Homebuyers

Mortgagor vs. Mortgagee: Understanding the Key Differences

Do you know the difference between a mortgagor vs. mortgagee? It's an important distinction to clear up before moving forward with the buying process. Both have unique responsibilities and rights. Here's what you need to know!

Who is the Mortgagee?

The mortgagee is the bank or lending institution providing a home loan. In addition to offering loans, mortgagees are also responsible for upholding loan terms. A mortgagee can be a large bank, community bank, credit union, or other lending institution.

Who is the Mortgagor?

If you're about to become a first-time homebuyer, you can consider yourself a potential mortgagor. This means that you're in a position to want to borrow funds from a bank or other financial institution. Borrowers are free to browse mortgages and lending options from different mortgagees.

Roles and Responsibilities

Once you're able to define mortgagor vs mortgagee, it's important to take time to understand the roles and responsibilities both parties bring to the table. With a mortgage loan being a legally binding contract, the duties of the mortgagor and mortgagee must be carried out according to the details of the contract. Here's a look at the core duties of both parties.

Mortgagor's Role and Responsibilities:

• Submits a mortgage application
• Provides honest, accurate information on all applications and loan documents
• Makes installment payments and interest payments
• Meets all deadlines for making on-time payments
• Puts the home up as a collateral asset
• Accepts financing terms
• Agrees to forfeit property ownership until the mortgage is paid in full

Mortgagee's Role and Responsibilities:

• Review a mortgage application
• Provides the loan
• Decides financial terms of a loan
• Holds the property ownership during the length of the mortgage until payments are fulfilled
• Prepares loan documents
• Receives installment payments and interest
• Retains the legal right to sell the property if the mortgagor defaults

Mortgage Agreement

A mortgage agreement is a contract between a mortgagor (borrower) and mortgagee (lender) outlining the legal and contractual obligations and responsibilities of both. The mortgage agreement holds two core purposes. The first is to simply define the terms of the mortgage for both parties to review, understand, and agree upon. The second is to make a contract legally enforceable. The key elements of a mortgage agreement might include:

• Loan amount
• Interest rate
• Type of rate (fixed or adjustable)
• Down payment
• Repayment terms
• Payment due dates
• Loan duration
• Fees and charges
• Penalties for late payments
• Rights and duties of the lender and borrower
• Legal consequences of failing to comply with loan terms

For the mortgagor, understanding the terms and conditions of a mortgage agreement is crucial. This is why the Consumer Financial Protection Bureau (CFPB) requires lenders to provide borrowers with a five-page document called a Closing Disclosure that provides full and final details regarding a mortgage. This document must be provided at least three business days before closing.

Mortgagor's Perspective

As the borrower, the mortgagor is responsible for repaying a loan in full compliance with the terms of the mortgage agreement. The mortgager's experience is greatly impacted by the credit history they are bringing to the table. Mortgagors with higher credit scores can generally look forward to better interest rates that ultimately make buying a home more affordable.

Having a credit score of 760 or higher generally earns borrowers access to the best mortgage rates. While 620 is considered the lowest score for being approved for a Conventional mortgage, FHA loans can be approved with scores as low as 500. Debt-to-income (DTI) ratio is another significant factor in mortgage approval. DTI refers to how your overall monthly debt weighs against your income. While lenders like to see DTIs below 35%, there are cases where they'll go as high as 45%.

Another major responsibility for a homeowner is obtaining homeowners insurance. Proof of a policy is generally a condition for closing. While mortgagors are free to switch companies and policies, they must keep their homes insured until a mortgage is paid off. Of course, this is smart even if you don't have a mortgage!

Mortgagor's Rights and Protections

Don't forget that a mortgage agreement is also in place to protect a mortgagor. A mortgage agreement typically has four major protections for borrowers. The first is the right of redemption which allows the mortgagor to redeem the property in some situations. The second is a transfer to a third party. The third is a right to inspection and production of all documents. Finally, the fourth is the right to make improvements or additions to a property.

Mortgagee's Perspective

The mortgagee's primary goal within the context of a mortgage agreement is to stay protected against default. This is why credit history and creditworthiness are prioritized during the approval process. Lenders will charge higher interest rates to borrowers with lower credit scores to account for the higher risk.

Mortgagees are protected against nonpayment and late payments. When a mortgagor defaults, the mortgagee can take possession of the property. During what is known as the foreclosure process, a bank or lender will attempt to sell a defaulted property to recoup the lost value.

Where the Mortgagee and Mortgagor Work Together

The relationship between the mortgagee and mortgagor should not be thought of as adversarial just because the nature of the relationship is financial. In reality, this is a mutually beneficial relationship. By agreeing to terms that protect both parties, a mortgagor can purchase a home that they would not be able to fund in cash. The mortgagee gets the benefit of interest payments that help to fund other investments. Here are some key terms involved in the process:

• Credit Score: A borrower's credit score is the core barometer of creditworthiness. Borrowers can make changes to improve their scores in order to be offered better rates.
• Interest Rate: As the percentage charged on the loan amount, the interest rate has a big impact on what monthly payments will look like. Borrowers can work with lenders to utilize down payments or mortgage points to get rates as low as possible.
• Loan Term: The duration for repaying the loan varies depending on which loan the borrower chooses. The most popular mortgage is a 30-year loan.
• Homeowners Insurance: All mortgaged properties need coverage that will provide the full replacement value of a home.
• Debt-to-Income Ratio: Borrowers provide pay stubs and financial transactions to prove DTI to lenders.
• Mortgage Agreement: This refers to the legal contract that outlines the terms of a mortgage. As one of the most important documents a person will ever sign, this agreement outlines payments and penalties that will be around for up to 30 years.
• Financial Institution: While most borrowers obtain mortgages through banks, many different types of financial entities provide mortgage services.
• Credit Union: This is a cooperative financial institution that can offer mortgages to its members.
• Real Estate: In addition to referring to a home, real estate covers any property consisting of land and buildings. Most lenders that provide home mortgages also provide loans for commercial and rental properties.
• Purchase Home: This is the process of acquiring a home. For many people, it's only possible with funding from a lender.
• Property Collateral: Collateral is a property pledged as security for the loan. Under a traditional mortgage agreement, the property that is used as collateral is the property being mortgaged.
• Mortgage Loan: Unlike personal loans, car loans, and other types of loans, a mortgage loan has strict specifications that ensure that the funds are only being used to purchase a property.
• Insurance Policy: All mortgaged homes require homeowners insurance policies that will cover the full replacement cost of a home in the event of fire, storm damage, or other types of damage. Proof of a policy must be provided to the mortgagee by the mortgagor at closing.
• Borrow Money: Borrowing money from a lender is the process of obtaining funds after going through the approval process.
• Property Taxes: Property taxes are assessed and collected by a local tax assessor. While a mortgagee doesn't benefit from taxes, lenders often allow borrowers to lump their tax payments into monthly totals that are paid with mortgage payments.
• Buy Home: For most Americans, buying a home is done through purchasing a property using a mortgage.
• Monthly Mortgage: Different from the full cost of a home, the monthly mortgage payment is the total that is worked out between the lender and borrower based on the loan term, the loan amount, the interest rate, and any other fees that apply.

Fortunately, mortgagors have time to become familiar with the process once they begin the buying journey. Lenders take time to explain different mortgage options to borrowers based on several factors that can include everything from a borrower's credit history to how long they plan to stay in a home. The one thing that's certain when it comes to mortgagor vs mortgagee is that this relationship has been the key to homeownership for millions of Americans!