As of October 2023, around 230 million Americans own a house. However, it can be difficult to buy a house in the complex world of mortgages. It is therefore essential to understand the role of a mortgagor before you start your journey of homeownership.
UNDERSTAND THE ROLE OF A MORTGAGOR
- A mortgagor is the borrower who secures a loan with their property.
- There are various steps involved in the mortgage loan process. These steps include pre-approval, underwriting and closing.
- Mortgages have many types, like conventional, FHA, VA, and USDA loans.
Who Is a Mortgagor?
A mortgagor is an individual or an entity who borrows money to purchase a property. They are legally obligated to pay mortgage installments regularly during the loan term.
The mortgagor uses their real estate as collateral to secure the loan. In some cases, a co-mortgagor or co-signer may apply for a mortgage plan together.
» Learn Everything About a Co-signer: Cosigning A Mortgage: All You Need To Know
Who Is a Mortgagee?
The mortgagee is the one who lends money to the borrower. The mortgagee can be an individual, a bank, or any financial company.
The lender receives monthly payments from the borrower. The payments include the principal loan amount and the interest charged on the loan.
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Mortgagor vs. Mortgagee
Here are the key differences between a mortgagor and a mortgagee:
| Mortgagor | Mortgagee |
| The individual or entity who is planning to purchase a home. | The individual or entity that grants the home loan. |
| The mortgagor applies for a loan. | The mortgagee approves the loan. |
| The mortgagor puts up their property as collateral for the loan. | The mortgagee receives the property as a collateral asset, in case of a default. |
| Makes monthly payments. | Receives monthly payments. |
| They adhere to the loan terms. | They make the loan terms. |
| Forfeits property ownership till they repay the loan. | Holds property ownership till the mortgagor repays the loan. |
| Surrenders to the loan terms in case of default. | Holds the legal right over property in case the mortgagor defaults. |
What Are Mortgagor’s Responsibilities?
A mortgagor has certain responsibilities to the lender and failing to fulfill them can lead to foreclosure. Below are the mortgagor’s key responsibilities:
- Loan Repayment: The mortgagor should make timely payments to the lender to avoid late fees and penalties. This would help them maintain a good credit score.
- Property Maintenance: The mortgagor must maintain the property. This would include necessary fixes to keep it in a livable condition.
- Insurance Coverage: The lender must insure the property throughout the mortgage tenure as it will help cover the cost of property damages or losses.
- Notification to lender: The mortgagor must notify the lender immediately of any obstacles that could affect their ability to make payments.
How Do Mortgage Loans Work?
Mortgage loan approval is a process in which lenders evaluate a borrower’s credibility to decide whether to grant them a mortgage loan.
The lender processes the loan application through several stages before they approve it.
- Mortgage Pre-Approval: During the pre-approval, the lender inquires about the mortgagor’s income, debts, and assets.
- Purchase Agreement: Pre-approval is followed by the drafting of a house purchase agreement. It includes the terms and conditions of the loan and the agreed-upon price.
- Loan Application: Mortgage loan applications are submitted using the standard Fannie Mae 1003 form by the majority of US lenders. The form asks for extensive details like the exact salary, marital status, investments, etc.
- Loan Estimate: It is a 3-page form, outlining important details about the loan. It includes details such as estimated interest rates, monthly payments, closing costs, and estimated taxes.
- Mortgage Processing: The mortgage processor orders a property inspection, title report, and credit report. This is done to examine any legal issues linked to the property.
- Underwriting: The underwriter assesses the borrower’s risk of defaulting. They review the mortgagor’s debt-to-income ratio, credit history, etc.
- Closing: The closing disclosure (CD) outlines the details of the loan, such as monthly payments, loan terms, and closing costs.
Types of Mortgages
There are various mortgages available to home buyers.
- Conventional Mortgage: This type of loan is not certified by a government agency such as the FHA or the Department of Veterans Affairs (VA). This mortgage demands a higher down payment and strict criteria to get approval.
- Fixed-Rate Mortgage (FRM): In FRM loans, the interest rate remains constant throughout the loan tenure. The mortgage period in this type is 15 years or 30 years.
- Adjustable-Rate Mortgage (ARM): In ARM loans, the initial interest rate is fixed for a specific period, say 5-7 years only. Later, the interest rates fluctuate due to changes in market conditions.
- FHA Loan: FHA loans make homeownership less restricted and benefit first-time buyers. They work under flexible standards, such as a lower down payment and credit score.
- VA Loan: VA loans are offered to veterans, active-duty military personnel, and their families. VA loans are guaranteed by the Department of Veterans Affairs. These loans do not have strict credit requirements and do not require private mortgage insurance.
- USDA Loan: USDA loans are designed to encourage homeownership in rural and suburban areas. These loans provide financing for low-to-moderate-income borrowers and may require no down payment. USDA loans also offer low-interest rates and flexible credit requirements.
Furthermore, based on their requirements, borrowers can choose the most suitable mortgage for them. We suggest to consult a professional before you take the final call.
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Bottom Line
A mortgage story revolves around a mortgagor and a mortgagee. It’s essential for both to thoroughly understand the terms associated with mortgages.
If you are planning to buy a house, you must explore different types of mortgages and choose the most suitable one. Moreover, make sure your mortgage plan complements your financial goals.
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Frequently Asked Questions
Can a mortgagor sell mortgaged property?
Yes, the mortgagor can sell the mortgaged property. Although its advisable to first check with the lenders before selling the property.
What happens to a mortgage if the mortgagor dies?
In case the mortgagor dies, the co-mortgager will take responsibility for the payments and maintenance. If there is no co-mortgager, then the report may go through the probate process.
What is a mortgagee clause?
A mortgagee clause protects the lender from any financial losses in case of damage to the mortgaged property.
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