Bank Requirements for Mortgages: What's Needed?

What are the typical prerequisites banks ask for when granting a mortgage? This question is crucial for individuals considering a loan to purchase property, whether it's their first or second home. When providing substantial loans, banks aim to minimize risks and seek assurance that the borrower can meet repayment obligations.

Reasons Behind Bank Requirements

Banks face risks, such as borrower insolvency, when issuing mortgages, which could lead to financial losses. To mitigate these risks, banks demand assurances from borrowers. These assurances allow the bank to recoup funds even in case of default. Common types of assurances include:

1. Property Mortgage : The prevalent form of assurance where the bank gains property ownership rights. If payments cease, the bank can sell the property to recover the loan amount.

2. Guarantor (Surety) : Here, a third party (the guarantor) commits to repay the debt if the borrower defaults.

3. Collateral (Less Commonly Used for Mortgages) : Acts as supplementary security, usually more applicable to other loan types rather than mortgages.

Functioning of a Mortgage as Assurance

A mortgage empowers the bank to claim the property if the borrower defaults. This grants the bank priority during property liquidation. The mortgage value exceeds the loan amount to cover additional expenses like interest, legal fees, and insurance.

Guarantor's Role in Assuring the Loan

A guarantor assumes responsibility for loan repayments if the borrower fails to do so. This obligation is formalized through a contract, with the guarantor sharing the same liability towards the bank as the borrower.

Supplementary Assurances

In certain cases, banks might demand extra assurances if the primary mortgage or guarantor seems insufficient. For instance, borrowers could offer another property as security or purchase insurance to cover loan payments in case of job loss or unforeseen events.

Circumstances Leading to Mortgage Rejection

Banks may deny a mortgage if:

• The property fails to meet specified criteria (e.g., unsuitable condition for sale).
• The guarantor lacks financial stability.
• No additional assurances are provided for heightened risks.

Prior to committing to a mortgage contract, it's advisable to compare terms from various banks since assurance requisites may vary.