There are times in a person’s life when they may decide to buy a home, but may be discouraged by the lack of funds. At such times, financial institutions like banks can help by providing mortgages or loans. A mortgage, which is an effective and commonly used debt instrument, is known as the funds provided against the collateral of real estate. The borrower is required to repay this amount along with pre-decided interest rate over a fixed time period. Mortgages can be utilized by not just individuals but also companies to purchase real estate without needing to pay the entire value of the acquisition up front.
Just like loans, mortgages can be of different types. Under the clauses of residential mortgages, the applicant vows to pledge the property that is being bought using the funds given. As per this, should the bearer of the loan discontinue their payments and violate the pre-decided repayment schedule, the bank has the legal right to claim the property.
The process implemented to apply and get approved for a mortgage is called origination. The federal government has established various plans to enable and promote home ownership. A mortgage broker is often involved in the process of gathering financial information and necessary documents from the applicant and forwarding them to the bank. The broker is also responsible for assessing the financial status of the applicant and submitting their request for a mortgage to various financiers accordingly. The applicants’ credit history should, by law, comply with the Fair Credit Reporting Act.
The origination process may vary from one state to another. Upon assessing the application and considering the applicant’s past and present background information, the underwriter, which may be the bank or any other financial organization, grades the loan. Based on the grade, the categories of loans could be A-paper, Alt-A, and subprime.
The loans could also be categorized on the basis of the type of interest rate as fixed and flexible. Most financial experts recommend taking fixed rate mortgages as the amount that has to be repaid stays fixed over time. Today, with the fixed rate mortgages that are available for a maximum term of thirty years, it has become increasingly easy for citizens to avail the benefits of mortgages and own their dream homes.
Another thing to know about mortgages is that mortgage loans are kept at the same level as commercial papers. This allows for the mortgage loans to be transformed into securities. Government-backed enterprises like Freddie Mac and Fannie Mae purchase mortgages from banks and either hold them as their investments or bundle them into mortgage-backed securities (MBS). They then sell these to interested investors.
