Residential mortgages are mortgage agreements that are used to finance the purchase of residential property, or a loan that is executed using a piece of residential property as the collateral. Mortgages of this type are often used to either purchase a home or to obtain resources that are in turn used to make improvements to the property. In many countries, there are limitations on the amount of funds that may be borrowed using a residential mortgage, with those limitations often connected with the currently assessed market value of the property.
Like many types of loans, a residential mortgage is extended by a financial institution to the borrower, based on several factors. First, the borrower must meet the minimum credit qualifications put in place by the lending institution. If the individual has some issues with late payments on obligations such as credit cards, a car loan, or other credit instruments, the possibility of not receiving the mortgage increases. This is true even if the individual currently has little in the way of debt, and earns enough on an annual basis to manage the payments.
When considering an application for a residential mortgage, the lender will also look closely at the current relationship between the outstanding debt of the applicant and the current level of verifiable income. Even if the individual earns what is considered a sufficient amount of salary or wages on an annual basis, the existence of a great deal of cumulative debt may also cause the lender to consider the degree of risk associated with the application to be undesirable. For this reason, many financial analysts encourage people interested in buying a home to pay down their current obligations before seeking to secure a residential mortgage.
There are also limitations on the amount of a residential mortgage, based on the current value of the property. It is not unusual for lenders to extend mortgages that cover only a percentage of the assessed value of the real estate, with the applicant expected to cover the rest of the purchase price independently. This is because property values change over time, and the property may appreciate or depreciate in value throughout the duration of the mortgage. There are lenders who will cover the entire cost of purchase, often requiring a higher rate of interest as a means of mitigating the degree of risk the lender assumes.
In some countries, it is necessary to open a savings account in order to receive the mortgage. Sometimes referred to as a deposit account, this strategy essentially allows the lender to not only secure the loan with the property that is purchased, but also with the proceeds in the account. This approach to lending helps to minimize the degree of risk to the lender, and can often result in the applicant receiving a more attractive rate of interest on the mortgage itself.
One of the benefits associated with a residential mortgage involves the tax breaks that are generated for the new homeowner. In many countries, deductions on the interest and overall balance of the mortgage are allowed each tax year. In some areas, these tax deductions not only apply to the national or federal tax return, but also to state and local tax returns.
