| | A Home Mortgage Is Attainable For Most People September 27, 2006 |
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A mortgage for purchasing a home is attainable for most people with a little looking. Most people consider home ownership to be the American dream, and banks, credit unions and other lending companies are in business to loan money at interest to help families buy homes. The home loan is called a mortgage, and most mortgages are available for fifteen, twenty or thirty years of payments back to the mortgage company at a set, or sometimes a variable rate of interest.
The participants in a mortgage are the lender, or creditor, also sometimes called a mortgagee; and the debtor, or borrower, who is the home owner. In some societies mortgages are uncommon and in those countries it is much more common for people to rent homes, and they only purchase homes when they have accumulated the entire amount. In the United States, the United Kingdom and Spain, in particular, the use of a mortgage to purchase a home has become quite common and it is in fact seen as odd to pay the full amount rather than to use a mortgage in these countries.
In the United States the use of a mortgage as a path to home ownership began in 1934. One of the reforms brought about by the great depression was the FHA, or Federal Housing Administration. The FHA lowered the amount of down payment required for a mortgage to 20%, offering what they called an 80% loan-to-value loan. The FHA also created longer terms for mortgages by introducing the 15 year loan to replace the three, five and seven year loans that were originally common. These earlier loans usually had a balloon payment at the end of a large amount, with small monthly payments in the previous time. At the time of the FHA mortgage actions only about 40% of households in the US owned homes. The rate of home ownership today is 70% showing the difference this action had. After the FHA paved the way many banks, credit unions, savings and loan associations, insurance companies and other lenders entered the field, and after World War II the VA, or Veterans Administration also made favorable rate mortgages available to the many war veterans who were returning home.
In the United States the mortgage, sometimes called the mortgage deed is generally accompanied by a document called a deed of trust. The deed of trust is a deed given by the borrower to a trustee in order to secure the debt. In most states in the US it creates a lien, but not a title transfer. This differs from a mortgage because in some states it can be foreclosed on by a non-judicial sale held by the trustee if the debtor defaults on the loan. Foreclosure can also be carried out through the orders of a judge. These deeds of trust to secure debts should never be confused with deeds given to trustees to create trusts for different reasons, which can include estate planning.
The process through which a mortgage can be secured by a borrower is known as origination. In origination of a mortgage the borrower will submit an application and accompanying documentation that is related to his or her financial and credit history to an underwriter. Many lenders now offer what they call no-doc or low-doc loans that require a borrower to submit only a small amount of financial information. These loans will have a slightly higher rate of interest and are only available to borrowers who have excellent credit histories. There are also times when a third party may be involved, such as a mortgage broker. The mortgage broker will take the information from the borrower and review several lenders, selecting the one that will best meet the consumer’s needs.
Loans are these days often sold on an open market to larger investors by the original or originating mortgage company or lender. They follow guidelines that suit the investors. There are some companies called correspondent lenders which will sell all or most of their closed loans to investors, accepting some risks for having issued them. These are often niche loads that are at higher prices that the investor did not want to originate. There are times when the underwriter will not be satisfied with all of the documents provided by the borrower. In those cases additional conditions, referred to as stipulations, will be required. Stipulations are required so that the lender has a reasonable certainty that the borrower can replay and will repay the loan. Sometimes a third party being involved is beneficial to help the borrower to clear these obstacles.
Recently a process known as automated underwriting has used statistical models to reduce the amount of documentation that is required of borrowers. Automated underwriting engines include Freddie Mac’s Loan Prospector and Fannie Mae’s Desktop Underwriter. If a person has excellent credit then little or no documentation may be required.
In the United States mortgage lending is considered a major category of the financial industry. Mortgages are called commercial paper and can be conveyed and assigned to other holders. The Federal government has created several government sponsored entities, or programs that are designed to encourage and foster mortgage lending and therefore encourage home ownership. These programs include the Government National Mortgage Association which we know as Ginnie Mae; the Federal National Mortgage Association which we know as Fannie Mae; and the Federal Home Loan Mortgage Corporate which we know as Freddie Mac. These programs all work by a process of buying a large number of mortgages from banks and issuing mortgage backed bonds to investors, also known as MBS or Mortgage Backed Securities. These entities and processes allow the banks and other lenders to free their money up quickly in order to lend it again, usually for another home mortgage. This circulates more money in the economy and stimulates home ownership, which also results in a healthy economy. Many of these ins and outs of the mortgage industry are never known by the average borrower who is just interested in first time home ownership.
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