In mortgage lending, the property of the borrower is mortgaged to the bank or the financial institution from where the loan has been raised. Mortgage lending is a kind of a secured loan for banks since it is extended against the property of the borrower.
The property in this sense usually refers to fixed real estate such as land or a building, whose owner is the borrower and the borrower deposits documentary evidence, which also works as a security at the bank. In the case of extending the loan, the bank conducts a valuation of the property before sanctioning the loan. This is to ensure that the market value of the property is almost equivalent to the loan and interest expected to be received from the borrower over a period of time.
The bank also calculates the future cost of the property value. The borrower has to deposit the copy of the sales deed agreement with bank as a form of security. Submitting the copy of the sales deed agreement, in addition to signing other documents, gives the right to the bank that it can seize and sell the property if the borrower fails to repay back the loan.
In addition to the sales deed agreement, the borrower also has to provide enough evidence to the bank about his financial credibility. While the fixed property acts as a security, the bank also needs an assurance that regular payments are made by the borrower as part of the equal monthly instalments. Financial credibility could include a secured job or a business from where the borrower has regular incomes.
The underwriter at the bank who is responsible for vetting all the documents of the borrower may seek additional documents if the submitted documents are not up to the satisfactory level. If the financial credibility is found to be low for a particular borrower, the bank usually ends up charging a higher rate of interest compared to other borrowers, who have demonstrated a sound financial credibility. The loans extended to people are referred to as subprime loans since the financial credibility of such borrowers is not considered to be significant from the perspective of the bank.
Extending too many of such loans can result in difficulties both to the bank and the borrower. Borrowers who are not financially sound in their financial credibility often end up with an inability to pay back the loan. In such cases, the bank has the option of seizing the property and selling it off to recover the amount of the loan. To counter such a situation, stop foreclosure can be opted out by the borrower. In stop foreclosure, there is some loan modification adopted both by the bank and borrower.
As stop foreclosure prevents the bank from seizing the property, however the borrower has to pay back the loan along with other fees over a period of time under the loan modification agreement. In such cases, the bank and the borrower do not negotiate with each other directly. There is usually a third party agency which carries out the loan modification process.