Mortgage is a loan usually long term in nature intended to ease the borrower’s purchase of a home. To the lender it is an investment with long term benefits collected in the form of interest. There are different options in the purchase of a home.
- The home may have been built by a bank (offset mortgage) and then sold to individuals. Payment of the home is then collected in small installments. The small installments are usually monthly payments made by the borrower to the bank.
- The home may have been built by a company or it may be an individual investment and then put on sale. Since the buyer does not have the full amount of money to pay for the home making a onetime payment as it is often required, the individual then tends to borrower the full amount of money needed for the purchase of the home. The money borrowed is then repaid to the bank at an agreed interest rate and it is done in installments.
- Another option is that the intended owner of the home builds the home either by hiring a contractor and supervises it. In this case, he gets an architect to draw up a plan depending on his taste and financial means. Once the plan is completed a budget is estimated for its construction. The intended owner presents the plan to the plan together with the estimated budget and requests for a loan from a money lending institution. After studying the application document the lending institution may then lend money for the construction of the home. Repayment of the loan is done as per an agreed basis.
It should be noted that the mortgage property serves as collateral for the money that is borrowed. This implies failure to repay the borrowed amount; the property can be seized from the borrower. However, this can only occur after court action and the property handed over to the money lender. Court action does not take place once the borrower fails to repay a monthly installment. It is an entire process and will normally be initiated in the case of disagreement or misunderstanding between the two parties, the borrower and the lender.
There are different types of mortgage: fixed rate mortgage tracker mortgage, discount mortgage etc.
Requirements for mortgage
Since mortgage is money making, it is given only to individuals that fulfill the basic requirements; that is provide documentation which indicates their ability to repay the loan. It is good to determine how much you can afford. This will help you in fixing the price range.
- Down payment
Down payments differ from one lender to another. Some banks require as much as 35 percent the total cost required for the home. Others can accept as low as 10%. The higher the down payment the more liable you are to get a loan. With a higher down payment, you will spend less money on interest rates.
- Employment history
Proofs of your employment history will also guide in the loan approval process. Individuals with more stable jobs above two years on the same job are more reliable than individuals that hop from one job to another.
Only persons above 18 years are eligible to request for a loan.
The lender would like to know your credit history whether it is good or not. Information in respect of payments deadlines will be considered as well as any recent bankruptcy.
Collateral and mortgage loan qualification
The lender will obviously not loan you money if the amount of money you are requesting is far more than the value of the collateral.
Mortgage monthly payments are determined by the amount of money borrowed and length of time the loan is expected to be paid back. The length of payment can be as long as thirty years. Mortgage calculations are done based on;
Principal; it is the full amount taken as loan
Interest: the lenders reward for investment. The interest is directly related to the amount of the loan. The rate of the interest determines the amount of money one can borrow. With lower interest rates more money would be burrowed and vice versa.
Taxes: the tax is assessed by government agencies.
Insurance: this can either be property insurance that protects the home in case of disaster fire etc and private mortgage insurance which serves as a guaranteed to the lender and permits him to resell the property in case the borrower is unable to repay the loan.
However, mortgage must not include taxes or insurance as part of the monthly payments. The borrowers may pay the taxes and insurance on their own.