Mortgages are guarantees that function as mechanisms supporting the acquisition of credit. Although they are part of many families´ financial decisions, they are a somewhat complex concept.
What are mortgages and how do they work?
Mortgages are guarantees provided to the bank as a form of payment. They function as safeguards for the bank that the money lent will be repaid.
In order to minimize the risk of default by the customer, the bank may require the property itself as collateral for the payment for which the credit is being granted. This type of guarantee is called a mortgage. In other words, if the customer defaults and stops paying, the bank keeps the property in order to settle the debt.
However, it is not only the property purchased by the customer that can be mortgaged. It is also possible to take out a loan and use someone else´s property as collateral, for example, a family member´s. In this situation, if the customer defaults, the bank can mortgage the property of the person in question.
In the event of default, the bank files a lawsuit in court to request the seizure of the property. After this seizure, the bank has the power to sell the property and use the proceeds to settle the debt. However, if the amount for which the property is sold is insufficient to pay off the entire debt, the bank can fall back on the remaining assets of the person who took out the loan to ensure full payment.
How are mortgages constituted?
To grant credit, the first step is to appraise the property that will be given as collateral. As previously mentioned, this may be the property to be purchased or a property already belonging to a third party.
The property must be appraised by an independent expert and then registered with the Securities Market Commission. As for the associated costs, in an initial appraisal, these may be borne by the person applying for the loan or by the banking institution.
After the appraisal, you should receive a copy of the report from the bank, as well as other documents related to it. However, if you disagree with the appraisal, you can file a complaint. You must do so in writing. The complaint must receive a reasoned response.
If you disagree with the result of the assessment and request a second one, the costs will be borne by you. However, if, for any reason, the bank requests a second assessment, these costs are not charged to the customer.
When is a mortgage formalized?
The mortgage is formalized in the deed of the house. Thus, at the same time that the deed of the property is formalized, i.e., when it becomes the property of the customer, the mortgage is also registered. This registration must be done at the Land Registry Office in order to be validated.
Documents required to apply for a mortgage loan
The documents to be submitted may vary between banking institutions. In addition to the usual documents required to formalize any loan, you will also need to provide documents relating to the movable or immovable property you wish to mortgage.
Therefore, the documents required to apply for a mortgage loan are:
- Identification document;
- Latest IRS tax return and respective settlement note;
- Last three pay slips;
- Declaration of contractual relationship;
- Last three months of bank statements;
- Bank of Portugal liability statement;
- Proof of address;
- Property valuation;
- Property registration certificate;
- Permanent property certificate;
- Housing license;
- Technical data sheet and energy certificate for the property;
- Proof of payment of IMT (Municipal Tax on Onerous Transfers of Real Estate);
- Validated fire or multi-risk insurance, as well as life insurance.
What are the advantages and disadvantages of mortgages?
Although at first glance a mortgage may seem like a negative situation, it can have several advantages, especially when it comes to granting credit. Since a mortgage reduces the financing risk, the bank can offer better conditions. Some of these include lower interest rates, larger loan amounts, and longer repayment terms.
However, there is also a disadvantage, which is the loss of the property or valuable asset that was mortgaged. This only happens if you stop paying the loan.
What precautions should I take when applying for a mortgage?
The first precaution to take before taking out a mortgage is to set aside a good margin in your budget to avoid defaulting. This will help you understand how much you feel comfortable with, so as not to suffocate your finances.
Secondly, it is important to request simulations from several banking institutions to see which one offers you the best conditions. A simple way to analyze this situation is to use the FINE (European Standardized Information Sheet). This document shows the total amount of the loan, including all fees, interest, and commissions.
Before taking out a mortgage, you should request a Property Certificate. This document describes, in detail, the history of the property in question. In it, you can find the constitution and location of the property, confirm who the owners are, identify if there are any associated charges (liens, mortgages, among others), as well as pending records.
Finally, although it is mandatory, you should request a statement of no debt from the condominium.
Source: https://www.doutorfinancas.pt/