What Is a Mortgage?
Mortgage is a loan secured by the value of real estate that allows homebuyers to afford homes that are generally out of their price range. Mortgages are typically backed by government-sponsored enterprises, private financial institutions, or other lenders and may be regulated by local laws or market practice. Often, mortgages are secured by an interest in land and can include a transfer of ownership from the mortgagor to the lender (also known as the pledge). In most cases, a borrower must provide a down payment on a property and make payments on both the loan principal and interest over an agreed-upon term of time, in order to own a property free and clear of the mortgage debt.
Mortgages are the primary method of financing real estate transactions worldwide. Many countries have strong domestic markets for mortgage loans, which can be funded through bank deposits or, in more developed markets, through the capital markets through a process called securitization where pools of mortgages are converted into fungible bonds that investors can purchase.
When a person applies for a mortgage, the underwriter takes into consideration a number of factors to determine if they can afford the loan. They will review the applicant’s income, credit report, and debt-to-income ratio. Some borrowers also provide a letter of explanation to help the underwriter better understand their financial situation. A letter of explanation can help explain situations such as a recent job change, issues with past debt payments, or other events that might have an impact on the ability to repay the mortgage.
A borrower can get a mortgage from a variety of sources, including banks, credit unions, online-only lenders, and mortgage brokers. Borrowers should always compare rates to ensure they’re getting the best deal. It is also important to look at the total cost of a mortgage, which can include the loan amount, interest rate, and fees such as application, appraisal, and origination fees. Some borrowers choose to pay upfront fees such as discount points in order to receive a lower interest rate.
Homeowner’s insurance is required for most mortgages, because it covers the homeowner in the event of a covered loss or damage to the property. Lenders require homeowners to have this coverage because it protects their investment and can help reduce the likelihood that a foreclosure will be necessary.
If a home is foreclosed on, the lender will typically sell the property and cover the mortgage debt. However, if the sale price of the property does not cover the entire amount that is owed on the mortgage, the difference is known as a deficiency. Deficiencies can be resolved by asking the lender to waive them, but it’s best to get the waiver in writing. Borrowers should ask about the possibility of a deficiency before making an offer on a home. If a deficiency is determined, the lender must notify the borrower of their rights. If the lender refuses to waive the deficiency, then the borrower can take legal action.