A Mortgage can be classified as a loans, and in fact, is actually just a security against a loan that you take. It eliminates the need for having the credit score scrutinized by the lender before deciding whether to give the loan or not, although your credit history itself is actually more thouroughly analyzed.  If you take a loan from the bank to finance the purchase of a house, in the event that you are unable to pay back the loan, along with all the excess charges, your house can be seized by the bank in lieu of the repayment.

Applying for a mortgage includes intensive paperwork, and nowadays getting a mortgage approval can be a bit tricky. It includes the filling of the official application form and the lender can include any other paperwork or agreement of his or her choice. Lots of documentation is necessary so that the lender can analyze the credit worthiness of the applicant. The government under President Barack Obama has also brought about some changes to benefit the loan applicants. All the terms are to be disclosed by the lender prior to the actual mortgage process. These new required disclosures come after a lot of traps have been observed in the mortgage market. Once the lenders have decided on a basic estimate for the interest payment, they are legally forbidden to change it and this has helped to eliminate a lot of confusion in the mind of potential homeowners.

The applicant must keep in mind the documents that are required while the application process is going on. All the closing costs should be decided and an agreement should be signed on paper with the signatures of the lender as well as the applicant. The social security numbers of all the involved parties should be noted down. If the homeowners have lived at some other address during the previous two years then proofs of address must be obtained. The applicants must keep their income statements ready. The lender should fully satisfy themselves and take whatever paperwork they require.

The complete application process lasts for about a month. Normally the down payment for the mortgage loan comes to around 10% to 20% while the rest is paid back with interest over a standard 15 or 30 year term. The lender may increase or decrease the rate of interest by looking at the credit score of the applicant. If the lender rejects the application, the homeowner can look for a different one. As this may turn out to be a very complicated procedure, homeowners should consider getting the help of a mortgage broker. The last thing you want to do is find yourself in a situation down the road where you lose your home because you didn’t fully understand the terms of your mortgage.

There are many ways in which a lender can recover a loan if the borrower is unable to pay the loan back on time. In case the lender feels that the borrower is living in his house despite being financially unstable he can adopt certain legal measures like foreclosures or short sales to get back the money which he has lost. During the initial mortgage approval process, many things were never taken into consideration, and homeowners and lenders alike are facing the consequences as a result.

After any of these processes occur, both the parties end up losing money. While the lender will lose just money, the buyer will be left indebted and with a serious negative impact on his credit report. Therefore, every financial expert will obviously recommend avoiding such a situation. Everybody wants to keep their house, and if you follow a few steps you should be able to do just that.

There should be contact between the lender and borrower and it is best if a mutual settlement is reached between them. If the borrower is unable to repay the loan, the lender should realize that it is a temporary situation and sooner or later, the borrower will again have money to continue the repayment process.

The lenders should realize that instead of falling prey to a foreclosure or short sale process, they should consult a lawyer or contact the borrower. The lender only requires his money back and if the borrower is financially strained presently, then the lender should choose to be patient. This will also be more economical as all of these legal procedures regarding a termination of the agreement between the two parties are very expensive and the banks and lawyers charge a huge fee.

Although short sales are a much better option as compared to foreclosures they still lead to a loss of money for the lender. In addition to that, your credit scores are still affected in a negative way. A lot of other legal procedures involved lead to a lot of headache for them which can be easily avoided.

In case the lender is unwilling to cooperate with the borrower, there are some last minute things that the borrower can do. In case the Federal Housing Authority (FHA) certified the loan, it can give the borrower a new loan to pay back the lender and a start a new repayment cycle with the FHA. A new agreement, forbearance, can be reached between the borrower and the lender. In this, the borrower agrees to pay back the loan as a down payment before a certain period of time. If nothing else, this serves to delay the foreclosure or short sale procedure.

The ideal way to avoid such a situation is if the borrower is fully aware of his financial condition and works on arranging the interest payments regularly. However, one of the above mentioned methods can be applied otherwise. Many of the recent changes in the mortgage application process will prevent things like this from happening in the future, but in the meantime, there are other options for homeowners.

There is a little known secret that most banks are loathe to discuss – there are people that have been living in their homes for years without paying on their mortgage and there is nothing that anyone can do about it.

In the rush to make controversial mortgage backed securities, many banks failed to actually file the proper paperwork and/or retain the actual notes behind the original mortgage. The end result? Courts can not legally foreclose on the property and remove the homeowners from the house. Additionally, since the mortgage is lost, there is nothing forcing these homeowners from paying.

Joe Lentz was approved for a mortgage of $1.5 million on a home that he hasn’t made a payment on since 2002. That’s right – he’s been living in his $1.5 million dollar home for 8 years without making a single mortgage payment and there isn’t anything anyone can do about it. His mortgage was one of millions that had been bundled into a mortgage backed security and Washington Mutual was unable to produce the paperwork proving that they owned the note. They eventually gave up and Mr. Lentz is now mortgage-free.

This is not an isolated incident either. Just over $2.1 trillion worth of mortgages – roughly 1 out of 5 homes have been bundled into similar securities by private banks, according to Inside Mortgage Finance. Those mortgages can be sold several times before they end up in one of these mortgage-backed securities.

Each time the mortgage changes hands, the sellers are required to sign over the notes to the buyers, but often times in a rush to get the paperwork done this step was skipped. If the homeowner doesn’t ask for proof of ownership on the note to be provided during foreclosure hearings, many courts simple ignore the lack of signatures and approve the foreclosure. Mr. Lentz asked the court for proof that Washington Mutual owned the note, and that’s why the courts didn’t approve the foreclosure.

Complicating things further, hundreds of the original banks that originated the mortgages no longer exist, so they aren’t around to provide the original mortgage application paperwork. It’s estimated that roughly 1 million homes will be repossessed this year, but many of these homeowners could avoid that by simply asking for the paperwork that proves the bank owns the note. To try and avoid detection, many banks provide something called Lost-Note Affidavits, and as long as the homeowner doesn’t object, the judge will just rubber stamp it in favor of the bank.