulations of a particular state or jurisdiction. For example, in California, a covered loan is defined as a consumer loan where the original principal balance does not exceed the current conforming loan limit for a single-family first mortgage loan established by the Federal National Mortgage Association. Additionally, one of the following conditions must be met:

• The annual percentage rate at the time of the transaction exceeds the yield on comparable Treasury securities by more than eight percentage points.
• The total points and fees payable by the consumer at or before closing exceed 6% of the total loan amount.

It is important to note that a "consumer loan" does not include a reverse mortgage, an open line of credit, or a consumer credit transaction secured by rental property or second homes.

The loan amount is capped at the conforming loan limit for a single-family mortgage

A covered loan is a cost-effective way to access funds while leaving your savings untouched. You can borrow up to the value of your savings at a discounted rate of interest.

The loan amount for a covered loan is subject to approval and terms and conditions. One of the key factors that determine the loan amount is the conforming loan limit, particularly for single-family mortgage loans. The conforming loan limit is the maximum amount of money a homebuyer can borrow using a conventional mortgage that is eligible for purchase by Fannie Mae and Freddie Mac, the principal market makers in mortgages. The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, sets the conforming loan limit annually in November. The limit is adjusted to reflect changes in the average price of a home in the United States and is designated by county.

For 2025, the conforming loan limit for single-family homes across most of the United States is $806,500, representing a 5.2% increase from the 2024 limit. This baseline limit varies based on the location of the home and the number of units. In high-cost-of-living areas, such as metropolitan areas and the states of Alaska and Hawaii, the limit can go up to $1,209,750. The FHFA provides an interactive map and a Loan Limit Look-Up Table to help lenders and borrowers determine the applicable loan limit for specific counties or metropolitan areas.

It is important to note that the conforming loan limit acts as a guideline for mainstream lenders. Traditional lenders prefer to work with mortgages that meet these limits because they are insured and easier to sell. Mortgages that exceed the conforming loan limit are known as non-conforming or jumbo mortgages and typically carry higher interest rates due to the increased risk associated with the higher loan amount.

Interest rates are discounted

A covered loan is a cost-effective way to borrow money while leaving your savings untouched. When interest rates are discounted, you can borrow up to the value of your savings at a rate that is lower than usual. For example, Sarsfield Credit Union offers a discounted interest rate of 6% (6.2% APR) on their covered loans. This is the lowest interest rate they offer on any of their loans.

The specific definition of a "covered loan" can vary depending on the jurisdiction and the institution offering the loan. In general, a covered loan is a type of consumer loan that is secured by real property or improved by a one-to-four residential unit. In the context of the Standard & Poor's Glossary, a covered loan specifically refers to a mortgage loan. According to California's Financial Code, a covered loan is a consumer loan where the original principal balance does not exceed the current conforming loan limit for a single-family first mortgage loan established by the Federal National Mortgage Association.

The benefit of a covered loan is that it allows you to access funds at a discounted interest rate while still earning dividends on your savings account. Your savings remain intact, and you can continue to grow your savings through dividends while also having access to funds for other purposes. This can be especially useful if you need access to additional funds for a specific purpose but do not want to touch your savings.

It is important to note that covered loans are subject to approval and terms and conditions. The availability of a covered loan and the specific interest rate offered may depend on the financial institution and the regulations in the relevant state or jurisdiction. It is always a good idea to review the specific terms and conditions of any loan before applying.

Covered loans are insured

A covered loan is a type of consumer loan, which is a credit transaction secured by real property located in a particular state. This property must be used, or intended to be used, as the principal dwelling of the consumer. This means that it is improved by a one-to-four residential unit. A consumer loan does not include a reverse mortgage, an open line of credit, or a consumer credit transaction secured by rental property or second homes.

The term 'covered loan' is defined by the Standard & Poor's Glossary, specifically in the Standard & Poor's High Cost Loan Categorization column. This definition is given in the then current Standard & Poor's LEVELS(R) Version 5.6b Glossary Revised, Appendix E. A more recent definition is given in the Standard & Poor's LEVELS(R) Version 5.7 Glossary Revised, Appendix E.

In addition, a covered loan is a type of mortgage loan. This is a consumer credit transaction secured by property located within a particular state, which is considered a mortgage under section 152 of the federal Home Ownership and Equity Protection Act of 1994.

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