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Mortgages: Lending Terms By Glenn H. Beyer The lending terms available to the home buyer are one of the most important aspects of housing finance. "Terms" includes (a) the ratio of loan to appraised value, which determines the amount of down payment required, (b) the length of the mortgage and (c) the interest rate. The amount of down payment is considered first. In almost every situation, the borrower is unable to obtain a loan for the full amount of the selling price, and he must make an "equity" contribution himself. This down payment is generally required as evidence of good faith and serious intentions, and also as an extra margin of safety for the lender. Obviously, if the down payment is small and the monthly payments are low, more families will be able to buy houses. This type of credit situation for home buying has been a principal factor in the great number of new houses built and purchased since World War II. It has been seen that there is a variation existing in current loan-to-value ratios possibly ranging from 50 to 98 per cent. (For a time, veterans could obtain 100 per cent loans, that is, no down payment was required.) In practice, the down payment varies with the price of the house; that is, the higher the price, the greater the down payment usually required. The loan-to-value ratios vary greatly, however. (The variances found among mortgages of different types of lending institutions is discussed later.) Equally important, of course, are the term of the loan and the interest rate. The life of the loan is important from the point of view of the paying capacity of the borrower. It determines in large part the amount of monthly payments. The period of amortization varies, with more conservative loans being granted for fifteen years or less, but Government types up to thirty years.The typical mortgage today probably is one covering twenty to twenty-five years. Closing Costs When a mortgage is arranged the buyer must pay certain costs incidental to completing the financing arrangements. These charges are known as "closing costs," and are in addition to the down payment. The items included vary with different mortgages and in different localities. It is at the stage of "closing" a loan that the lawyer plays an important role in the housing situation. Usually the home buyer, seller (or builder) and the lender are represented by lawyers in the legal matters of giving, taking, holding, and recording titles of ownership. It is at this stage that it is most important to determine that a "clear" title exists to the property being transferred. Source: Housing: A Factual Analysis