Loan Origination Requirements
When a person is seeking a loan to purchase a home, the lender will usually require some down payment to make sure the borrower has something "at stake" in case the borrower runs into some financial difficulty and thinks about maybe not making timely payments. Many years ago, 20% of the purchase price of the property was considered a normal down payment, the acceptance of government backed loans and mortgage insurance companies has reduced this down payment requirement to as little as 3% of the property purchase price required as down payment, or in some very good credit cases even 0% down. We'll discuss this more later down this page, but for now, remember that when the loan was originated, the lender felt the loan amount was somewhere between 3 and 10 percent below the property value at that point in time.
Who Owns the Loan?
With the exception of smaller regional lenders, most lenders in today's environment do not originate and service their own loans. Most loans today are originated by one lender, using guidelines provided by the institution to whom they would like to sell the loan. Then the loan (note) is sold to that secondary lender who will continue to service the loan, meaning collecting monthly payments, maintaining any escrow accounts for property insurance and property taxes, and interface with the borrower regarding the borrower account. It is very common with home loans for the home loan to be originated with one lender, the note serviced by a different lender, and ownership of the note held by a third lender or financial institution. While the servicing lender is, for most intents and purposes, the foreclosing lender, their procedures for completing the foreclosure and handling the property post-foreclosure will be dictated by the institution owning the note.
Mortgage Insurance and Loan Guarantees
Lenders are often guaranteed against loss on their notes by Housing and Urban Development (HUD), the Veterans Administration (VA), or one of many mortgage insurance companies. When a new home loan is originated with less than 20% down payment, the originating lender qualifies the borrower using the requirements of the guaranteeing agency. The loan isn't funded using any money from these agencies, they are acting in a capacity more like insurance, where they collect a fee and only get directly involved when something bad happens, which in this case would be a default in payments, and a possible foreclosure. If a default in payments occurrs, the guaranteeing agency will require the lender to follow certain steps to try to make the loan performing once again. If those attempts are unsuccessful, then the guaranteeing agency will have requirements for the lender to follow through the foreclosure process. Post-foreclosure, the guaranteeing agency will reimburse the lender for either all, or most of the loss incurred on the foreclosed loan.