What You Need to Know About a Mortgage
Mortgages enable individuals and businesses to buy real estate without paying the entire purchase price up front. A borrower pledges a legal claim to the property as collateral for the loan and agrees to pay back the principal plus interest over a specified period, often 30 years. Upon repayment, the borrower owns the property free and clear. A lender may also foreclose on the property if the borrower fails to repay the debt.
A mortgage is made up of four parts: the principal amount, the interest rate, the property taxes and homeowners insurance. When it comes to the principal amount, your monthly payments increase your equity in the home by reducing the loan balance over time.
The interest rate on your mortgage is determined by the lenders market conditions and the credit worthiness of the borrower. Lenders are cautious about lending money to borrowers with significant debt or who have a thin credit history. They look at your overall financial situation including income, debts and assets as well as your current and past credit performance when determining your eligibility for a mortgage.
Before a lender approves you for a mortgage, it requires documentation of your income and employment, as well as bank and investment account statements, tax returns and proof of assets. In addition, mortgage lenders will run a credit report on the applicant to determine the borrower’s credit score and to check for any inaccuracies.
The type of occupancy, or use, of a mortgaged property is also important to lenders. Owner occupancy refers to a primary residence, which is the type of residence most borrowers seek when purchasing a home. Lenders generally offer the best mortgage rates for this type of occupancy. A second home or vacation home may be mortgaged as well, but guidelines for this type of occupancy are generally more restrictive and come with higher down payment requirements and mortgage rates.
Many lenders require that a borrower carry homeowner’s insurance to protect the lender against property damage or loss. The premiums for this insurance are usually included in the monthly mortgage payment. In some cases, the premiums are paid in an escrow account and the lender makes the payment to the insurance provider on behalf of the borrower when the bill is due.
If you are unable to make your mortgage payments, you can speak to a loan officer about mortgage modification options. The lender can work with you to negotiate a reduced interest rate, extended term or other changes to the loan. The lender can foreclose on your home if you fail to meet the terms of your mortgage agreement, but there are two ways that foreclosure happens — judicial and non-judicial.
The borrower’s rights to the secured property take precedence over the other debts owed by the borrower, which means that other creditors are paid from any sale of the property before the mortgage lender is repaid. Mortgages are often sold by mortgage lenders to investors through a process called securitization.