Buying a home is one of the most significant investments that a person can make in their lifetime, and many people have to take out a loan to afford it. A loan that you take out to finance a property is called a mortgage, and the whole process and the terminologies that come with it can be confusing for most people.
The documentation involved in mortgaging can come with unfamiliar terms, such as “mortgagor” or “mortgagee.” These words can be especially baffling for first-time homebuyers, which can lead to issues with the necessary paperwork. With this, here’s a beginner’s guide to home loans and some essential terms that can help you throughout the process.
The Mortgagor’s Role
If you’re taking a loan from a bank or other financial institution to pay for a home or other real estate property, you are considered the mortgagor. Put simply, it’s another word for “buyer” or “borrower.”
The Mortgagee’s Role
In contrast to the mortgagor, who receives the loan for a piece of real estate, the mortgagee is the lender. They can be a bank or financial institution that provides the borrower with funds. They have the right to foreclose on or repossess the property if the buyers fail to make payments.
The Basics of Mortgage
The home loan process involves the mortgagor or borrower depositing a particular amount for a piece of property, and the remaining sum will be covered by the mortgage. The down payments usually cost at least 5% of the home’s total cost, leaving homeowners to pay around 95% over the course of 15, 20, or 30 years.
Mortgagors need to qualify for a home loan if they want to purchase a property and want the transaction to be safe. Mortgagees or lenders will check if the borrower can afford to pay back the loan amount. To do so, they will have to take various considerations into account. These factors include:
- The Mortgagor’s Credit Score: Mortgagees have to ensure that you can pay your loans back, and your credit score is a good indicator of your financial stability and responsibility. If you have a good credit score, lenders will be more likely to trust you and accept your home loan application.
- The Mortgagor’s Monthly Income: Your monthly income also indicates whether or not you can afford loan payments. Lenders may examine your earnings, assets, and the property’s details before approving the application.
- The Mortgagor’s Debt-to-Income (DTI) Ratio: Your income may not be enough proof to convince mortgagees to trust you—they’ll also look into your DTI ratio, which is the comparison between your monthly debts and income. If you have a high DTI, it could signal that you might not be able to afford monthly mortgage payments.
As collateral for the mortgage, the lender holds the lien on the property, and the borrower has to make regular payments until the home is paid in full. If you fail to pay regularly, the piece of real estate may go into foreclosure. However, you can still retain ownership under the equity of redemption, which is your right to catch up on the set payments under a specified amount of time.
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The home loan process can be intimidating at first, especially if you’re unfamiliar with the process and the terminology it entails. However, with this helpful guide in mind, you’ll be better equipped to handle the documentation and paperwork with relative ease—and you’ll be one step closer to getting your dream home!
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