A mortgage agreement occurs when an owner pledges an interest or right to the property as collateral for a loan. Since the prices of homes and property are typically exorbitant, it is rare for a person to buy a house in full. As a result, the prospective buyer of the home or property needs to take out a loan through a mortgage lender.
The loan allows the individual to move into the home, while the mortgage lender is promised a monthly payment, with interest, to pay off the debt. In addition, the buyer of the property must pay at least 20% of the home’s appraised value upfront, and in full. If the prospective buyer does not offers less than 20%, he or she will be subjected to penalties, additional payments, and will be given a mortgage with a higher interest rate.
A mortgage lender is usually a bank or another financial institution that invests in properties. These financial companies invest in real estate, with the assumption that over time, the buyer’s debt becomes more profitable than the initial purchase of the particular property.
This concept is typically true; however, the majority of mortgage lenders did neither process background nor credit checks when offering mortgages in the early portion of this decade. This resulted in many citizens purchasing homes beyond their means, and subsequently defaulting on their mortgage payments. When this occurs, the remaining balance is not paid off, leaving the financial institutions with a severe gap in their initial investment.
Mortgage lenders, in addition to being banks or other financial institutions, can also be investors who own a specific interest in the mortgage through a mortgage-backed security.
Essentially the aforementioned scenario, a mortgage-backed security is a financial instrument where the initial lender is the mortgage originator. The loan is packaged with other loans and sold to investors with the premise in mind that the loans will be satisfied with interest in the future.