Mortgage Loan

Mortgage Loan Definition:

A mortgage loan is a credit tenable by a real estate property through the use of a record which explains that the loan exists. But in day to day usage mortgage loan or just a mortgage have the same meaning.

In this a person inclining to a buy a house or to secure it against a property gets some amount of money from a financial institution such as a bank.

Features of mortgage loans are:

  • Size of the loan
  • Maturity of the loan
  • Interest rate
  • Method of paying off the loan

These features vary considerably.

Basic concepts of mortgage loan:

Generally a mortgage is an encumbrance on the right to property; because most mortgages are taken as a clause for new loan, the word mortgage became the standard term for a loan secured by a real property.

Mortgages have an interest rate and are scheduled to amortize normally for over a period of 30 years.

The basic components of mortgage lending are:

Property: the physical residence being financed.
Mortgage: the security interest of lender in the property, which ts restriction on the use or disposal of the property.
Borrower: he is the person borrowing money
Lender: the person who lends the money to the borrower; usually a bank or any financial institution.
Principal: the amount of the loan. This does not include other overheads of the borrower. For example, if a principal is paid off then the debt amount will go down.
Interest: is the financial charge for use of lender’s money
Foreclosure: the possibility that the lender has to foreclose, depends on certain conditions. The condition to be met is that if the borrower does not pay the amount in the given time. This is the main aspect of the loan; without this the loan is no different from any other loan.

Mortgage loan types:

Two basic types of amortized loans are fixed rate mortgage and adjustable rate mortgage.
In fixed rate mortgage the interest rate and periodic payment remains fixed for the life of the loan. In US it is generally 30 years. The principal and interest rate do not change although ancillary costs do change.

In adjustable rate mortgage the interest rate is generally fixed for a period after which it varies according to the market conditions.

Other loan types are:

  • Assumed mortgage
  • Balloon mortgage
  • Blanket loan
  • Bridge loan
  • Budget loan
  • Buydown mortgage
  • Commercial loan
  • Endowment mortgage
  • Equity loan
  • Flexible mortgage
  • Foreign national mortgage
  • Graduated payment mortgage
  • Hard money loan
  • Jumbo mortgage
  • Offset mortgage
  • Package loan
  • Participation loan
  • Reverse mortgage
  • Repayment mortgage
  • Seasoned mortgage
  • Interest only loan
  • Negative amortization loan
  • Non conforming loan

Loan to value and downpayments:

After making a mortgage loan, lenders require a downpayment from the borrower. This downpayment may be expressed as a portion of the value of the property. The loan to value ratio is the size of the loan against the value of the property.

For example, if the downpayment value is 20% then the loan to value ratio has a value of 80%.


It is the value of the property minus the outstanding debt subject to the value of the property.
For example, if the borrower’s property is estimated to be $400000 and the outstanding mortgage loans are $300000 then home owner’s equity is $100000.

Mortgage lending process in United States:

In Us the process by which the mortgage is secured by the borrower is called as origination. The borrower submits an application and documentation related to his/her financial and credit history to the underwriter. A third party such as a mortgage broker reviews the borrower’s information and checks for lenders who suit the borrower’s needs.

If the underwriter is not satisfied with the documentation additional documents and conditions are imposed on the borrower which is called as stipulation. The documents required are:

  • Credit report
  • 1003 uniform residential loan application
  • 1004 uniform residential appraisal report
  • 1005 verification of employment
  • 1006 verification of deposit
  • 1007 single family comparable rent schedule
  • 1008 transmittal summary
  • Copy of deed of current home
  • Federal income tax records for last two years
  • Verification of mortgage
  • Borrower’s authorization
  • Purchase sales agreement
  • 1084A and 1084B (self employed income analysis)  and 1088(comparable income analysis)