During the homebuying process, you’ll be reviewing and signing a lot of documents. Within these documents, you’ll come across various words and terms that can get confusing, such as “mortgagor” and “mortgagee.” When you set out to borrow a home loan, it’s important to understand mortgagor vs. mortgagee and learn the roles and responsibilities of each, as well as how mortgages work, different types of mortgage loans available and how to get a mortgage.
What is a mortgagor?
A mortgagor is simply another word for “borrower.” In the context of a mortgage purchase or refinance loan, that means you.
“The mortgagor is the person, couple or group of people seeking a loan to purchase a home — also known as the buyer, borrower or homeowner,” explains Rob Heck, head of origination at Morty in New York City.
Who is the mortgagee?
The mortgagee is another word for the bank or lending institution providing the funds to purchase a home or refinance.
“The mortgagee has rights to the real estate collateral associated with securitizing the loan, providing them with protection against default,” Heck says.
In other words, the mortgagee has the right to foreclose on and repossess your home if your mortgage payments go unpaid.
“These terms can be confusing because most people think of the creditor or the grantor as the institution extending something, so many believe the word ‘mortgagor’ would follow the same logic,” explains Jared Maxwell, vice president of Consumer Direct Lending at Middletown, Rhode Island-headquartered Embrace Home Loans.
Maxwell notes that the term ‘mortgagee’ appears not only in your loan documentation, but also in your homeowners insurance policy in the “mortgagee clause,” which describes the lender attached to the property.
Knowing the mortgagee definition and mortgagor definition, and understanding the roles and rights of each, makes you a more well-informed borrower when it’s time to sign your loan paperwork and other documents at closing.
How mortgages work
When learning the difference between a mortgagee and a mortgagor, it’s helpful to also understand the definition of a mortgage and how it works.
Basically, a mortgage loan involves a mortgagee lending a mortgagor a lump sum of money to buy or refinance a home. The mortgagor pays back the mortgagee every month in small increments, including the principal borrowed plus a predetermined fixed or adjustable interest rate until the loan is paid off. A fixed rate stays the same throughout the term of the loan.
Nearly all mortgage loans are amortizing, meaning that the loan requires regular monthly payments. Part of the principal balance and part of the interest are paid down with each monthly payment until the loan is completely paid off with the last payment. Fully amortized loans have equal monthly payments that don’t change. Partially amortized loans also have payment installments; however, a balloon payment is made either at the beginning or end of the loan.
A mortgagee will work with a mortgagor to explain whether the mortgagor qualifies for a mortgage loan based on their credit, income and equity position in a home.
“As the mortgagor, you will need to provide supporting documentation, such as information about your income and assets,” Maxwell says. “Plus, you’ll want to understand how the monthly payments are calculated and how your mortgage payment fits into your monthly budget.”
Note that mortgagees do not set most of the minimum guidelines for the loans they create. Government loan guidelines are set either by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA), while conventional loan guidelines are set by Fannie Mae and Freddie Mac.
“The goal of the mortgagee is to help navigate the mortgagor through these guidelines so that they can qualify for a mortgage loan,” explains Alexander Vance, loan consultant for Blue Spot Home Loans, a division of Cherry Creek Mortgage.
Different mortgage types
Conventional loans backed by Fannie Mae and Freddie Mac require a minimum credit score of 620, although some lenders can impose a higher standard on top of that (a practice known as “overlaying”). While a 20 percent down payment is necessary to avoid having to pay for private mortgage insurance (PMI) with your monthly mortgage payment, there are conventional loan programs that allow for as little as 3 percent down, and still others that require a minimum of just 5 percent.
“For most consumers, a conventional loan offers the best rate a mortgagor can find that does not require any extra upfront fees or mortgage insurance, provided that at least a 20 percent down payment is made,” says Vance. “Mortgage insurance is usually required when you put down less than 20 percent, but the cost of mortgage insurance is less expensive for borrowers with higher credit scores.”
An FHA loan is backed by the Federal Housing Administration, and requires you to pay mortgage insurance premiums (MIP) over the life of the loan as well as an upfront premium equating to 1.75 percent of the loan amount borrowed.
“FHA loans generally have lower rates on 30-year mortgage loans than conventional loans and can help borrowers to qualify through a lower down payment requirement — as low as 3.5 percent — a lower qualifying credit score and a higher debt-to-income limit,” says Vance.
A VA loan is available to service members, veterans and eligible surviving spouses. To those who qualify, there is no down payment or mortgage insurance requirement, the credit underwriting is more flexible and the interest rates are usually lower than for other types of loans. However, you might be obligated to pay a VA funding fee ranging from 0.5 percent on some refinances to 3.6 percent for some home purchases.
A USDA loan is another government-sponsored loan that also has no down payment requirement and looser credit requirements. However, the property attached to the loan must be located in a USDA-approved rural area, and you cannot exceed certain income limits. In lieu of mortgage insurance, USDA loans have both an upfront and annual guarantee fee.
A jumbo loan offers more funds than the limits set by Fannie Mae and Freddie Mac (currently $548,250 in most parts of the country). If you’re looking to purchase an expensive property, a jumbo loan might be your best or only option. Note that the rates on jumbo mortgage loans fluctuate and can be lower or higher than typical conforming mortgage rates.
You can pursue a non-qualified mortgage (non-QM) loan if you are ineligible for a mainstream mortgage — for example, if you are self-employed. A non-QM borrower typically submits only bank statements as opposed to pay stubs and tax returns required for a conventional loan. Non-QM loans tend to come with significantly higher rates and differing requirements.
How to get a mortgage
Here’s a basic rundown of the steps involved with getting a mortgage when buying a home:
- Work on improving your credit score and credit history, save up enough for a minimum down payment and understand what you can afford.
- Decide on the right type of mortgage loan for you.
- Shop around with different lenders and gather mortgage offers.
- Choose a lender and loan product based on criteria important to you, such as the lowest possible rate, down payment required and loan term.
- Get preapproved for a mortgage loan and obtain a preapproval letter from the lender. Prepare to provide the necessary documentation requested.
- Hunt for the ideal home.
- When you find a property you like, make an offer and, if accepted, enter into a purchase agreement.
- Complete the mortgage loan application.
- Await an underwriting decision from the lender.
- Close on the loan and sign the necessary paperwork.
“The most important step in this process is shopping around with several lenders, as mortgagees will compete against other offers and you may be able to lower your rate and get more favorable loan terms,” says Vance.