Home Loan Lending Practices

The home loan market has evolved over the past fifty years so much that every conceivable way in which money can be lent and paid back in conjunction with a home mortgage has been packaged into a loan or refinancing program.

Lets look at the three basic patterns that mortgage loan repayments can follow: term, amortized, or partially amortized.

Term Loans

A home loan that requires interest only mortgage payments until the last day of its life, at which time the full amount borrowed is due, is called a term loan or straight loan. Until 30s, the term loan was the standard method of financing real estate in the United States. These loans were typically made for a short period of 3 to 5 years. The borrower signed a note or bond agreeing (1) to pay the lender interest on the loan every 6 months and (2) to repay the entire amount of the loan upon maturity; that is, at the end of the life of the loan. As security, the borrower mortgaged his property to the lender.

Loan Renewal

In practice, most real estate short term loans were not paid off when they matured. Instead, the borrower asked the lender, typically a bank prior to the 1930's, to renew the home loan for another 3 to 5 years. The major flaw in this approach to lending was that the borrower might never own his property free and clear of debt. This left him continuously at the mercy of the lender for renewals. As long as the lender was not pressed for funds, the borrower's renewal request was granted. However, if the lender was short of funds, no renewal was granted and the borrower was expected to pay in full. The borrower might then go to another lender. But there have been periods during America's economic history when loans have been difficult to obtain from any source. If the borrower's loan came due during one of these periods, going to other lenders did not solve the borrower's problem. With the borrower unable to repay, the lender foreclosed and applied the sale proceeds to the amount due on the loan.

The inability to renew a short term loan was the cause of hardship to thousands of property owners during the first 155 years of U.S. history, but at no time were the consequences so harsh as during the Great Depression that began in 1930 and lasted most of the decade. Banks were unable to accommodate requests for loan renewals and at the same time satisfy unemployed depositors who needed to withdraw their savings to live. As a result, owners of homes, farms, office buildings, factories, and vacant land lost their property as foreclosures reached into the millions. So glutted was the market with properties being offered for sale to satisfy unpaid mortgage loans that real estate prices fell at a sickening pace, hence, the evolution of the different home loan mortgage types.

Home Loan Mortgage Types

Home Loan Lending to Home