Mortgage loan basics

[edit]Basic concepts and legal regulation

According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee
simple interest in realty) pledges his interest (right to the property) as security or collateral for a
loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as
an easement would be, but because most mortgages occur as a condition for new loan money,
the word mortgage has become the generic term for a loan secured by such real property.
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As with other types of loans, mortgages ha!e an interest rate and are scheduled to amorti"e o!er
a set period of time, typically 3# years. All types of real property can be, and usually are, secured
with a mortgage and bear an interest rate that is supposed to reflect the lender$s ris%.
&ortgage lending is the primary mechanism used in many countries to finance pri!ate ownership
of residential and commercial property (seecommercial mortgages). Although the terminology and
precise forms will differ from country to country, the basic components tend to be similar'
(roperty' the physical residence being financed. The e)act form of ownership will !ary
from country to country, and may restrict the types of lending that are possible.
&ortgage ' the security interest of the lender in the property, which may entail restrictions
on the use or disposal of the property. *estrictions may include re+uirements to
purchase home insurance and mortgage insurance, or pay off outstanding debt before selling
the property.
,orrower ' the person borrowing who either has or is creating an ownership interest in the
property.
-ender ' any lender, but usually a ban% or other financial institution. -enders may also
be in!estors who own an interest in the mortgage through a mortgage-bac%ed security. .n
such a situation, the initial lender is %nown as the mortgage originator, which then pac%ages
and sells the loan to in!estors. The payments from the borrower are thereafter collected by
a loan ser!icer.
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(rincipal' the original si"e of the loan, which may or may not include certain other costs0
as any principal is repaid, the principal will go down in si"e.
.nterest ' a financial charge for use of the lender$s money.
1oreclosure or repossession' the possibility that the lender has to foreclose, repossess or
sei"e the property under certain circumstances is essential to a mortgage loan0 without this
aspect, the loan is arguably no different from any other type of loan.
&any other specific characteristics are common to many mar%ets, but the abo!e are the essential
features. 2o!ernments usually regulate many aspects of mortgage lending, either directly
(through legal re+uirements, for e)ample) or indirectly (through regulation of the participants or
the financial mar%ets, such as the ban%ing industry), and often through state inter!ention (direct
lending by the go!ernment, by state-owned ban%s, or sponsorship of !arious entities). 3ther
aspects that define a specific mortgage mar%et may be regional, historical, or dri!en by specific
characteristics of the legal or financial system.
&ortgage loans are generally structured as long-term loans, the periodic payments for which are
similar to an annuity and calculated according to the time !alue of money formulae. The most
basic arrangement would re+uire a fi)ed monthly payment o!er a period of ten to thirty years,
depending on local conditions. 3!er this period the principal component of the loan (the original
loan) would be slowly paid down through amorti"ation. .n practice, many !ariants are possible
and common worldwide and within each country.
-enders pro!ide funds against property to earn interest income, and generally borrow these funds
themsel!es (for e)ample, by ta%ing depositsor issuing bonds). The price at which the lenders
borrow money therefore affects the cost of borrowing. -enders may also, in many countries, sell
the mortgage loan to other parties who are interested in recei!ing the stream of cash payments
from the borrower, often in the form of a security (by means of a securiti"ation).
&ortgage lending will also ta%e into account the (percei!ed) ris%iness of the mortgage loan, that
is, the li%elihood that the funds will be repaid (usually considered a function of the
creditworthiness of the borrower)0 that if they are not repaid, the lender will be able to foreclose
and recoup some or all of its original capital0 and the financial, interest rate ris% and time delays
that may be in!ol!ed in certain circumstances.
[edit]Mortgage loan types
There are many types of mortgages used worldwide, but se!eral factors broadly define the
characteristics of the mortgage. All of these may be subject to local regulation and legal
re+uirements.
.nterest' interest may be fi)ed for the life of the loan or !ariable, and change at certain
pre-defined periods0 the interest rate can also, of course, be higher or lower.
Term' mortgage loans generally ha!e a ma)imum term, that is, the number of years after
which an amorti"ing loan will be repaid. 4ome mortgage loans may ha!e no amorti"ation, or
re+uire full repayment of any remaining balance at a certain date, or e!en negati!e
amorti"ation.
(ayment amount and fre+uency' the amount paid per period and the fre+uency of
payments0 in some cases, the amount paid per period may change or the borrower may ha!e
the option to increase or decrease the amount paid.
(repayment' some types of mortgages may limit or restrict prepayment of all or a portion
of the loan, or re+uire payment of a penalty to the lender for prepayment.
The two basic types of amorti"ed loans are the fi)ed rate mortgage (1*&) and adjustable-rate
mortgage (A*&) (also %nown as a floating rateor !ariable rate mortgage). .n many countries
(such as the 5nited 4tates), floating rate mortgages are the norm and will simply be referred to as
mortgages. 6ombinations of fi)ed and floating rate are also common, whereby a mortgage loan
will ha!e a fi)ed rate for some period, and !ary after the end of that period.
.n a fi)ed rate mortgage, the interest rate, and hence periodic payment, remains fi)ed for
the life (or term) of the loan. Therefore the payment is fi)ed, although ancillary costs (such as
property ta)es and insurance) can and do change. 1or a fi)ed rate mortgage, payments for
principal and interest should not change o!er the life of the loan,
.n an adjustable rate mortgage, the interest rate is generally fi)ed for a period of time,
after which it will periodically (for e)ample, annually or monthly) adjust up or down to some
mar%et inde). Adjustable rates transfer part of the interest rate ris% from the lender to the
borrower, and thus are widely used where fi)ed rate funding is difficult to obtain or
prohibiti!ely e)pensi!e. 4ince the ris% is transferred to the borrower, the initial interest rate
may be from #.78 to 98 lower than the a!erage 3#-year fi)ed rate0 the si"e of the price
differential will be related to debt mar%et conditions, including the yield cur!e.
The charge to the borrower depends upon the credit ris% in addition to the interest rate ris%.
The mortgage origination and underwriting process in!ol!es chec%ing credit scores, debt-to-
income, downpayments, and assets. :umbo mortgages and subprime lending are not supported
by go!ernment guarantees and face higher interest rates. 3ther inno!ations described below can
affect the rates as well
Credit history or credit report is, in many countries, a record of an indi!idual$s or company$s
past borrowing and repaying, including information about late payments and ban%ruptcy. The
term ;credit reputation; can either be used synonymous to credit history or to credit score.
.n the 5.4., when a customer fills out an application for credit from a ban%, store or credit
card company, their information is forwarded to acredit bureau. The credit bureau matches the
name, address and other identifying information on the credit applicant with information retained
by the bureau in its files.That$s why it$s !ery important for creditors, lenders and others to pro!ide
accurate data to credit bureaus.
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What Is a Credit Report?
A credit report is a record of your credit activities. It lists any credit-card accounts or loans you may
have, the balances, and how regularly you make your payments. It also shows if any action has
been taken against you because of unpaid bills.
Where Do Credit Reports Come from?
A company that gathers and sells credit information is called a consumer reporting agency (CRA.
!hese types of companies collect information about your credit activities, store it in giant databases,
and charge a fee for supplying the information. !he most common type of CRA is the credit bureau.
!here are three ma"or credit bureaus that operate nationwide, plus many smaller companies serving
local markets.
What Is a Credit Rating?
#our credit rating is drawn from your credit report, which outlines your borrowing, charging, and
repayment activities. A good rating helps you reach financial goals$ a poor rating limits your
financial opportunities.
%ince your credit report influences whether you are able to buy a home and get a "ob, it is
e&tremely important to protect your credit rating by making loan and bill payments on time and by
not taking on more debt than you can handle.
Who Is Allowed to See Your Credit Report?
Credit bureaus can provide information only to the following re'uestors( () creditors who are
considering granting or have granted you credit$ (* employers considering you for employment,
promotion, reassignment, or retention$ (+ insurers considering you for an insurance policy or
reviewing an e&isting policy$ (, government agencies reviewing your financial status or
government benefits$ and (- anyone else with a legitimate business need for the information, such
as a potential landlord.
Credit bureaus also furnish reports if re'uired by court orders or federal "ury subpoenas. !hey will
also issue your report to a third party if you re'uest this in writing.
What Type of Information Is on Your Credit Report?
!here are usually four types of information(
1. Identifying Information: #our full name, any known aliases, current and previous
addresses, social security number, year of birth, current and past employers, and, if
applicable, similar information about your spouse.
2. Credit Information: !he accounts you have with banks, retailers, credit-card issuers, utility
companies, and other lenders (accounts are listed by type of loan, such as mortgage,
student loan, revolving credit, or installment loan$ the date you opened the account$ your
credit limit or the loan amount$ any co-signers of the loan$ and your payment pattern over
the past two years.
3. Public Record Information: %tate and county court records on bankruptcy, ta& liens, or
monetary "udgments (some consumer reporting agencies list non-monetary "udgments as
well.
4. Recent Inquiries: !he names of those who have obtained copies of your credit report within
the past year (two years for employment purposes.
Where Do the Consumer Reporting Agencies Get Their Information?
Credit bureaus collect information from parties that have previously e&tended credit to you, such as
a department store that issued you a credit card or a bank that granted you a personal loan.
Who Decides whether or not to Grant You a oan?
!he lenders themselves make the decision about whether or not to grant you credit. !he credit-
reporting companies only supply the information about your credit history.
Why Should You !"tain a Copy of Your Credit Report?
!o avoid any unwelcome surprises, it.s important to see a copy of your credit report before you
apply for credit such as car loans, mortgages, or credit cards. /rrors in credit reports can be
common. 0eep in mind, however, that they are not part of a conspiracy against you. !hey are
simply the result of human error.
#ow Do $rrors in Reports #appen?
!hink about how often your mail has a misspelling of your name or a mistake in your street
address. !hen, imagine the possibility for error in a report that contains much more information
about you. Cases of mistaken identity, out-of-date information, and outright errors can easily occur.
#ow Do You Correct an $rror on Your Credit Report?
Contact the consumer credit reporting agency immediately. !he company is then responsible for
researching and changing or removing incorrect data. !his process may take as long as ,- days. At
your re'uest, a corrected report will be sent to those parties that you specify who have received
your report within the past si& months, or employers who have received it within the last two years.
What if the Consumer Reporting Agency Stands "y Its Report?
#ou have the right to present your side of the story in a brief statement ()11 words or less, which
the credit bureau must attach to your credit file. #our statement should be used to clarify
inaccuracies, not e&plain reasons for delin'uency. Anyone re'uesting a copy of your credit report
would also automatically receive your statement (or a summary of it, unless the credit bureau
decides that it is irrelevant or frivolous.
What Should You Do if You Are Denied Credit "ecause of Something in Your Credit
Report?
!he lender who denied you credit must give you the name and address of the credit bureau that
produced the credit report. !hen, you have up to +1 days to re'uest a free copy of your report.
!he credit bureau must tell you the nature and substance of all information contained in your
report. It must also tell you the sources of the information and who has received your report for the
previous si& months (two years for reports furnished for employment purposes.
2ate and missed payments will show up on your credit report and hurt your chances of being
approved for credit, life insurance, or employment. !o find out about organi3ations in your area that
help consumers solve credit problems and create a budget, contact the 4ational 5oundation for
Consumer Credit at (611 +66-***7. %panish speakers can call (611 86*-96+*. Additional
information on improving a credit rating can be found in :;ow to /stablish, <se, and =rotect #our
Credit,: a brochure by the 5ederal Reserve >ank of %an 5rancisco.
#ow ong Does Information Stay on Your Credit Report?
?enerally, all your credit history information, good or bad, remains on your report for seven years.
If you file for personal bankruptcy, that fact remains on your credit report for )1 years.
#ow Do You Get a Copy of Your Credit Report?
#ou are entitled to receive one free credit report every )* months from each of the nationwide
consumer credit reporting companies@/'uifa&, /&perian and !rans<nion. !his free credit file can be
re'uested through www.annualcreditreport.com or by contacting the companies directly by phone
or by mail as listed below.
!o process your re'uest, you will need to provide specific information, such as your name, current
and previous addresses, telephone number, social security number, and date of birth. Also, to verify
your identity, other information such as a copy of your driver.s license, utility bill(s, or bank
statement may be re'uired. 0eep in mind that the three large bureaus do not necessarily share
information with each other. !he content of your credit report can be different at each bureau, so
it.s a good idea to re'uest copies from each one.
Reverse Mortgage
What Does Reverse Mortgage Mean?
A type of mortgage in which a homeowner can borrow money against the !alue of his or her
home. =o repayment of the mortgage (principal or interest) is re+uired until the borrower dies
or the home is sold. After accounting for the initial mortgage amount, the rate at which
interest accrues, the length of the loan and rate of home price appreciation, the transaction is
structured so that the loan amount will not e)ceed the !alue of the home o!er the life of the loan.
3ften, the lender will re+uire that there can be no other liens against the home. Any e)isting liens
must be paid off with the proceeds of the re!erse mortgage.
Investopedia explains Reverse Mortgage
A re!erse mortgage pro!ides income that people can tap into for their retirement. The ad!antage
of a re!erse mortgage is that the borrower$s credit is not rele!ant, and is often
unchec%ed, because the borrower does not need to ma%e any payments. ,ecause the home
ser!es as collateral, it must be sold in order to repay the mortgage when the borrower dies (in
some cases, the heirs ha!e the option of repaying the mortgage without selling the home). These
types of mortgages ha!e large origination costs relati!e to other types of mortgages. These costs
become part of the initial loan balance and accrue interest. 4enior citi"en borrowers with good
credit should carefully analy"e the options of a more traditional mortgage, such as a home e+uity
loan, against a re!erse mortgage.
Warehouse lending is a speciali3ed type of lending that commercial banks and other finance
institutions provide to companies involved in the mortgage banking business. !he loan that
was closed with A#B finance company or the small community bank will get funded with
money provided by this credit facility and the documentation will be sent to the institution that
has the warehouse lending facility to act as collateral for the line of credit.
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