A mortgage is a loan that is used to purchase a property or real estate. The property serves as collateral for the loan, and the borrower is required to make monthly payments to the lender until the loan is fully repaid. The terms of the mortgage, such as the interest rate and length of the loan, are agreed upon by the lender and borrower at the time the loan is issued.
When the borrower first takes out the mortgage, they will typically make a down payment, which is a percentage of the purchase price of the property. The lender will then provide the remaining funds needed to purchase the property. The terms of the mortgage, such as the interest rate, length of the loan, and any fees, are agreed upon by the lender and borrower at the time the loan is issued. These terms can vary depending on the type of mortgage, and the creditworthiness of the borrower.
The borrower will make monthly payments until the loan is fully repaid. Once the loan is fully repaid, the borrower will own the property outright.
How Does It Work?
A mortgage works by using a property or real estate as collateral for a loan. The borrower, usually a home buyer, is required to make monthly payments to the lender, which typically include both principal and interest. The principal is the amount of the loan itself, while the interest is the cost of borrowing the money.
Many individuals and businesses utilize such a type of mortgage to buy real estate properties without the need of paying the whole purchase price in one go. The borrower repays the loan plus interest over a specified period, and most traditional mortgages are fully amortizing. In other words, the regular payment amount will remain the same, but the proportion of principal vs. interest will be different with each payment. The term of the mortgage is around 15 or 30 years.
In the event the borrower stops paying the mortgage, the lender can foreclose on the property. Mortgages are also known as liens against property or claims on property.
For instance, if a residential homebuyer pledges his or her house to their lender, a claim gets on the property. The interest of the lender depends upon the financial obligations of the buyer. In many cases, the lender evicts the residents, sells the property, and uses it for the sale to pay off the mortgage debt.
Types of Mortgage
There are several types of mortgage in India which are regulated as per Section 58 of the Transfer of Property Act, of 1882 as follows:
When the mortgagor binds himself personally to pay the mortgage money even though he has not yet delivered possession, and if he fails to do so, the mortgagee will have the right to sell the mortgaged property and apply the proceeds of the sale, so far as necessary, to repay the mortgage money. Simple mortgages are transactions where the mortgagee is a simple mortgagee and the mortgaged property is sold.
The basic elements of a simple mortgage are:
- Mortgagor should bound himself personally for the repayment of the loan.
- Possession of the property is not granted - As security for the loan, he has transferred to the mortgage the right to sell the immovable property if he fails to repay it.
- Personal Obligation - The basic element for a simple mortgage is to pay on the part of the mortgagor. As a promise to pay arises from the acceptance of the loan, a personal liability or obligation to pay can be expressed or implied from the terms of a transaction.
When the mortgagor ostensibly sells a mortgaged property – as long as the mortgage money is paid on a certain date or the sale becomes absolute if the mortgage money is not paid on that date, or if the payment is made, the sale becomes void, or if the buyer will transfer the property to the seller upon payment, the transaction is known as mortgage by conditional sale, and the mortgagee is a mortgagee by conditional sale. Any such transaction shall not be considered a mortgage unless the condition is embodied in the document that affects or purports to affect the sale.
As a result of their religion prohibiting taking interest on loans, the Muslims introduced mortgages by conditional sale (known as bye-bil-wafa in Islam).
The basic elements of a Conditional Sale mortgage are:
- The property must ostensibly be sold to the mortgagee
- There must be some condition associated with the sale like the date of repayment or default in repayment
- The condition must be mentioned in the deed itself
- One of the crucial factors in determining the nature of a transaction is the intention of the parties, and evidence needs to be produced before the court if one's claim contradicts the written words of the deed.
- Because there is no personal liability on the part of the mortgagor in a mortgage by conditional sale, the mortgagee cannot include other properties in the transaction.
Mortgagees are entitled to retain possession of the mortgaged property until payment of the mortgage money when the mortgagor delivers possession or expressly or by implication binds himself to deliver possession to them. A usufructuary mortgage is one where the owner receives the rents and profits accruing from the property, or a portion of such rents and profits, or the payment of the mortgage money, or interest in paying the mortgage money.
The basic elements of a Usufructuary Mortgage are:
- Mortgagor either expressly or impliedly delivers the possession of the mortgaged property to the mortgagee.
- Authority to retain the property is given till the repayment is done like receiving the rent from such property.
- No personal liability is taken by the mortgagor in the case of Usufructuary Mortgage.
- The mortgagee can sue for possession or recovery of advance money if the mortgagor fails to deliver possession, but if possession has already been given, he can only keep the property until his debts are repaid.
In an English mortgage, the mortgagor agrees to repay the mortgage money on a certain date and transfers the mortgaged property to the mortgagee with a proviso that he will transfer it back to the mortgagor after the mortgage money has been repaid.
The basic elements of an English Mortgage are:
- The consensus to pay the amount on a date is there.
- There is an absolute transfer of the property.
- Such an absolute transfer must be subject to the condition that the mortgagee will transfer the property to the mortgagor upon the payment of mortgage money on the date agreed to by both parties.
- No personal liability to repay the loan however, an agreement to repay the loan is crucial in such a mortgage.
- There is an absolute transfer of property, but it is subject to retransfer if the mortgagor pays back the loan.
Mortgages that are not simple, conditional mortgages, usufructuary mortgages, English mortgages, or mortgages by deposit of title deeds within the meaning of this section are anomalous. For anomalous mortgages, the rights and liabilities of the parties shall be determined by the mortgage deed and, where applicable, local usage. Such an agreement is termed an anomalous mortgage. In addition to exercising his right of redemption through the mortgage deed, the mortgagor can also exhaust it if he or she agrees between the parties, or if a court decree prohibits redemption by the mortgagor. As stated above, a usufructuary mortgage only grants possession to the mortgagee and has no right to sell.
Process Involved In Obtaining Mortgage Loan:
The process of obtaining a mortgage loan depends upon the respective lender, but it typically involves the following steps:
The first step in obtaining a mortgage loan is to apply to one or more lenders. The lender will ask for information about your income, employment, and credit history.
They may also ask for documentation such as bank statements, investment statements, and tax returns to verify your financial information. The lender will then use this information to determine your eligibility for the loan and assess your ability to repay the loan.
After submitting the loan application, the lender will run a credit check on you. This will help them to see your credit history and credit score. This will help the lender to get an idea of your creditworthiness and to determine if you are a good candidate for a mortgage loan. A good credit score can help you to qualify for a lower interest rate on your mortgage loan.
Once your loan application is approved, the lender will conduct a property appraisal to determine the value of the property you are planning to purchase. This will help the lender to determine the loan amount that they can approve. The lender will also use the property appraisal to ensure that the property is worth the amount of money that you are borrowing.
Approval and Disbursement:
After the property appraisal, the lender will approve the loan amount and the interest rate. Once the loan amount is approved, the lender will disburse the funds to you and you will have to pay closing costs and fees. You will also have to provide documentation such as ID proof, income proof, and property documents.
Once the loan is approved and the funds are disbursed, the next step is to close the loan. This typically involves a meeting between the buyer, the seller, and the lender, known as closing.
At closing, the buyer will make a down payment and will sign any remaining mortgage documents. The seller will then transfer the ownership of the property to the buyer and the mortgagee.
After the closing, the borrower will have to start repaying the loan to the lender as per the agreed schedule. The repayment is usually done in the form of Equated Monthly Installments (EMIs) which consist of both the principal and the interest component.
In conclusion, a mortgage is a loan that is used to purchase a property or real estate, where the property serves as collateral for the loan. The borrower is required to make monthly payments to the lender until the loan is fully repaid.
The terms of the mortgage, such as the interest rate, length of the loan, and any fees, are agreed upon by the lender and borrower at the time the loan is issued. It's worth noting that there are different types of mortgages, each with its own set of terms and requirements.