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
Question: (a) Describe the Interest Rate Parity Theory. (b) A company needs to pay in 3 months USD 1 million. The USD are already at disposal in the company, thus the c

An Investor can receive income from this source when the bonds purchased at discount are held up to maturity or when he sells the bond before ma

What is the Floating Rate Bonds (FRBs) Bonds whose interest payments fluctuate with changes in general level of interest rates and are tied to a basic rate (termed as the refer

Corrective Action: Once budget figures are compared with those actually achieved, and a variance analysis carried out, management can then take steps to correct any problems id

Q. Explain the benefit plan? Cafeteria Plan - A benefit plan maintained by an employer for benefit of the employees underwhich every participant has the opportunity to select t

Suppose the supply curve for a good is totally inelastic.  If the government imposed a price ceiling below the market-clearing level, would a deadweight loss result?  Explain.

Explain the terminal value calculation at the end of the forecast period.  Why is it necessary? The organization whose business operation is being valued is not supposed to sudde

Accounting : Many people believe financial management only relates to bookkeeping and the establishment of accounting reports which reflect those transactions in the books.  Whi

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

Question 1: Analyze the practice of democracy as advocated by the early Greek political thinkers. Question 2: To what extent can Man live peacefully with each other wi