Mortgages, Financial Management

A mortgage may be defined as a pledge of property to secure a debt payment; in this context, we will use the term property to mean real estate. If the mortgagor (say, homeowner) fails to pay the lender (the mortgagee), the lender can foreclose the loan, seize the property and sell it in order to realize his dues.

Depending upon the terms of mortgage agreed upon between the lender and the borrower, mortgages can be classified into traditional and non-traditional mortgages.

Before discussing the features of the two mortgages, we will take a look at some of the important aspects of all mortgages. The lender usually examines the creditworthiness of a borrower by eliciting information on the following:

  • Details of the amounts outstanding on any other loans taken by the borrower.

  • Details of monthly/annual income of the borrower from all sources; and the net worth of the borrower.

The lenders in the US follow two basic rules of thumb to adjudge the adequacy of the income for paying the obligations under mortgage:

Rule 1: The total mortgage payment (principal and interest) should not exceed 25% of the borrower's total income less all payments owed to other obligations.

Rule 2: Total mortgage payments plus other housing expenses such as taxes, insurance, utilities and normal maintenance costs should not exceed 33% of the borrower's total income less all payments owed to other obligations.

It must be understood that the above percentages are not always rigidly applied - the percentages may be lowered if the lender is otherwise convinced of the borrower's net worth and liquidity and if the interest rates rise to a high level in tight money situations; also lenders do lower the percentages to maintain a certain level of business.

Posted Date: 9/8/2012 7:24:50 AM | Location : United States







Related Discussions:- Mortgages, Assignment Help, Ask Question on Mortgages, Get Answer, Expert's Help, Mortgages Discussions

Write discussion on Mortgages
Your posts are moderated
Related Questions
Q. Disadvantages of just-in-time inventory management? A JIT inventory management system mayn't run as smoothly in practice as theory may predict since there may be little room

Q. Determinants of Working Capital? Determinants of Working Capital: - The working capital necessity is determined by a large number of factors but generally the following fa

Discuss the process of  Maximise Profits Let's first look at profit maximisation.  Profit (also known as net income or earnings) canbe defined as the amount a business earns af

Characteristics - Nature of Financial Management: 1) Financial Planning and Control: Finance is a base for all the business activities. Business Activities should be not on

Question : (a) A company wants to purchase a plant for its expanding operations. The desired plant is available at Rs 300,000 in cash. Alternatively, the company has the option

Ask question #Minimum 100 words acceptedaqs #

Product Advantages: A firm that has developed a reputation for superior products in the domestic market may find acceptance from the foreign consumers as well. Hence, such firm

Q. Yield curve - influence the rate of interest? The normal yield curve demonstrates that the yield required on debt increases in line with the term to maturity. One reason for

Corporates generally raise funds from the Inter Corporate Deposit (ICD) markets. These instruments generally carry interest rates higher than the other short-term

What are the financial management problems Traditional approach was challenged was that the treatment was built too closely around episodic events, like incorporation, promotio