As the saying “East or West, home is the best” goes, everyone likes to own a beautiful house. It is readily affordable by a few people. What about others? Should they abandon their `dream’? Not necessarily, thanks to the mortgage industry.
People borrow money as loan when they like to buy a house, purchase a car, pursue higher studies etc. or in an emergency. When they apply for a loan, banks or other lending organizations, known as “creditors”, seek an evidence of ownership of some property by the borrower. The borrower pledges the property to the creditor. If the borrower doesn’t repay the loan according to the agreement, the lender may take legal steps to acquire the borrower’s property.
Webster’s dictionary defines the term “mortgage” as the process of "pledging of property to a creditor as security for the payment of a debt". In plain terms, it is an agreement by which the lender tells the borrower, “If you don't repay the loan with all the fees and interest, then we can have your house.”
Steps involved in the mortgaging process:
Prospective homeowner, who applies for a mortgage loan, approaches a mortgage processing company and fills up a form of request known as Mortgage Lead. A mortgage lead normally includes details such as Date of application, Personal information, Details of collateral property, Purpose and Amount of Loan required, affordable Down Payment, Applicant’s Annual Income and Credit Report. The mortgage processing firm sends the documentation to several lenders including banks, credit unions and mortgage finance firms. Whether the loan applicant seeks the lender directly or through a mortgage firm, chances of his obtaining a mortgage loan depends upon his Credit Profile or Credit Report. Credit Profile is a documentation that shows how promptly or otherwise, the person repaid any previous loans. The loan advancing organization makes a very careful assessment of the credit profile and verifies the borrower’s bank statement and deposits.
Most loan advancing organizations use FICO credit scores to assess the credit report. In the FICO system, there are 5 factors that are considered by lenders when assigning a credit score based on percentages, as shown below. They are: Borrower’s Payment History [Loan applicant’s punctuality in repaying any earlier loan/s] (35%), Credit on various accounts (30%), Length of Payment history [A measure of how long did the applicant take to clear any previous loan/s] (15%), Applicant’s existing credit accounts and how they are used (10%), and New Credit Percentage [Ratio of newly opened credit accounts to that of total number of credit accounts owned] (10%).
Borrower’s chances of obtaining a loan depends heavily on the data disclosed, particularly credit profile, as documented in the mortgage lead. If the borrower has a good credit profile, chances of his or her dream house coming true is greater.
When going in for a mortgage loan, the most important question that the borrower needs to ask is “Can I afford a mortgage loan?”. The affordability depends on the mortgage rate. The mortgage rate is expressed as Annual Percentage Rate and includes the rates of interest and additional fees charged on the loan. All mortgage companies and lending firms are expected to disclose their APR in loan agreements, in accordance with The Federal `Truth in Lending Act’. APR is a convenient parameter to compare costs of loans or mortgage rates.
Types of Mortgage Loans: Mortgage Loans are of two types. They are: Conventional Loans and Government Loans.
Conventional Loans: These loans cannot be insured. There are four types of Conventional Loans. They are: Fixed Rate Mortgage Loans, Adjustable Rate Mortgage Loans, Balloon Mortgage Loans and Sub-prime Mortgage Loans. Fixed Rate Mortgage loans provide a non-fluctuating, fixed interest rate over the entire loan period, which may be 15, 20 or 30 years. 15 years’ term loan is the least expensive.
Interest rates in Adjustable Rate Mortgage loans fluctuate according to economic trends. These Loans come with a maximum limit, known as `cap’, up to which interest rates can go. Interest rates in ARM loans are sometimes `tied’ by lending organizations, Bank Certificates, Federal Treasury Bills, London Inter-Bank Offer Rate (LIBOR), or any other financial index. Global economy changes cause these indices and consequently, the interest rates to change. Adjustable Rate Mortgage loans involve time periods of 1, 3, 5, 7, or 10 years. Usually, Interest rates on these loans are lower than that on Fixed Rate Mortgage loans. Balloon Mortgage Loans involve a loan period of 5 to 7 years. These loans usually require the borrower to repay the balance as one final payment, known as "balloon" payment. Sub-prime Mortgage Loans are suited to borrowers with poor or not-so-perfect credit.
Government Loans are of two types: Federal Housing Administration Loans and Veteran’s Affair Loans.
FHA Loans are designed for people who earn low to moderate income. These loans offer insurance to the lender, instead of to the borrower or his family, in the event of a default on a home loan. VA Loans are meant for ex-military personnel who have had an honorable discharge.
As all mortgage loans are bilateral, the borrower and the lender share a common responsibility in identifying “appropriate” each other so that the lender is benefited financially and the borrower realized his “dream” come true.
Bank of America www.bankofamerica.com