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
What can be the reason for the negative synergistic gains for British acquisitions of U.S. firms? Negative synergies for British acquisitions of U.S. firms (united state firms) m

Add or Drop Analysis Lakespring Retirement Village is home to senior citizens who are fairly independent but need assistance with basic health care and occasional meals. Jill Thomp

Q. What are Sources of Finance? No details are specified concerning the nature of a business to comment on and hence only general recommendations can be made. Given that fixed

Q. Example on Bills of exchange? ARG Co will be apprehensive to protect the sterling value of its expected dollar receipt. The quoted forward rates demonstrate that the dollar

Define the term- Future Cost and Historical Cost Future cost of capital refers to expected cost of funds to be raised to finance a project. In contrast, historical cost signifi

explain the concept of working capital.what are the factors which influence the working capital?

What are the options available for growth Joint venture   A joint venture is when a separate company is formed, in which every member holds an equity st

Types of Government Stocks Issue of Stock through AuctionThe RBI, on behalf of the government, issues notification to auction government securities, stating the amount and time

1. What is a venture's present value? Does the past matter? What is meant by the statement, "If you are not using estimates, you are not doing a valuation?" 2. Define (a) requ

Explain the term- Market penetration A strategy which pursues to increase sales of existing services or products to the same market. Price reduction strategies Aggre