The term "mortgage retention" is used in several contexts, but it always relates to a loan that is secured by real estate. The term is used in certain Federal Housing Administration home loan programs, in regards to programs to restructure distressed mortgages, and as part of the typical mortgage application process for home buyers in the United Kingdom. Of course, as the contexts are quite varied, the requirements for mortgage retention are varied as well.
FHA Mortgage Programs
The Federal Housing Administration (FHA) works through state agencies and local financial institutions to facilitate lending for home buyers, particularly first-time buyers or low-income buyers. Mortgage retention is a basic requirement for these loans, which means that, as a condition of loan approval and receiving FHA financial assistance, the buyer will agree to reside in the home and not otherwise sell or refinance the home for a certain period of time, typically five years. Failure to abide by the requirements during the retention period will subject the buyer to penalties, such as repaying a portion or all of the FHA funds.
Distressed Mortgage Programs
The mortgage crisis in the United States has caused many homeowners to search for a way to stay in their home, yet get relief from the unaffordable adjustable rate mortgages that will inevitably drive the property to foreclosure. The term "mortgage retention" is used in reference to programs by the lenders and other financial services companies designed to retain the mortgage with the homeowner staying in the home. The requirements for these mortgage retention programs are typically: a financial hardship brought on by such things as medical issues or divorce; a regular monthly income from which the homeowner can make payments on the modified loan; and an adjustable rate loan, balloon payment loan, or other unusual loan condition that makes it unaffordable.
Mortgages in the U.K.
In the U.K., mortgage retention is a common practice used by lenders as part of the mortgage approval and home buying process. Prior to approving a loan, the lender will require a valuation report prepared for the property, which will include a thorough inspection of the home for any repair or maintenance issues that may affect the overall value of the property, such as the roof needing replacement. In such a case, the mortgage retention rules permit the lender to retain funds from the mortgage equal to the cost of replacing the roof. The lender will release the retained funds upon completion of the repair work.