When the mortgagee has given you the funds, they gain a security interest in the property you purchase. This means they’ve got a monetary investment in the property. As the mortgagor, you’ll have a legal interest; this is because the legal deed will belong to you. You’ll need to make payments on the mortgage, which usually includes a combination of both principal and interest. The mortgagee is protected against default on the loan by the ability to foreclose on the property. A foreclosure results in the entirety of the debt becoming due immediately; when it is not paid, the property can be seized and sold, allowing the mortgagee to regain their investment.
How Mortgagees Work
Both mortgagees and mortgagors need to weigh the possible outcomes before entering into a loan agreement.
Considerations for Mortgagees
Mortgagees are often financial institutions rather than individuals, but you can still opt to be one. Let’s say your child wants to buy a home and has asked you to help them finance it. Perhaps they’re not traditionally employed and wouldn’t qualify for a standard mortgage, or maybe their credit score isn’t quite good enough to get a loan. Whatever the reason, they’d like you to act as their mortgagee. Your financial situation allows you to pull that money out of your savings account, and your child has offered to pay you a higher-than-average interest rate. All in all, it seems like it would be a worthwhile investment for both of you. Before you jump in, though, consider the likelihood of your child being able to repay the mortgage. Offering a loan carries some amount of risk regardless of the situation, so think carefully about whether it’s something you’d be able to manage in the worst-case scenario. If your child went into default, could you survive without the money they had planned on repaying you?
Considerations for Mortgagors
Getting a mortgage when purchasing a home is common. Few people have the ability to pay with cash for a house, so you’ll likely need to apply for a loan. Whether you’re looking to use your bank or a family member, consider your financial situation. Banks have rigorous criteria you’ll need to meet to qualify for a mortgage. This includes a stable income, satisfactory debt-to-income ratio, and a good credit score, among other requirements. Before applying for a mortgage, be sure you can meet all of these benchmarks. If you’re looking for a less traditional mortgagee to provide you with funds, you may not need to meet the same standards. However, you’ll still want to consider whether or not you’ll be able to make your payments on time and how much money you can legitimately afford to borrow. Evaluate, too, the risks of not being able to repay the friend or relative who is lending you the money. If you couldn’t pay off the loan, do you think your relationship with that person would survive? Would they lose their trust in you?
