Purchasing a property demands a large sum of money to be presented on the table. The real estate activities revolve around big cash and certainly not everybody has such a big amount in their pockets. Keeping that in spot light one may think of an alternate such as “lent money”. Yes, you heard it right! Whether be a businessman wishing to diversify his business or a person looking up for house, take advantage of this lent money.
The lent money comes in shape of a mortgage loan that’s been given against the possession of property and therefore mortgages are known as claims on property. Hold right there! No need to panic, as possession of the property isn’t a permanent one but acts like a security and is returned to the burrower once he pays back the loan. The lender better known as mortgagee, is usually a financial institution, such as a bank, building society or credit union lending the money.
Mortgage system actually works by lending money to the burrower and taking it back in the form of monthly payments with interest over the years. Ever wondered how does real estate mortgage work? Let’s end the curiosity by enlightening you with the know how of real estate mortgage. For this we have divided the succeeding paragraphs into segments, including:
- Types of mortgages
- Mortgage loan dependency
Types of Mortgages:
The type mortgage you are availing can be very impactful. Thus, it is important to know the basic types. Depending upon the flexibility in interest rate the mortgages are of two types:
- Fix-rate Mortgage:
- Adjustable-rate Mortgage
– Fix-rate Mortgage:
In fix rate mortgage, the burrower has to pay the same fix interest that is set from day 1 of the agreement. This means that the interest remains constant and doesn’t vary with the market interest rates. Fix rate mortgage puts you on a safe side as the market interest rate of a property usually increases with time, however what if it falls? How would this benefit you? Instead of biting your nails you can simply mold the agreed interest rate into the market’s one by refinancing the mortgage. This play is not new and is usually considered by the homeowners. Basically, refinancing a mortgage is the clearance of existing loan with a new mortgage loan whose interest rate depends upon the current market’s interest rate.
– Variable-rate Mortgage:
This type of mortgage involves linear variation in the agreed interest rate with the market interest rate. One can think of it as being “adjusted” to the market’s rate. It should be noted that the initial interest rate remains fixed for a brief initial period, afterwards it adjusts to recent rates. As the initial interest is below the market’s rate, it is relatively a wise option for those looking for short term mortgage. However, if you are into a long-term mortgage, this is clearly not a good option for you!
Mortgage Loan Dependency:
Pondering how much mortgage loan can you avail? Hear us out! The loan to be granted depends upon a lot of factors, among them the prime factors are as follows:
Type of Property:
The mortgage loan is granted in terms of Loan to Value Ratio (LTV), that is, the amount of loan given depends upon the market value of the property. Each type of property has its own LTV, residential property tops the chart in this regard.
- Residential property: 65% LTV
- Commercial Property: 55% LTV
- Industrial Property: 50% LTV
- Open Plot: 40% LTV
Yet another factor for deciding the amount of loan to be granted is occupancy. There is this rule that the LTV will slightly change when you will be renting out the mortgaged property instead of occupying the property yourself. That is, self-occupancy has higher LTV.
You can not just knock the door and get mortgage loan. It’s never this easy. Banks take no second in turning down the requests if they lack the requirements. Before applying for such loan, you should be well equipped with all the documents and other requirements.
The foremost thing taken into notice is the income. If you can’t afford to pay the monthly payments of mortgage loan, there is no point of applying. Lender likes to look into your monthly income to comprehend if you are eligible for the loan. They execute this process in a professional way by going through your credit history. Mortgagee do so by calling out to the credit bureau, who assist them by providing the burrower’s credit file.
Credit file bears credit score of the burrower, which targets the bill payment history as well as the unpaid debts in relation with the burrower’s income. Higher the credit score, higher the chances of approval and vice versa.
Real estate world is known for its documents and paperwork. It is never a kick start thing and revolves around complex paperwork. The mortgage system has its base in this defined world, requiring number of documents. To save time, you must gather all the required documents and make a copy of each document. The documents can go from income tax return to those supporting the burrower’s assets and debts.
This unfortunate event in the burrower’s life happens when he fails to keep up with the mortgage payments. As the loan is secured against the property, in case of defaulted loan, the entire property is repossessed by the lender. After the foreclosure of property, the foreclosed property is auctioned by the lender to recover the money. Foreclosure can happen for multiple reasons like going bankrupt, ever increasing interest or in case of death.
Lenders aren’t in favor of foreclosure too as it’s great deal of efforts to repossess and auction the property. However, if the lender is left with no choice but foreclosure, it will be executed in the following steps:
- If the property owner misses monthly payments, he will be notified via a public notice to pay the outstanding balance or else a legal action will be taken against him.
- If the burrower pays no heed to the public notice, the phase of repossession will be set in motion.
The property will be entirely repossessed by the lender should the burrower doesn’t pay the mortgage payments.
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