Glossary

Here are the most common home refinancing definitions.

AAA Rating:

This is a security rating, in terms of how secure a company, share or bond is. A triple A rating is the most secure rating that can be achieved.

Accrued Interest:

Interest that has been calculated, since the last interest payment, and is owed but is yet to be paid.

Additional Repayments:

This is any extra payment you make on top of the minimum monthly payment are required to make to service your loan.

Adjustable Interest Rate:

A loan that has an interest rate that changes through the term of the loan. It usually varies in accordance with the official market interest rate.

Amortization:

The repayments of a loan that cover both principal and interest. These repayments are scheduled in installments over a period of time.

Application Fee:

This is the fee charged by lenders to set up and process a loan application. Paid up front, it is usually refunded if the loan is declined. Also know as establishment fee.

Appraised Value:

The estimated value of the property, however not necessarily an accurate market value of your property. This is needed by lenders, offered to them as security for your new home loan.

Arrears:

When behind on your repayments this is the total of unpaid loan repayments.

Assets:

Real estate, a car, securities, cash and other items of economic value owned by an individual or corporation.

Basis Point:

One hundredth of a percentage point (0.01%) Used to measure the rate of interest.

Break Cost:

The fee charged for switching from a fixed rate home loan to a adjustable rate home loan before the fix rate period has expired.

Bridging Finance:

A short term loan that enables you to purchase a new property whilst you await the sale of your existing property.

Capital Gain

: The profit from the sale of a property. It being profitable when the sale price is higher then the purchase price.

Capped Rate Loan:

Like an adjustable rate loan but, the interest cannot exceed a specified rate for a set period of time.

Certificate of Compliance:

A certificate that confirms Council building regulations have been followed in regards to a specific property. This can be obtained from Councils for a fee.

Certificate of Title:

A certificate issued by a government body that proves ownership of a property and details dimensions and encumbrances on it e.g. mortgages.

Community Title:

A property title establishing ownership of a club house, swimming pool and other communal dwellings to be shared among all dwellers of a particular estate.

Company Title:

A property title where a company owns the whole of the property, and by purchasing shares in the company, the purchaser gets authority to reside in a particular area of the real estate.

Compound Interest:

Interest that is added to the principal before it is next calculated. Funds earning compound interest grow at an exponential rate.

Consumer Credit Code:

A law that was passed to protects individual that are borrowing money from the lenders. It gives the individuals certain rights and make the consequences of the loan more transparent by requiring lenders to provide certain information about their loan.

Contract:

A legal agreement made between to or more parties.

Contract for sale:

A contract that lists the details and conditions of a sale/purchase.

Conveyancing:

The legal process where ownership of a property is transferred from the old owner, the seller, to the new owner, the buyer.

Covenant:

An agreement in regards to the usage or nature of property on specific lands.

Credit Bureau:

An organization that records people’s credit history and is authorized to issue credit reports, on individuals, to lenders.

Credit Limit:

The maximum amount a lender sets, on a loan, for the borrower to borrow up to.

Credit Reference or Credit Report:

This is a report detailing an individual’s credit history. Used by a lender to assess the risk of lending to people, it can only be obtained with permission and from authorized credit reporting agencies.

Daily Interest:

Interest that is calculated daily.

Debt Service Ratio (DSR):

This is a measure of ones ability to service a debt. Usually expressed as a percentage of ones income in comparison to the individuals expenses.

Default:

When you fail to make a loan repayment by a specific date.

Disbursements:

Expenditure incurred by the services of third parties in relation to finalizing your mortgage e.g. solicitor and government fee’s for title searches and registration.

Early Repayment Penalty:

This a fee charged by lenders if you pay off your home loan early. Not all lenders charge this fee.

Equity:

The amount of the property value that you own. Every bit of principal you pay from your home loan becomes your equity. Any rise in the value of your property becomes your equity. To work out how much equity you have in your property take the current market value of the property and subtract the outstanding home loan balance.

Establishment Fee:

(See Application Fee definition)

Exchange of contracts:

When the buyer and the seller exchange contracts this locks them into the stated course of action. The buyer must buy and the seller must sell. However some states allow a cooling off period after the exchange of contracts.

Exit Fee:

This is a fee charged by lenders when the borrower wishes to refinance their loan with another lender, within a specific time period from the start of the loan. Not all lenders charge this fee.

Facility:

Another name for your loan account.

Fixed Interest rate:

A home loan that has its interest rate locked to a specific rate for a set period of time. Fees may apply in relation to early repayment or switching to variable rate loan.

Garnished:

Having money diverted from your income, to another party, before you receive it.

Gearing:

The ratio of property income to repayments needed to service the loan.

Government or statutory charges:

These are charges payable by an individual that have been incurred only due to various government laws, that are in place. E.g. Stamp duty and mortgage duty. The charges vary from state to state.

Guarantee:

Where a third party promises to repay the home loan if the borrower defaults. This is a form of security for the lender.

Guarantor:

The person giving the guarantee to the financial institute.

Interest:

In reference to a loan, interest is the fee charged by a lender to a borrower for the use of borrowed money. This is usually expressed as an annual percentage of the principal; the interest rate.

Interest Only Loan:

This a loan where your minimum repayments over the term of the loan only cover the interest. You are not obliged to pay any principal until the end of the loan term, where the principal is due in full.

Joint and Several Liability:

Where a loan is taken out jointly, by two or more people, all parties are responsible for the loan and must make repayments. In joint loans if one party defaults, all parties are held responsible.

Joint Tenants:

Where two or more people own a property. In the case of death to one or more parties involved the title reverts to the remaining survivors.

Lease:

A contract that allows residence of a property for a set amount of time.

Lenders Mortgage Insurance:

This is insurance that protects the lender against the borrower defaulting. The insurance premium is usually paid by the borrower, however it does not offer them any security at all. It only gives the lender some security.

Liabilities:

A person’s financial obligations or debts.

Loan Agreement:

The contract between the borrower and the lender. This document will outline all the conditions that apply to the loan.

Loan Security Duty:

Charged by the government for the registration of a mortgage. Also know as Loan Stamp Duty or Mortgage Stamp Duty.

Loan to Valuation Ratio (LVR):

This is a comparison of your loan amount to the value of your property. It is usually expressed as a percentage. For example, if you have borrowed $90,000 and your property is valued at $100,000, the LVR would be 90%

Lump Sum Payment:

These payments are additional and serve the purpose of reducing the loan amount. (See Additional Payments)

Mortgage:

A form of security for a loan over property. The lender has the right to the property if the borrower defaults on the loan repayments.

Mortgage:

The person or institute lending you the money and taking security over the property.

Mortgagor:

The person borrowing the money and providing the property as security.

Negative Gearing:

Where the income derived from the property is less then the costs involved with obtaining and maintaining the investment. The difference can be used as a tax deduction.

Overdraft:

Where a borrower can exceeds the account balance limit, to a predetermined amount, assigned to them by the lender.

Power of attorney:

Where authorization is given to another to act as ones legal representative.

Principal:

The amount borrowed, or the amount borrowed which remains unpaid. In reference to your monthly home loan payments it is the part of the monthly payment that reduces the outstanding balance of a home loan.

Principal & Interest Loan:

A loan where the interest and the principal are repaid together through the repayments.

Private Sale:

A property sale that does not go through a real estate agent.

Redraw Facility:

A facility that come with some loans where by if you have made any lump sum payments/additional repayments you can then access and use that money.

Refinancing:

Switching lenders by finalizing your current home loan with money obtained from a new home loan. This is a home refinancing loan.

Reserve Price:

A minimum price that a seller will accept from a buyer.

Search (Title search):

A search that provides you with details of ownership and encumbrances of a specific property.

Security:

Property which is used to guarantee a loan.

Settlement:

The finalization of the process needed for a buyer to take possession of property. All documents are finalized and handed over between seller, buyer and lender.

Settlement Date:

The date at with settlement (see above) will take place.

Signatory:

The person who’s signature is on an account and grants them access to it.

Survey:

A plan of the land that details the positions of buildings and boundaries.

Tenants in common:

Similar to joint tenants, in that, more then one person owns a share of the property. However unlike joint tenants the parties are free to sell or gift their share as in sole ownership.

Term:

The duration of a loan or a specific time period within that loan.

Valuation:

A report giving a professional opinion regarding the value of a property.

Vendor:

The seller of the property.

Mortgage Refinance Stalls on Higher Costs, Tightening Credit

Mortgage applications fell over the last week as mortgage rates climb and some borrowers wait for President Obama's mortgage plan to be implemented. However, there may be an even bigger contraction that will prevent any significant recovery--mortgage loan officers are finding it increasingly difficult to help borrowers.

The Mortgage Bankers Association released their index of application to purchase or refinance a home, which showed a 15.1 percent decline in the week ending February 20. The mortgage refinance index was down 19.1 percent and mortgage purchases were off 2.6 percent.

Much of this decline is explained in the MortgageLoan.com mortgage rate index that has risen to 5.21 percent from 5.11 percent a week ago. Borrowing costs are also increasing with reported increases in Fannie Mae and Freddie Mac fees, while credit standards are tightening.

Many are attributing some of the decline in mortgage applications to the hope that President Obama's recently announced mortgage plan will bring better deals. Unfortunately, there is growing concern that implementation may be a challenge.

As was seen in the failure of the Hope for Homeownership program, having a plan and getting it into troubled borrowers hands are two separate challenges.

Not only are these emerging programs very constrained, like previous loan modification programs, but they will find that the market now lacks sufficient qualified mortgage brokers and loan officers to originate the modifications.

Prior to the mortgage crisis better than 80 percent of loan originations were done by mortgage brokers. The population of licensed mortgage brokers is easily cut in half and dwindling. Major banks, like JP Morgan Chase, are completely cutting their wholesale and correspondent programs.

Owen Raun, Principle at RMC Vanguard, says that mortgage brokers and banks like his are "seeing their funding source options constrict." So, while their borrower inquiries are high they are unable to help many of the borrowers. Meanwhile, large lenders are minimizing their lending to preserve capital ratios against deteriorating mortgage portfolios.

This leaves the homeowner with few options to refinance at competitive rates or purchase a new home. There is increasingly no one to take their call as banks starve out their origination capacity. This is forcing homeowners into loan modification scams, who promise to "fast track" a solution or servicing departments that have little mortgage origination experience.

This constriction of loan origination capacity is perhaps having a bigger impact on getting trouble mortgages worked-out than rising borrowing costs and tightening credit standards. Leaving many borrowers wondering who to call and when they might get a call back.

Mortgage Tax Deduction May Be at Risk, Quietly Wounding Mortgage Payers

President Obama's recent budget proposal may wipe out your mortgage deduction. Is this the right time to cut incentives to homeownership? The housing industry, at record lows and bulging with home inventory, is loudly protesting.

Currently, households taxed at the 33 and 35 percent rate can claim mortgage deductions. However, under the newly proposed Obama Federal budget the deduction would be eliminated for anyone over the 28 percent tax bracket. In the 2009 tax year that would mean those households making more than $208,850 in taxable earnings will not be eligible to claim a mortgage deduction.

The elimination of the mortgage deduction for this income tax bracket seems to tie to the president's campaign promis to increase taxes on households earning over $250,000.

In a statement from the Mortgage Bankers Association, CEO David Kittle says the timing couldn't be worse. "This proposal could have an adverse effect on a market that is already in trouble, and this is not the time to reduce incentives for buying or refinancing a home."

Advocates of eliminating the tax deduction argue that first-time home buyers are rarely at the high-point of their earning potential. Therefore, it will have little impact on the recovery of the housing market.

However, consulting IRS data shows the disincentive may be larger than expected. Lower-income households rarely itemize deductions, so the incentive only applies to the upper two-thirds of income levels. And according to the most recent IRS study, conducted in 2003, 36 percent of those claiming a mortgage deduction had adjusted gross incomes exceeding $100,000.

The National Association of Realtors (NAR) battled a similar Bush proposal in 2005 that would have eliminated the deduction in exchange for a 15 percent tax credit. NAR argued that removing the deduction would directly decrease the value of homes, especially in high-cost areas like California. Some econometric studies demonstrate that the tax beliefs of homeownership add 5 to 7 percent to the value of a home.

Taking away key incentives for those that can afford to own homes seems counterproductive. Meanwhile, the government is considering incentives for lower-income home buying--bringing back seller down payment assistance. A program that is documented by FHA to directly correlate to increased mortgage defaults.

It seems that where the government is placing the incentives on mortgages and housing may make the housing crisis worse.

The Obama administration appears to be agressively battling the mortgage crisis with foreclosure prevention aid packages, while quietly wounding folks that continue to pay their mortgages--the only strength in the mortgage market.

Citigroup to Help Jobless with Mortgage Payments

According to a Wall Street Journal report, Citigroup will announce a program today that attempts to help unemployed homeowners make their mortgage payment.

Despite all of the emphasis on foreclosure prevention and loan modifications the latest challenge in battling the mortgage crisis is homeowners losing jobs. Citigroup is launching a new program to give these borrowers some temporary relief.

Under the new program Citigroup will give borrowers a three month reprieve on their mortgage payment obligations, lowering them to an average of $500. This program is for homeowners that have recently lost a job and are at least 60 days behind on their payments.

The Citigroup plan is expected to preempt an Obama administration announcement on guidelines for a massive new loan modification program--a new offensive on a deepening housing crisis.

Danjiv Das, the CEO of CitiMortgage told the Wall Street Journal that they expect to help thousands of borrowers and called rising unemployment "the single bigget issue facing mortgage servicers." This program is expected to be copied by other large servicers to help stem increasing foreclosures.

To qualify for the CitiMortgage program borrowers need to live in the home and the mortgage must be owned and serviced by CitiMortgage. The program is also capped at mortgages less than $417,500. Citigroup currently holds 1.4 million mortgages that it owns and services.

Many investors have considered Citigroup as a prime target for nationalization by the Federal government. Citigroup has received $45 billion in Federal funding and the US now taking a 36 percent stake in the company. This has fueled concern that the company may be making politically, but not financially sound decisions.

Das assured the Wall Street Journal that this latest loan modification program "was created by us, developed by us, and is now being implemented by us." This is not the first time Citigroup has bucked the rest of the banking industry with controversial moves in the mortgage crisis. In January, Citigroup came out all alone in endorsing legislation to allow bankruptcy-court judges to modify mortgages--so call "cram-downs."

Treasury Releases Details of Expansive Mortgage Modification Program

Today the US Treasury announced the much anticipated details of the Obama loan modification plan. This program is the broadest program to date targeting foreclosure prevention. Unique to other similar loan modification programs this plan seeks to aid troubled borrowers before they begin missing mortgage payments.

The Home Affordable Refinance program is projected to provide government assistance to 7 to 9 million homeowners. The mortgage modification plan is focused on homeowners that have a solid payment history and have their loans owned or serviced by Fannie Mae or Freddie Mac.

The new government refinance program is expected to help homeowners that are unable to refinance in a traditional manner due to significant losses in home equity. The economic depreciation of most housing markets is push many homeowners loan to values much higher than the customary 80 percent required to refinance.

Millions of borrowers are facing pending hardship because of job loss or resetting adjustable-rate mortgages. The Home Affordable Refinance program is designed to efficiently renegotiate these mortgages into less risky 30-year fixed-rate loans taking advantage of low mortgage rates to lower monthly payments.

Early details of the government mortgage modification program include these eligibility guidelines:

• Mortgages were originated on or before January 1, 2009
• Loans must be first-lien loans on owner-occupied properties
• Principal balance must not exceed $729,750. Higher limits for owner-occupied 2-4 unit properties
• Borrowers must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must sign an affidavit of financial hardship
• Property owner occupancy status will be verified; no investor-owned, vacant, or condemned properties
• Incentives will be provided to lenders and servicers to modify at risk borrowers who have not yet missed payments
• Loan modifications will begin immediately and be available until December 31, 2012. Loans can be modified only once

Mortgage Crisis Expands as Economy Weakens

Recent mortgage industry data reports are showing that the mortgage crisis continues to alarming deepen despite a variety of government assistance programs and capital. One of the major contributors in the expansion of job loss to multiple sectors and an increasing number of States.

According to First American CoreLogic's data 1 in 5 homeowners owe more than their properties are worth. This number represents 8.31 million homes with negative equity at the end of 2008. A number that is up 9 percent from 7.63 million at the end of September 2008.

The real alarm is in the report's analysis that 2.16 million more homes could be added to those already under-water is home prices drop another 5 percent--a real possibility give current economic indicators.

The aggregate value of residential properties in the US fell from $19.2 trillion from $21.5 trillion in 2007. The housing markets currently impacted the most are California, Florida, and Nevada. However, as the economy continues to weaken housing markets in multiple States are feeling consistent declines--Arizona, Georgia, Michigan, and Ohio are starting to feel even larger percentage declines resulting from job loss impacts.

Mortgage Bankers Association data is showing the first order effect of these job loss models. Released today, the MBA default statistics show 5.4 million behind in payments or in foreclosure. This represents 12 percent of US mortgages.

Mortgage defaults and foreclosures are up 10 percent in the July-September 2008 quarter, up 8 percent from a year prior.

The sharpest increases in mortgage defaults and foreclosures are in Louisiana, New York, Georgia, Texas, and Mississippi--all States facing massive job loss.

Mortgage Cram-Down Bankruptcy Legislation Passes in House

A controversial bill that would allow Federal judges to modify loans, forcing banks to reduce the payments of borrowers in bankruptcy got one step closer to becoming a law. The so called mortgage "cram-down" law passed in the House of Representatives yesterday 234-191 and heads to the Senate.

According to reports from the Congressional Budget Office this law will help 1 million homeowners remain in their homes. The proposed law would give Federal judges the authority to modify mortgage contracts by lengthening terms, cutting mortgage rates, or reducing loan balances. It would also permanently increase the Federal Deposit Insurance Corporation (FDIC) coverage of deposits to $250,000.

Although this law would arguably give judge more tools to help consumers recover from crushing debt, it will continue to apply pressure to banks and housing prices.

The bill stalled in the House earlier this week amid significant opposition from the banking industry. Industry groups, like the American Banker, claim that this legislation will just further destabilize housing prices. There was also concern with the earlier version of the bill being too attractive; therefore, ceasing to be a true "last resort."

As a result, the House tightened the legislation with the provisions such as a equity share that would be paid back to the bank if the property was sold later at a profit.

Experts believe that this will significantly increase Chapter 13 bankruptcy filings. Chapter 13 bankruptcy code allows individuals with regular income to pay all or a portion of their debts and avoid losing their homes in foreclosure.

Friday jobless numbers that continue to climb give us reason to believe that this bankruptcy provision is likely to get a lot of exercise, if passed. February jobless claims reported another 651,000 jobs lost. This raises the unemployment rate to 8.1 percent from 7.6 percent in January, the highest level since 1983. Total job loss since the recession began in December 2007 reaches 4.4 million.

Other terminologies

Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some terms explained in brief. If a term is not explained here it may be related to the legal mortgage rather than to the loan.

Advance This is the money you have borrowed plus all the additional fees.

Base rate In UK, this is the base interest rate set by the Bank of England. In the United States, this value is set by the Federal Reserve and is known as the Discount Rate.

Bridging loan This is a temporary loan that enables the borrower to purchase a new property before the borrower is able to sell another current property.

Disbursements These are all the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.

Early redemption charge / Pre-payment penalty / Redemption penalty This is the amount of money due if the mortgage is paid in full before the time finished.

equity This is the market value of the property minus all loans outstanding on it.

First time buyer This is the term given to a person buying property for the first time.

Loan origination fee A charge levied by a creditor for underwriting a loan. The fee often is expressed in points. A point is 1 percent of the loan amount.

Sealing fee This is a fee made when the lender releases the legal charge over the property.

Subject to contract This is an agreement between seller and buyer before the actual contract is made.

Islamic mortgages

The Sharia law of Islam prohibits the payment or receipt of interest, which means that practising Muslims cannot use conventional mortgages. However, real estate is far too expensive for most people to buy outright using cash: Islamic mortgages solve this problem by having the property change hands twice. In one variation, the bank will buy the house outright and then act as a landlord. The homebuyer, in addition to paying rent, will pay a contribution towards the purchase of the property. When the last payment is made, the property changes hands.

Typically, this may lead to a higher final price for the buyers. This is because in some countries (such as the United Kingdom and India) there is a Stamp Duty which is a tax charged by the government on a change of ownership. Because ownership changes twice in an Islamic mortgage, a stamp tax may be charged twice. Many other jurisdictions have similar transaction taxes on change of ownership which may be levied. In the United Kingdom, the dual application of Stamp Duty in such transactions was removed in the Finance Act 2003 in order to facilitate Islamic mortgages.

An alternative scheme involves the bank reselling the property according to an installment plan, at a price higher than the original price.

Both of these methods compensate the lender as if they were charging interest, but the loans are structured in a way that in name they are not, and the lender shares the financial risks involved in the transaction with the homebuyer.

Mortgage insurance

Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in loans with a loan-to-value ratio over 80%, and employed in the event of foreclosure and repossession.

This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized component of monthly mortgage payment. In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down, or any combination of both to relegate the loan-to-value under 80%.

In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to dispose of hard assets (such as real estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing authority recover less than full and fair market value for any hard asset.

Mortgage lending in Continental Europe

Within the European Union, the Covered bonds market volume (covered bonds outstanding) amounted to about EUR 2 billion at year-end 2007 with Germany, Denmark, Spain, and France each having outstandings above 200.000 EUR million. In German language, Pfandbriefe is the term applied. Pfandbrief-like securities have been introduced in more than 25 European countries – and in recent years also in the U.S. and other countries outside Europe – each with their own unique law and regulations. However, the diffusion of the concept differ: In 2000, the US institutions Fannie Mae and Freddie Mac together reached one per cent of the national population. Furthermore, 87 per cent of their purchased mortgages were granted to borrowers in metropolitan areas with higher income levels. In Europe, a wider market has been achieved: In Denmark, mortgage banks reached 35 per cent of the population in 2002, while the German Bausparkassen achieved widespread regional distribution and more than 30 per cent of the German population concluded a Bauspar contract (as of 2001).

Costs

A study issued by the UN Economic Commission for Europe compared German, US, and Danish mortgage systems. The German Bausparkassen have reported nominal interest rates of approximately 6 per cent per annum in the last 40 years (as of 2004). In addition, they charge administration and service fees (about 1.5 per cent of the loan amount). In the United States, the average interest rates for fixed-rate mortgages in the housing market started in high double figures in the 1980s and have (as of 2004) reached about 6 per cent per annum. However, gross borrowing costs are substantially higher than the nominal interest rate and amounted for the last 30 years to 10.46 per cent. In Denmark, similar to the United States capital market, interest rates have fallen to 6 per cent per annum. A risk and administration fee amounts to 0.5 per cent of the outstanding debt. In addition, an acquisition fee is charged which amounts to one per cent of the principal.

Recent trends

July 28, 2008, US Treasury Secretary Henry Paulson announced that, along with four large US banks, the Treasury would attempt to kick-start a market for these securities in the U.S., primarily to provide an alternative form of mortgage-backed securities. Similarly, in the UK "the Government is inviting views on options for a UK framework to deliver more affordable long-term fixed-rate mortgages, including the lessons to be learned from international markets and institutions". More specifically, Mr. George Soros issued a Wall Street Journal Opinion: Denmark Offers a Model Mortgage Market. - A survey of European Pfandbrief-like products was issued in 2005 by the Bank for International Settlements^[13]; the International Monetary Fund in 2007 issued a study of the covered bond markets in Germany and Spain, while the European Central Bank in 2003 issued a study of housing markets, addressing also mortgage markets and providing a two page overview of current mortgage systems in the EU countries.

History

While the idea originated in Prussia in 1769, a Danish act on mortgage credit associations of 1850 enabled the issuing of bonds (Danish: Realkreditobligationer) as a means to refinance mortgage loans . With the German mortgage banks law of 1900, the whole German Empire was given a standardized legal foundation for the emission of Pfandbriefe. An account from the perspective of development economics is available.

Mortgages in the UK

The mortgage loans industry and market

There are currently over 200 significant separate financial organizations supplying mortgage loans to house buyers in Britain. The major lenders include building societies, banks, specialized mortgage corporations, insurance companies, and pension funds. Over the years, the share of the new mortgage loans market held by building societies has declined. Between 1977 and 1987, it fell drastically from 96% to 66% while that of banks and other institutions rose from 3% to 36%. The banks and other institutions that made major inroads into the mortgage market during this period were helped by such factors as:

• relative managerial efficiency;

• advanced technology, organizational capabilities, and expertise in marketing;

• extensive branch networks; and

• capacities to tap cheaper international sources of funds for lending.

By the early 1990s, UK building societies had succeeded in greatly slowing in not reversing the decline in their market share. In 1990, the societies held over 60% of all mortgage loans but took over 75% of the new mortgage market – mainly at the expense of specialized mortgage loans corporations. Building societies also increased their share of the personal savings deposits market in the early 1990s at the expense of the banks – attracting 51% of this market in 1990 compared with 42% in 1989.One study found that in the five years 1987-1992, the building societies collectively outperformed the UK clearing banks on practically all the major growth and performance measures. The societies' share of the new mortgage loans market of 75% in 1990-91 was similar to the share level achieved in 1985. Profitability as measured by return on capital was 17.8% for the top 20 societies in 1991, compared with only 8.5% for the big four banks. Finally, bad debt provisions relative to advances were only 0.4% for the top 20 societies compared with 2.8% for the four banks.

Though the building societies did subsequently recover a significant amount of the mortgage lending business lost to the banks, they still only had about two-thirds of the total market at the end of the 1980s. However, banks and building societies were by now becoming increasingly similar in terms of their structures and functions. When the Abbey National building society converted into a bank in 1989, this could be regarded either as a major diversification of a building society into retail banking – or as significantly increasing the presence of banks in the residential mortgage loans market. Research organization Industrial Systems Research has observed that trends towards the increased integration of the financial services sector have made comparison and analysis of the market shares of different types of institution increasingly problematical. It identifies as major factors making for consistently higher levels of growth and performance on the part of some mortgage lenders in the UK over the years:

• the introduction of new technologies, mergers, structural reorganization and the realization of economies of scale, and generally increased efficiency in production and marketing operations – insofar as these things enable lenders to reduce their costs and offer more price-competitive and innovative loans and savings products;

• buoyant retail savings receipts, and reduced reliance on relatively expensive wholesale markets for funds (especially when interest rates generally are being maintained at high levels internationally);

• lower levels of arrears, possessions, bad debts, and provisioning than competitors;

• increased flexibility and earnings from secondary sources and activities as a result of political-legal deregulation; and

• being specialized or concentrating on traditional core, relatively profitable mortgage lending and savings deposit operations.

Mortgage types

The UK mortgage market is one of the most innovative and competitive in the world. Unlike some other countries, there is little intervention in the market by the state or state funded entities and virtually all borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders (typically banks). Since 1982, when the market was substantially deregulated, there has been substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of mortgage types.

As lenders derive their funds either from the money markets or from deposits, most mortgages revert to a variable rate, either the lender's standard variable rate or a tracker rate, which will tend to be linked to the underlying Bank of England (BoE) repo rate (or sometimes LIBOR). Initially they will tend to offer an incentive deal to attract new borrowers. This may be:

• A fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and/or have more onerous early repayment charges and are therefore less popular than shorter term fixed rates.
• A capped rate; where similar to a fixed rate, the interest rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.
• A discount rate; where there is set margin reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
• A cashback mortgage; where a lump sum is provided (typically) as a percentage of the advance e.g. 5% of the loan.

To make matters more confusing these rates are often combined: For example, 4.5% 2 year fixed then a 3 year tracker at BoE rate plus 0.89%.

With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan within the incentive period or a longer period (referred to as an extended tie-in). These penalties used to be called a redemption penalty or tie-in, however since the onset of Financial Services Authority regulation they are referred to as an early repayment charge.

"Self Cert" mortgage

Mortgage lenders usually use salaries declared on wage slips to work out a borrower's annual income and will usually lend up to a fixed multiple of the borrower's annual income. Self Certification Mortgages, informally known as "self cert" mortgages, are available to employed and self employed people who have a deposit to buy a house but lack the sufficient documentation to prove their income.

This type of mortgage can be beneficial to people whose income comes from multiple sources, whose salary consists largely or exclusively of commissions or bonuses, or whose accounts may not show a true reflection of their earnings. Self cert mortgages have two disadvantages: the interest rates charged are usually higher than for normal mortgages and the loan to value ratio is usually lower.

100% mortgages

Normally when a bank lends a customer money they want to protect their money as much as possible; they do this by asking the borrower to fund a certain percentage of the property purchase in the form of a deposit.

100% mortgages are mortgages that require no deposit (100% loan to value). These are sometimes offered to first time buyers, but almost always carry a higher interest rate on the loan.

Together/Plus mortgages

A development of the theme of 100% mortgages is represented by Together/Plus type mortgages, which have been launched by a number of lenders in recent years.

Together/Plus Mortgages represent loans of 100% or more of the property value - typically up to a maximum of 125%. Such loans are normally (but not universally) structured as a package of a 95% mortgage and an unsecured loan of up to 30% of the property value. This structure is mandated by lenders' capital requirements which require additional capital for loans of 100% or more of the property value.

UK mortgage process

UK lenders usually charge a valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage amount. This is not a full survey so it may not identify all the defects that a house buyer needs to know about. Also, it does not usually form a contract between the surveyor and the buyer, so the buyer has no right to sue if the survey fails to detect a major problem. For an extra fee, the surveyor can usually carry out a building survey or a (cheaper) "homebuyers survey" at the same time.

Mortgage lending: United States

United States mortgage process

In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting an application and documentation related to his/her financial history and/or credit history to the underwriter. Many banks now offer "no-doc" or "low-doc" loans in which the borrower is required to submit only minimal financial information. These loans carry a higher interest rate and are available only to borrowers with excellent credit. Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer.

Loans are often sold on the open market to larger investors by the originating mortgage company. Many of the guidelines that they follow are suited to satisfy investors. Some companies, called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does not wish to originate.

If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. The meeting of such conditions can be a daunting experience for the consumer, but it is crucial for the lending institution to ensure the information being submitted is accurate and meets specific guidelines. This is done to give the lender a reasonable guarantee that the borrower can and will repay the loan. If a third party is involved in the loan, it will help the borrower to clear such conditions.

The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who have excellent credit and very acceptable debt positions, there may be virtually no documentation of income or assets required at all. Many of these documents are also not required for no-doc and low-doc loans.

• Credit Report
• 1003 — Uniform Residential Loan Application
• 1004 — Uniform Residential Appraisal Report
• 1005 — Verification Of Employment (VOE)
• 1006 — Verification Of Deposit (VOD)
• 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 (VOM) or Verification of Payment (VOP)
• Borrower's Authorization
• Purchase Sales Agreement
• 1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) - used if borrower is self-employed

Predatory mortgage lending

There is concern in the U.S. that consumers are often victims of predatory mortgage lending [2]. The main concern is that mortgage brokers and lenders, operating legally, are finding loopholes in the law to obtain additional profit. The typical scenario is that terms of the loan are beyond the means of the borrower. The borrower makes a number of interest and principal payments, and then defaults. The lender then takes the property and recovers the amount of the loan, and also keeps the interest and principal payments, as well as loan origination fees.

Option ARM

An option ARM provides the option to pay as little as the equivalent of an amortized payment based on a 1% interest rate, (please note this is not the actual interest rate). As a result, the difference between the monthly payment and the interest on the loan is added to the loan principal; the loan at this point has negative amortization. In this respect, an option ARM provides a form of equity withdrawal (as in a cash-out refinancing) but over a period of time.

The option ARM gives a number of payment choices each month (for example, the equivalent of an amortized payment where the interest rate 1%, interest only based on actual interest rate, actual 30 year amortized payment, actual 15 year amortized payment). The interest rate may adjust every month in accordance with the index to which the loan is tied and the terms of the specific loan. These loans may be useful for people who have a lot of equity in their home and want to lower monthly costs; for investors, allowing them the flexibility to choose which payment to make every month; or for those with irregular incomes (such as those working on commission or for whom bonuses comprise a large portion of income).

One of the important features of this type of loan is that the minimum payments are often fixed for each year for an initial term of up to 5 years. The minimum payment may rise each year a little (payment size increases of 7.5% are common) but remain the same for another year. For example, a minimum payment for year 1 may be $1,000 per month each month all year long. In year 2 the minimum payment for each month is $1,075 each month. This is a gradual increase in the minimum payment. The interest rate may fluctuate each month, which means that the extent of any negative amortization cannot be predicted beyond worst-case scenario as dictated by the terms of the loan.

Option ARM mortgages have been criticized on the basis that some borrowers are not aware of the implications of negative amortization; that eventually option ARMs reset to higher payment levels (an event called "recast" to amortize the loan), and borrowers may not be capable of making the higher monthly payments; and that option ARMs have been used to qualify mortgages for individuals whose incomes cannot support payments higher than the minimum level.

Costs

Lenders may charge various fees when giving a mortgage to a mortgagor. These include entry fees, exit fees, administration fees and lenders mortgage insurance. There are also settlement fees (closing costs) the settlement company will charge. In addition, if a third party handles the loan, it may charge other fees as well.

The United States mortgage finance industry

Mortgage lending is a major category of the business of finance in the United States. Mortgages are commercial paper and can be conveyed and assigned freely to other holders. In the U.S., the Federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These programs work by buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are known as mortgage-backed securities (MBS).

This allows the banks to quickly relend the money to other borrowers (including in the form of mortgages) and thereby to create more mortgages than the banks could with the amount they have on deposit. This in turn allows the public to use these mortgages to purchase homes, something the government wishes to encourage. The investors, meanwhile, gain low-risk income at a higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than they could gain from most other bonds.

Securitization is a momentous change in the way that mortgage bond markets function, and has grown rapidly in the last 10 years as a result of the wider dissemination of technology in the mortgage lending world. For borrowers with superior credit, government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools of funds used to create new loans can be refreshed more quickly than in years past, allowing for more rapid outflow of capital from investors to borrowers without as many personal business ties as the past.

The greatly increased rate of lending led (among other factors) to the United States housing bubble of 2000-2006. The growth of lightly regulated derivative instruments based on mortgage-backed securities, such as collateralized debt obligations and credit default swaps, is widely reported as a major causative factor behind the 2007 subprime mortgage financial crisis.

Second-layer lenders in the US

A group called second-layer lenders became an important force in the residential mortgage market in the latter half of the 1960s. These federal credit agencies, which include the Federal Home Loan Mortgage Corp., the Federal National Mortgage Association, and the Government National Mortgage Association, conduct secondary market activities in the buying and selling of loans and provide credit to primary lenders in the form of borrowed money. They do not have direct contact with the individual consumer.

Federal Home Loan Mortgage Corporation

The Federal Home Loan Mortgage Corporation, sometimes known as Freddie Mac, was established in 1970. This corporation is designed to promote the flow of capital into the housing market by establishing an active secondary market in mortgages^[1]. It may by law deal only with government-supervised lenders such as savings and loan associations, savings banks, and commercial banks; its programs cover conventional whole mortgage loans, participations in conventional loans, and FHA and VA loans.

Federal National Mortgage Association

The Federal National Mortgage Association, known in financial circles as Fannie Mae, was chartered as a government corporation in 1938, rechartered as a federal agency in 1954, and became a government-sponsored, stockholder-owned corporation in 1968^[1]. Fannie Mae, which has been described as "a private corporation with a public purpose", basically provides a secondary market for residential loans. It fulfills this function by buying, servicing, and selling loans that, since 1970, have included FHA-insured, VA-guaranteed, and conventional loans. However, purchases outrun sales by such a wide margin that some observers view this association as a lender with a permanent loan portfolio rather than a powerful secondary market corporation.

Government National Mortgage Association

The Government National Mortgage Association, which is often referred to as Ginnie Mae, operates within the Department of Housing and Urban Development. In addition to performing the special assistance, management, and liquidation functions that once belonged to Fannie Mae, Ginnie Mae has an important additional function — that of issuing guarantees of securities backed by government-insured or guaranteed mortgages. Such mortgage-backed securities are fully guaranteed by the U.S. government as to timely payment of both principal and interest^[1].

Competition among US lenders for loanable funds

To be able to provide homebuyers and builders with the funds needed, financial institutions must compete for deposits. Consumer lending institutions compete for loanable funds not only among themselves but also with the federal government and private corporations. Called disintermediation, this process involves the movement of dollars from savings accounts into direct market instruments: U.S. Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.^[2]

To compete for deposits, US savings institutions offer many different types of plans^[2]:

• Passbook or ordinary accounts — permit any amount to be added to or withdrawn from the account at any time.
• NOW and Super NOW accounts — function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.
• Money market accounts — carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.
• Certificate accounts — subject to loss of some or all interest on withdrawals before maturity.
• Notice accounts — the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.
• Individual retirement accounts (IRAs) and Keogh accounts—a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal.
• Checking accounts — offered by some institutions under definite restrictions.
• Club accounts and other savings accounts—designed to help people save regularly to meet certain goals.

Repaying the capital

There are various ways to repay a mortgage loan; repayment depends on locality, tax laws and prevailing culture.

Capital and interest

The most common way to repay a loan is to make regular payments of the capital (also called principal) and interest over a set term. This is commonly referred to as (self) amortization in the U.S. and as a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or semi-annually; prepayment penalties may apply; and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices.

Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change.

Interest only

The main alternative to capital and interest mortgage is an interest only mortgage, where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to clear the debt.

Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest rate).

No capital or interest

For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year.

These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages, depending on the country. The loans are typically not repaid until the borrowers die, hence the age restriction. For further details, see equity release.

Interest and partial capital

In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short of that term. In the UK, a part repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing is arranged on a capital and interest (repayment) basis.

Foreclosure and non-recourse lending

In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally, non-payment of the mortgage loan - obtain. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt. In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by the relevant government; in some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.

Mortgage Loan Basic

Basic concepts and legal regulation

According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest as security or collateral for a loan. Therefore, a mortgage is an encumbrance on property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property.^{[clarification needed]}

As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time; typically 30 years. All types of real property can, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.

Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential property. For commercial mortgages see the separate article. Although the terminology and precise forms will differ from country to country, the basic components tend to be similar:

• Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible.
• Mortgage: the security created on the property by the lender, which will usually include certain restrictions on the use or disposal of the property (such as paying any outstanding debt before selling the property).
• Borrower: the person borrowing who either has or is creating an ownership interest in the property.
• Lender: any lender, but usually a bank or other financial institution.
• Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size.
• Interest: a financial charge for use of the lender's money.
• Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.

Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system.

Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.

Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization). In the United States, the largest firms securitizing loans are Fannie Mae and Freddie Mac, which are government sponsored enterprises.

Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances.

Mortgage loan types

There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.

• Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
• Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.
• Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
• Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.

The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In many countries, floating rate mortgages are the norm and will simply be referred to as mortgages; in the United States, fixed rate mortgages are typically considered "standard." Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.

Historical U.S. Prime Rates

In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. In the U.S., the term is usually up to 30 years (15 and 30 being the most common), although longer terms may be offered in certain circumstances. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan, although ancillary costs (such as property taxes and insurance) can and do change.

In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Common indices in the U.S. include the Prime rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"); other indices are in use but are less popular.

Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.

Additionally, lenders in many markets rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest rates are offered to buyers with high scores. Lower scores indicate higher risk for the lender, and higher rates will generally be charged to reflect the (expected) higher default rates.

A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. This payment is sometimes referred to as a "balloon payment" or bullet payment. The interest rate for a balloon loan can be either fixed or floating. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due.

Other loan types:

• 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 loan
• Hard money loan
• Jumbo mortgages
• Offset mortgage
• Package loan
• Participation mortgage
• Reverse mortgage
• Repayment mortgage
• Seasoned mortgage
• Term loan or Interest-only loan
• Wraparound mortgage
• Negative amortization loan
• Non-conforming mortgage

Loan to value and downpayments

Upon making a mortgage loan for purchase of a property, lenders usually require that the borrower make a downpayment, that is, contribute a portion of the cost of the property. This downpayment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan where the purchaser has made a downpayment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property.

The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.

Value: appraised, estimated, and actual

Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various ways, but the most common are:

1. Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available.
2. Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official appraisal.
3. Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances.

Equity or homeowner's equity

The concept of equity in a property refers to the value of the property minus the outstanding debt, subject to the definition of the value of the property. Therefore, a borrower who owns a property whose estimated value is $400,000 but with outstanding mortgage loans of $300,000 is said to have homeowner's equity of $100,000.

Payment and debt ratios

In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc; the specifics will vary from location to location. Many countries have lower requirements for certain borrowers, or "no-doc" / "low-doc" lending standards that may be acceptable in certain circumstances.

Standard or conforming mortgages

Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws, government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80% LTV and no more than one-third of gross income going to mortgage debt.

A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which it may be sold. In the United States, a conforming mortgage is one which meets the established rules and procedures of the two major government-sponsored entities in the housing finance market (including some legal requirements). In contrast, lenders who decide to make nonconforming loans are exercising a higher risk tolerance and do so knowing that they face more challenge in reselling the loan. Many countries have similar concepts or agencies that define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to limits or higher risk weightings for non-standard mortgages. For example, banks in Canada face restrictions on lending more than 75% of the property value; beyond this level, mortgage insurance is generally required (as of April 2007, there is a proposal to raise this limit to 80%).

What is "Mortgage Loan"?

A mortgage loan is a loan secured by real property through the use of a note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.