What Is A Mortgagor And What Do They Do?

From applying for your mortgage to closing on a home loan, you may encounter dozens of terms throughout the process that may have you looking up, "What is a [fill in the blank]?" A mortgage contract isn't one you should enter into lightly, and it's important to understand all the contract terms, including the parties involved.

A mortgage has two primary parties: the mortgagor and the mortgagee. In this article, we'll discuss these two primary parties, their primary responsibilities and their differences.

What Is A Mortgagor?

In the mortgage process, who is the mortgagor?

The mortgagor is the home buyer, or the person or entity that takes out a mortgage. A mortgagor could be either an individual or an entity. For example, an individual could be a person who buys a home, or it could be a legal entity like an LLC or partnership in a commercial real estate transaction.

Who Is The Mortgagor Vs. The Mortgagee?

What's the difference between a mortgagor versus a mortgagee?

• Mortgagor: The mortgagor is the borrower in a mortgage agreement who will eventually make mortgage payments on a home loan.
• Mortgagee: The mortgagee is the lender in a mortgage agreement. Mortgage lenders underwrite and approve the mortgage, set the mortgage term, payment due date and interest rate; determine mortgage insurance, charge fees like origination fees (the origination fee is the cost to process loans), draft the mortgage contract and more.

However, the mortgagor and mortgagee don't work independently during the home buying process. The mortgagee works with the mortgagor and vice versa, and the process culminates in closing, when both parties sign closing papers.

Mortgagor Requirements And Responsibilities

As the mortgagor, you sign and agree to the mortgage note, which is known as the promissory note. It is a legal document, or a contract for making a loan in return to repay a loan with interest, secured with the home the loan buys.

You must meet obligations, including a monthly payment of a certain amount and by a due date set by the mortgagee. Your monthly payment may require you to pay more than just principal and interest – you may also have to pay property taxes and insurance and private mortgage insurance (PMI). (If you put down less than 20% on a down payment with a conventional mortgage, you'd pay PMI.)

Mortgage loan contracts include provisions for title ownership and a lien on the real estate property as collateral. The requirements for maintaining monthly payments and specifications are outlined, as are specifications regarding missed payments. It will outline when the lender can take action with the lien to seize the property in default.

Mortgagor Eligibility Requirements

Eligibility requirements for getting a mortgage include several considerations. Lenders examine your credit history, credit scores, debt-to-income ratio and more.

• Income: Lenders look at household income to determine whether you can cover your mortgage payment and other bills. Lenders consider all sources of income, including military benefits, side hustle income, commissions, investment accounts and more.
• Property type: Lenders also look at the type of property you want to buy. Primary residences are less risky for lenders and secondary properties are riskier because lenders surmise that you'll take care of your primary property first. Secondary properties also require you to meet higher credit requirements, down payment and debt standards.
• Assets: Lenders also want to know about the type of assets you have, including checking and savings accounts, certificates of deposit (CDs), stocks, bonds, IRAs and other accounts.
• Credit score: Your credit score is a three-digit number that shows how well you've handled debt in the past. A low credit score means you may not make payments as regularly as you should or have a habit of taking on debt. You'll need at least a 620 credit score to qualify for most loans.
• Debt-to-income (DTI) ratio: Your debt-to-income ratio tells lenders how much of your gross monthly income goes toward bills every month. You can figure this out by adding up your fixed payments and dividing by your total pretax household income. The lower your DTI, the better. You generally need a DTI ratio of 50% or less to qualify for most loans.

Your lender will give you more details about the types of eligibility requirements you must meet to qualify for a mortgage.

Applying For A Mortgage

Becoming a mortgagor or taking out a mortgage loan involves a meticulous process. A few steps to take when applying for a mortgage include the following:

1. Seek preapproval. A mortgage preapproval helps determine the amount you can afford when buying a home. The lender reviews your credit report, income, assets and debt. While a preapproval doesn't guarantee you'll close on a loan, it is the first step to purchase a home. 
2. Enter the underwriting process. Loan underwriting is like taking a look under the hood of a car. It means a lender verifies your income, assets, debt, employment and other aspects of your financial life to determine your qualifications for a mortgage, using supporting documents you provide for proof of these qualifying factors.
3. Sign a mortgage commitment letter. In this step, a lender provides you with a mortgage commitment letter, which states you're approved for a mortgage loan and lists some loan terms. It usually comes after you get preapproval and complete the underwriting process. The letter contains the approved loan amount, interest rate and terms and conditions.

How Mortgage Loans Work

Mortgages are secured loans, which means the home you purchase serves as collateral. You agree to pay your loan back with interest over a predetermined number of years, depending on the loan term you choose. You can agree to pay back your loan with interest over a period of several years. Your lender claims rights to your home until the mortgage is s paid off. Fully amortized loans have a set payment schedule that you continue to pay off till the end of your term.

If you fail to repay the loan your lender can sell your home to recoup the loss.

Types Of Mortgages

As a mortgagor, you choose from many types of mortgages, including conforming loans, government-backed loans and jumbo loans, which we'll detail below.

Conforming Loans

A conforming loan meets the requirements to be sold to government-sponsored enterprises Fannie Mae and Freddie Mac. The Federal Housing Finance Agency (FHFA) sets limits on these conforming loans.

Once securitized, investors can buy these loans on the open markets. Due to liquidity and government regulations, conforming loans usually have lower interest rates than nonconforming loans.

Government-Backed Loans

Government-backed loans are loans insured or backed by the federal government. In other words, the federal government protects lenders if borrowers default on their payments. Three types of government-backed loans include FHA, VA and USDA loans:

• FHA Loans: An FHA loan is a type of mortgage backed by the Federal Housing Administration; a part of the U.S. Department of Housing and Urban Development (HUD). FHA loans allow for lower credit score, income and down payment requirements compared to conventional loans.
• VA Loans: VA loans are for current and former military service members and qualifying spouses. VA loans don't require a down payment or have a minimum credit score requirement, which makes it easier for service members and veterans to buy homes.
• USDA Loans: USDA loans come from the U.S. Department of Agriculture for borrowers in designated rural areas and allow borrowers to buy homes with no down payment. You can see if a home is eligible by visiting the USDA’s eligibility site to see if your area qualifies.

Jumbo Loans

Jumbo loans exceed the conforming loan limits. High-value homes that require jumbo loans can't be sold to Fannie Mae or Freddie Mac. The conforming loan limits are higher in certain areas of the country because real estate costs more. Because Fannie Mae and Freddie Mac can't "accept" jumbo loans, the mortgagee must take on more risk. This means that mortgagors must have higher down payments and credit scores. In return, mortgagors will also receive higher interest rates.

Refinance

A mortgage refinance means you trade in your original mortgage for a new one, usually with a new principal and different interest rate. Your lender pays off the old mortgage and gives you a new loan. You may refinance if you know you will get a lower interest rate or a shorter term. It can help you save money over time.

Some mortgage refinances allow you to tap into your home equity – the amount of your home that you have paid off – such as a home equity loan or a cash-out refinance. A home equity loan gives you a second mortgage on your home, with a separate payment. A cash-out refinance is higher than the amount you currently owe. You pocket the difference between the new loan amount and your current mortgage balance.

How Mortgages Differ

Different types of home loans have different requirements and features. Introduce the following list as potential ways that mortgages can differ:

• Mortgage rates: A fixed-rate mortgage is a mortgage that you lock in and which stays the same throughout the life of the loan. An adjustable-rate mortgage (ARM) is a home loan with an interest rate that changes – it usually starts out with an initial low, fixed interest rate, then adjusts to the market and shifts to a higher or lower rate. The interest rate may calibrate monthly or yearly and the initial low-rate period can vary across different ARMs.
• Repayment terms: Loan terms refer to the time you have to pay off a loan. It may also be called the "duration" or "life" of the loan. For example, you may choose between a 15-year versus a 30-year mortgage. A 15-year mortgage has a repayment term of 15 years, while a 30-year mortgage has a repayment term of 30 years.

How To Apply For A Mortgage Loan

If you’re in the market for a home and need to borrow money, you’ll have to apply for a mortgage loan. For most people, this process actually starts with the preapproval stage, which ideally happens before you make an offer on your home. It gives you an idea of how much you’ll be able to borrow and at what interest rate, as well as shows sellers that you’ll be able to buy the home.

Once you’ve had an offer accepted, you’ll formally apply for your loan and move into the underwriting process. Throughout this stage of the buying process, the mortgagee takes a closer look at your financials, including your employment status, income, DTI, credit score, assets and liabilities.

Once the mortgagee determines you qualify for the loan, it signs off on it with a mortgage commitment letter, which allows you to move forward with the home closing. Once you close on the loan, you’ll have to meet the terms of the loan, including making your required monthly payments for the duration of the repayment term.

The Bottom Line: Mortgagors Are The Borrowers In The Home Loan Process

As a prospective homeowner, you've earned a new title, whether you realized it or not: mortgagor. Your lender will help you understand all your responsibilities as a mortgagor in the home loan process, so don't be afraid to ask questions. Learn more about the eligibility requirements, responsibilities and types of mortgages available to you.

Ready to become a homeowner? Apply for a mortgage today.