Buying your first home is an exciting time, but can also mean you're navigating a world of new jargon. You know you'll apply for a mortgage, but what exactly is a mortgagor versus a mortgagee? Simply put, the mortgagor is the person or group receiving the mortgage, while the mortgagee is the bank or lending institution. If it's still confusing, understand the implications for the mortgagor and mortgagee for all real estate transactions.
Key Takeaways
- The mortgagor is the borrower who takes out a loan to purchase a property, while a mortgagee is the lender who provides the loan and holds the property as collateral.
- The mortgagee has the right to foreclose on the property if the mortgagor fails to make timely payments, while the mortgagor is responsible for maintaining the property and paying property taxes.
- It is important to understand the roles of both the mortgagor and mortgagee in a mortgage agreement to ensure a smooth and successful home financing process. There is a need for clear communication and adherence to the terms of the mortgage agreement to avoid any potential conflicts or misunderstandings in the future.
Who Is a Mortgagor?
The mortgagor is the borrower. If you're planning to buy a home, you're the mortgagor. Without a mortgagor, the mortgagee has no role in the homebuying process. To secure a mortgage to buy a home, you will need to verify income, debt, employment and more.
Documentation the mortgagee typically requires from the mortgagor includes:
- Government-issued ID
- Social Security number to check credit score and credit history
- Proof of income with pay stubs, W-2s, etc.
- Information on any debt
- Information on any other assets, savings or retirement accounts
Once approved, the mortgagor is responsible for providing all necessary documentation and repaying the loan according to the agreed-upon terms. The mortgagor is also responsible for paying homeowners insurance and property taxes, maintaining the home and the property, and communicating with the mortgagee in case anything changes in their situation.
What Is a Mortgagee?
The mortgagee is the bank, credit union or other financial institution acting as the mortgage lender. In the case of government-backed loans, the mortgagee has additional assurances when offering the loan. The mortgagee provides funds to buy or refinance a home purchase. The mortgagee has the right to collateralize the loan, usually in the form of a home with a mortgage.
If the mortgagor fails to pay the loan on time, the mortgagee has the right to foreclose on and repossess the home. The term mortgagee comes from the fact that homeowners insurance policies usually include a mortgagee clause, which describes the lender attached to the property.
The mortgagee’s responsibilities include underwriting the loan to verify all of the information provided by the mortgagor and then creating the loan. The mortgagee will then pay out the funds to the seller when the property closes. The mortgagor is also responsible for managing the escrow account for the mortgagor's homeowners insurance and property taxes.
Key responsibilities of the mortgagee include:
- Loan origination, including evaluating loan applications, conducting credit checks and determining the borrower’s eligibility for the mortgage.
- Disbursement of funds at closing.
- Loan servicing including collecting monthly mortgage payments and providing regular account statements to the borrower.
- Escrow management for property taxes and homeowners insurance premiums.
- Default and foreclosure, including initiating foreclosure proceedings, to recover the outstanding debt if the mortgagor fails to pay back the loan.
Mortgagor vs. Mortgagee in the Homebuying Process
Here's a side-by-side comparison table between a mortgagor and a mortgagee:
| Mortgagor | Mortgagee | |
|---|---|---|
| Definition | The borrower who takes out a mortgage loan to purchase property. | The lender who provides the mortgage loan to the borrower. |
| Role | Receives funds to buy the property. | Provides funds to the borrower. |
| Ownership | Holds the title to the property. | Holds a lien on the property until the loan is repaid. |
| Payment Obligation | Must repay the loan with interest over time. | Collects loan payments and interest. |
| Risk | Risk of foreclosure if unable to make payments. | Risk of default if the borrower fails to repay the loan. |
| Profit | Gains equity in the property over time. | Earns interest income from the loan. |
| Examples | Homebuyers, real estate investors. | Banks, credit unions, mortgage companies. |
| Legal Rights | Right to occupy and use the property. | Right to foreclose on the property if the borrower defaults. |
| Financial Responsibility | Responsible for property taxes, insurance, and maintenance. | No direct financial responsibility for the property. |
| Contractual Agreement | Signs a promissory note and mortgage agreement. | Issues the mortgage agreement and manages the loan. |
Both the mortgagor and the mortgagee play essential roles in the home-buying process. When a potential homebuyer starts looking for a home, they may decide to get prequalified for a mortgage. The mortgagor will typically apply for prequalification with several mortgage lenders at this stage.
The mortgagee will require information on the mortgagor's income, credit score, debt and other factors. You'll need to provide all the initial documentation for prequalification. Once you're prequalified, you'll know how much you can afford and can start looking for homes.
Once you find a home that meets your requirements, you can make an offer on it. If the offer is accepted, you'll sign a purchase and sale agreement with the homeowner. At this stage, you must fulfill all necessary contingencies, including finalizing the mortgage with the mortgagee.
As the mortgagor, you'll need to carefully review the final mortgage offer, including interest rate, fees and the total monthly mortgage costs with homeowner's insurance and taxes. Understanding total costs can help ensure that you'll be able to afford mortgage payments comfortably.
When your application is approved, you'll get final approval to close from the mortgagee. The mortgagee will pay a lump sum to the seller at closing. Then, each month, the borrower (mortgagor) will repay the agreed-upon amount, including principal and interest at either a fixed or adjustable rate. The mortgagor is responsible for paying off the mortgage until the loan is paid back in full.
In the case of a fixed-rate mortgage, the mortgagor will pay a fixed monthly amount throughout the mortgage. With a variable-rate mortgage, the annual percentage rate (APR) is adjusted according to a fixed index every six months to one year. In that case, your monthly mortgage payment can be adjusted over time.
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Summary of Mortgagor vs. Mortgagee
Buying your first home or upgrading to your dream property can be an exciting time. If you need a mortgage to complete the purchase, you'll be the mortgagor, while the lender acts as the mortgagee. Knowing these terms can make navigating the home-buying process simpler. Ready to get started? Find the best jumbo loans, low-income mortgages or the best loans for self-employed professionals here.
Frequently Asked Questions
How does the mortgagor benefit from a mortgage?
A mortgagor benefits from a mortgage by receiving the necessary funds to buy a home. As a mortgagor, you can access funds to buy your home, even with a low down payment in some cases. A mortgagee, or lender, benefits from a mortgage through interest and fees paid. For a mortgagee, a mortgage is an investment that generates returns over time.
Can a mortgagor also be a mortgagee?
No, a mortgagor would not be a mortgagee. The mortgagee underwrites the loan and verifies the buyer’s information (the mortgagor). If you have the funds to act as a mortgagee (a mortgage lender), you wouldn’t need to apply for a mortgage as a mortgagor.
Are there any alternatives to traditional mortgage financing?
Some alternatives to traditional mortgage financing include lease-to-own agreements, seller financing, land contracts, portfolio lenders or borrowing from private lenders.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.