Checking Creditworthiness for Mortgage Loan

Posted on April 9, 2012 by admin

Various methods are used for checking the creditworthiness of a loan seeker to determine how much eligible he is and for what amount for getting the loan. This also helps in making the lender aware about the risk factors involved in the process.

Measures used in various countries to check the creditworthiness of a customer vary to a large extent. The most common methods used are payment to income and debt to income.

In the first method which is payment to income, mortgage payments are calculated as a percentage of gross or net income. In the second method which is debt to income, all the debt payments including mortgage payments are calculated as a percentage of income.

Various nations also make use of credit scores to add to the accuracy of the payment to income and debt to income methods. Apart from applying these methods, various documents are also required for checking the creditworthiness. Some of the most necessary documents include income tax returns and pay stubs. However, the importance of the documents varies in different regions.

Keeping the risk factor in mind, a few lenders also make it necessary for the loan seekers to have ‘reserve assets’ for a minimum of one month available with them. The main purpose of this requirement is to make the borrower prepared in advance for being able to show assets in accordance with the amount required for the hosing costs. This proves to be of immense helps in situations when a borrower loses his job or his source of income.

There are also a few nations which approve loans without any documentation in some specific situations however; such cases are very few.

Calculating Property Value in Mortgage loans

Posted on April 9, 2012 by admin

As property value plays a significant role in analyzing the risk of the loan, to know the actual value of the property is an important aspect of mortgage lending. For determining the value of a property, various methods are used now days however; there are a few recommended ones which are considered to be the best.

First is by determining the actual or transaction value. In this, the value is considered to be what the value was at the time of purchase of the property. However, this method is not applicable in the case where the property is not purchased at the time of loan approval.

Second is appraised or surveyed value. As the term suggests, the appraisal of the value of the property is done in this case by a licensed professional. It is a common process in most of the jurisdictions. An official appraisal of the property against which the loan is taken is most of the times required by the lenders from the borrower’s end to get an accurate value of the property at that time.

Third recommended method by the experts to determine the value of a property is to get the estimated value. In this method, the internal estimate of the property value is made by lenders themselves. Sometimes, other parties involved in the loan process also give their estimates.

So, these are the three methods which are most often used in determining the value of a property. It has an utmost role in the loan process as it determines the amount of the loan fund as well the risk factors involved in it.

LTV and Down Payments in Mortgage Loans

Posted on April 9, 2012 by admin

Down payments are usually required by the lenders from the borrowers when the later is interested in taking a mortgage loan.

Down payment is mainly a portion of the amount required for purchasing a property deposited at the time of applying for the loan. So, in simple terms, it can be referred as a part of the actual value of the property.

The size of the loan against the value of the property is called the loan to value ratio or LTV. So, keeping in view the definition of the loan to value ratio, a mortgage loan in which a down payment of 20% of the whole amount is made by the loan seeker, he has a loan to value ratio of 80%. So, the percentage of the loan amount which is left unpaid after the down payment by the borrower is called the loan to value ratio.

In case a borrower opts for a loan against the property for which he is already the owner, the loan to value ratio will be levied on estimated value of the property. This ratio forms an important factor which indicates the level of risk taken in a mortgage loan. So, if the loan to value ratio is high, it means that the value of the property will not be able to make up for the left principal amount. However, this risk is more in cases of foreclosure where the cost of the property is of utmost importance. This makes the loan to value ratio hold a special place in the process of a mortgage loan.

Types of Mortgage Loans

Posted on April 9, 2012 by admin

Though there are various types of mortgage loans offered in the world however; depending on the basic characteristics of the mortgage loans, these are divided into two basic categories. These categories are defined on the basis of several factors which decide the mortgage loans. However, a few things are common in all mortgage loans which include rate of interest, term of the loan, frequency of the payment amount and prepayment options.

Based on the significant features, the mortgage loans are basically divided into two types. First is the fixed rate mortgage loan and second is known as the adjustable rate mortgage loan which is also commonly called as floating rate or variable rate mortgage.

In many nations like the United States of America where adjustable rate mortgages are chosen by 90% of the loan seekers, these are also termed mortgages. Many people prefer to take combinations of fixed and floating rates in which the loan has a fixed rate for some period with some variations in the rates towards the end of the loan.

As the name itself suggests, a fixed rate mortgage has a fixed rate of interest which provides the convenience of fixed periodic payments for the whole term of the loan. So, in simple terms, the principal amount of the payment and the interest levied on it doesn’t change for the whole life of the loan.

The adjustable rate mortgage provides a fixed rate of interest for a specific period of time and then adjusted according to the market index. The interest charge levied on the loan amount of the borrower in this type of loan depends on the credit risk as well as the interest rate risk.

Enjoy Long Term Loans with Mortgage Loans

Posted on April 9, 2012 by admin

If a loan seeker wants to take a long term loan, a mortgage loan can prove to be a good option for him. The repayment of this loan consists of periodic payments for a specific duration of time. These periodic payments are calculated by applying the formulae of time value of money.

For the repayment of the loan, the whole loan amount including the interest charged on it is spread over a span of ten to thirty years. With in this period of time, the amount is paid off by giving fixed monthly payments. This fixed monthly payment process is very similar to the way a person pays off the loan taken from a bank within a few predefined installments.

However, there may be variations in the payment process depending on the nation in which it’s taken. The whole process through which the original loan amount is paid off is called amortization.

Lenders earn huge benefits from the loan seekers who take loan against property. The main source of income for the lenders is the interest money earned by them on every loan. In some cases, lenders take such loans themselves with the help of deposits or by issuing bonds.

The price at which the lenders get funds hold a lot of significance as it affects the rate of interest levied on the amount taken by the borrowers from them.

The creditworthiness of the borrower is of utmost importance during the process as it helps in checking the riskiness of the mortgage loan.

Legalities Related to a Mortgage Loan

Posted on April 9, 2012 by admin

There are certain legal formalities related to a mortgage loan which are essential to be fulfilled before taking a loan. As per the recommendations of the Anglo-American property law, a loan is called a mortgage loan when the owner of a property pledges his interest or property as security or collateral for getting the funds.

So, in simple terms, mortgage can be called as limitation on one’s right to the property. This limitation is termed as encumbrance in legal terms. As most of the mortgages are for getting new funds as loan amount, the word mortgage is now recognized for getting loan against collateral security or real property.

There are many things similar in mortgage loans which match with other loans. Like other loans, the rate of interest is also levied on mortgage loan. The rate of interest in addition with the actual loan amount is also subject for repayment with in a specific duration of time. The repayment duration for mortgage loans is normally 30 years during the whole amount with the charged interest needs to the paid back.

Mortgage lending has become one of the most common methods for people in many nations to finance for gaining ownership on any residential or commercial property.

During mortgage lending, many aspects are under the control of the government and governed either directly or indirectly. Some of the aspects which are dealt directly are the legal requirements and the aspects where there is an indirect participation of the government consist of regulation of the participants or the financial markets. Apart from these factors, there are various regional, historical, features of the legal or financial system which affect the mortgage loan process.

What is a Mortgage Loan?

Posted on April 9, 2012 by admin

A mortgage loan is a kind of loan taken against real property. The evidence of the real property is given with the help of a mortgage note which also proves the existence of the granted loan. Now days, mortgage loan has gained so much popularity among the loan seekers due to the convenience factor that mortgage is now also referred as mortgage loan. The word ‘mortgage’ means ‘’death contract’’ which is taken from the law section of the French language.

A person in need of money for purchasing a home or a builder in lack of finances can apply for mortgage loan through a bank. Intermediaries pay a great role in the sanction of a mortgage loan. It can be helpful either directly or in an indirect way. However; there can be a lot of variations in the features of mortgage loans depending on the bank from which it is taken. There can be difference in the size of the loan, maturity term of the loan, rate of interest, method used for the repayment of the loan and many other factors which are significant for a loan seeker.

Except some nations like Bali and Indonesia, borrowing funds with the help of mortgage loan for purchasing a home is quite normal. It is very common as very few people have such a huge amount of cash at an instance to be able to buy property without borrowing funds from anywhere. This has also led to the development of the domestic markets to a large extent in especially the nations where people crave for having their own homes and demand for home ownership is the highest.