Real Estate Law

Mortgages

Most people who are looking to buy a new home need a mortgage. A mortgage is like a loan to purchase real estate but the process can be confusing for first-time homebuyers. It is important to understand the mortgage process, how to get approved, and what to do if your application is denied by the bank.

Real estate and financing laws are different in every state. It is important to talk to a real estate lawyer in your area for specific legal advice about mortgages and financing for your home.

What Is a Mortgage?

A mortgage is a purchase agreement between the borrower and the lender. The lender puts up the money to buy the real property and the borrower has to make payments based on the mortgage agreement. In some jurisdictions, the lender keeps an ownership interest in the property and has the right to take back the property if the borrower doesn’t make payments.

Types of Mortgages and Mortgage Terms

The two most common types of mortgages include fixed-rate mortgages and adjustable rate mortgages. A fixed-rate mortgage has a set interest rate and will have predictable monthly payment amounts for the entire duration of the loan. An adjustable-rate mortgage (ARM) pays an interest rate based on a formula and market conditions that can change over time. The ARM interest may be at a lower rate initially but could rise based on higher interest rates.

Other loan options include VA loans for qualifying veterans, and Federal Housing Administration (FHA) loans for qualifying individuals.

There are many important mortgage and real estate terms that buyers should understand. When looking at a mortgage, the prospective buyer should look at:

  • Amount of the loan
  • Annual percentage rate (APR)
  • Closing costs
  • Origination fee and lender’s fees and points
  • Fixed or adjustable rate
  • Penalties, including pre-payment penalties

How Can I Get a Mortgage?

The mortgage process begins with an application. The borrowers apply for a loan through the bank or financial institution. The lender looks at the buyer’s financial position, and the components that the lender will consider include:

  • The amount of the down payment
  • Buyer’s employment status and income
  • Buyer’s current assets
  • Buyer’s outstanding debts, including student loans
  • Buyer’s credit score

The lender will also look at the value of the property. If the lender finds the borrowers qualify, they will issue a loan commitment, which includes the loan terms. When the borrower agrees, they will get the amount to purchase the property under the repayment terms of the mortgage.

Do I Need a Mortgage to Buy a House?

You can buy a house without a mortgage if you can secure other financing. If they have the cash on hand, some buyers can purchase a property in the full amount, without having to go through a bank. Buyers may also be able to get private loans. In some cases, a buyer can make a home purchase directly from the owner with owner financing.

Making Monthly Mortgage Payments

Every month, the homeowner is required to make mortgage payments according to the terms of the loan. For a fixed-rate mortgage, the amount should not change significantly month to month for the term of the loan. However, most mortgage payments also include an amount to pay for property taxes and insurance premiums in an escrow account (also known as impound). Property tax and mortgage insurance can change over time and change the total amount of the mortgage payment.

A mortgage calculator can help prospective homebuyer estimate monthly payments, based on the mortgage loan amount and interest rate.

What If I Have Trouble Paying My Mortgage?

If you are having trouble paying your mortgage, you may be at risk of foreclosureForeclosure is the process where the lender forces the sale of the property when a borrower stops making payments. After foreclosure, the homeowner may lose home equity they’ve built up in the property. The foreclosure process is based on federal and state law and each state has specific conditions for the rights and obligations of the borrower and the lender in foreclosure.

For example, in California, the borrower is considered in default after 90 days a Notice of Default is recorded, but the entire foreclosure process may take four months or longer. After the lender files a Notice of Default with the county, the borrower may still be able to pay the lender the balance of the missed payments and fees during the 90 days in order to keep the house.

Federal mortgage laws require the lender to make attempts to contact the borrower to talk about mitigation options, including loan modifications or repayment plans. In New York, upon request, banking laws require mortgage lenders to provide a single point of contact to communicate loan modification information and other loss mitigation options.

Can I Pay Off My Mortgage Early?

Generally, buyers can pay off their mortgage earlier than the life of the loan. Most mortgages allow for early repayment without additional fees. However, some mortgages may have a prepayment penalty so talk to a real estate law firm about the disclosures and terms of your mortgage agreement.

Some borrowers make regular additional payments to pay down the principal over time, including an extra monthly payment every year or bi-weekly payments instead of monthly payments. If you just want to lower your interest rate, you may also be able to refinance at a lower rate to save on the home loan interest.

If you have any other questions about how mortgages work or the mortgage process, a real estate attorney can help. A real estate lawyer can explain the process, help you with refinancing questions, and help you understand your rights if you are at risk of losing your home.

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