Mortgages

Real estate is defined as “land, including the air above and the earth below, plus any permanent improvements to the land, such as homes, apartment buildings, factories, hotels, shopping centers, or any other ‘real’ property.” Whether for commercial or residential property, practically all real estate transactions today involve some type of financing. The mortgage loan is the most popular method of financing real estate purchases. A mortgage is any loan in which real property is used as security for a debt. During the term of the loan, the property becomes security, or collateral, for the lender, sufficient to ensure recovery of the amount loaned. Mortgages today fall into one of three categories: FHA-insured, VA-guaranteed, and conventional. The National Housing Act of 1934 created the Federal Housing Administration (FHA) to encourage reluctant lenders to invest their money in the mortgage market, thereby stimulating the depressed construction industry. Today the FHA is a government agency within the Department of Housing and Urban Development (HUD). The FHA insures private mortgage loans made by approved lenders. VA loans may be used by eligible veterans, surviving spouses, and active service members to buy, construct, or refinance homes, farm residences, or condominiums. Down payments by veterans are not required but are left to the discretion of lenders, whereas FHA and conventional loans require a down payment from all buyers. Conventional loans are made by private lenders and generally have a higher interest rate than either an FHA or VA loan. Most conventional lenders are restricted to loaning 80% of the appraised value of a property, thus requiring a 20% down payment. By their nature, mortgage loans involve large amounts of money and long periods of time. Consequently, the monthly payments and the amount of interest paid over the years can be considerable.