A Few Frequent Questions About Mortgages

What is Mortgage?

Mortgage is a debt instrument by which a borrower gives the lender a lien on property as security for the repayment of the loan. It involves a legal agreement where real property is used to guarantee repayment of loan. Incase the borrower fails to pay the full loan amount; the lender has the right to take possession of the property that is pledged. Once the loan is repaid in full, the pledge is cancelled.

How do I qualify for a Mortgage and how much can I Borrow on a Mortgage?

To qualify for a mortgage, the annual income of the borrower is taken into account as well as his past credit record.

Normally lenders loan up to 75% of the property’s value. Some may even lend up to 100% of the property value, depending on certain conditions.

Lenders verify the annual income of a borrower earned by way of gross salary, bonuses, interest, dividends, social security/pension and child support for at least the past two years. Expenses are also looked into. Expenses incurred on car loans/leases/insurance, student loans, minimum monthly payment on credit cards, alimony and child support. The average monthly income and expenses are compared.

Lenders take into consideration the 28/36 factor. The 28/36 factor means a borrower qualifies for a mortgage if his monthly loan installment amount is equal to or less than 28% of his monthly gross income. It also means lenders do not hesitate in giving a loan if the borrower’s total monthly expenses fall below 36% of his gross monthly income. It is not uncommon for lenders to waive certain conditions and overlook these conditions.

What is Loan Amortization?

Amortization is the process of repaying the debt over a period of time, in monthly installments. The amount repaid includes principal, interest, taxes and insurance (PITI) as applicable.

How Much Time do I get to Repay?

The ‘Term’ of a mortgage can run from 6 months to up to 30 years. If a borrower can repay faster or if the amount borrowed is low then a shorter period is chosen.

What is the Difference Between Fixed and Adjustable Rate of Mortgage?

Fixed rate mortgage means the interest you pay on the mortgage remains fixed irrespective of the fluctuation in the bank rate and consequently the market rate of interest. Adjustable rate mortgage, on the other hand, means the interest you pay varies according to the variation in the bank rate. If the bank rate goes up you pay higher and if it goes down you pay a lower rate of interest.

An adjustable rate mortgage can be converted into a fixed rate mortgage during the amortization period.

Sounds Good. However, I Have Bad Credit. Am I Still Eligible?

Bad credit does not close all the lenders’ doors on your hopes of getting a mortgage. Lenders are willing to acknowledge that there can be ill health, a sudden loss of employment and other such catastrophes that might result in bad credit.

A bad or poor credit history would still enable you to get a mortgage loan. The interest rate with these mortgages goes up as the lender is taking a bigger risk.

With So Many Options, which Mortgage should I Choose?

There are indeed various types of mortgages that a borrower can choose from, which include fixed and adjustable rate mortgage, hybrid mortgage, interest only mortgage, capped mortgage etc…

It is better to study in more detail about each type of mortgage and decide while keeping in mind your financial situation. Take the advice of a financial consultant before deciding would be a wise decision.

How Long does it Take to Close a Mortgage?

If your credit is good and depending on the loan program selected, a mortgage will be approved within as little as 24 hours. Typically, it takes 45-60 days from the application date to close a mortgage.