A mortgage is essentially a financial agreement that allows a borrower to purchase a property by receiving funds from a lender, such as a bank or financial institution. In return, the lender places a real estate lien on the property as security for the loan.
The mortgage transaction typically involves two main documents: a promissory note and a deed of trust.
The promissory note serves as a legally binding contract in which the borrower promises to repay the loan with interest.
A promissory note for a mortgage may contain the following information:
- Borrower’s name and address;
- Lender’s name and address;
- Loan amount (also known as principal);
- Interest rate (either fixed or adjustable);
- Loan term (e.g., 15, 20, or 30 years);
- Payment schedule (e.g., monthly payments);
- Late payment penalties;
- The due date for the final payment;
- Prepayment conditions, if any; and
- A clause states that the borrower must repay the loan, even if they sell or transfer the property.
The deed of trust acts as a lien on the property. A lien is a legal claim or interest that a lender has on a borrower’s property as security for a debt.
In the context of a mortgage, the lien created by the deed of trust allows the lender to take possession of the property and sell it if the borrower defaults on the loan. The lien ensures that the lender has a way to recover their investment in case the borrower fails to fulfill their repayment obligations. The lien remains in place until the loan is fully repaid, at which point it is removed, and the borrower regains full ownership of the property.
A deed of trust for a mortgage may contain the following information:
- Borrower’s name and address (also referred to as the “trustor”);
- Lender’s name and address (also referred to as the “beneficiary”);
- Trustee’s name and address (a neutral third party responsible for managing the deed of trust);
- The legal description of the property, including its address and parcel number;
- Loan amount (also known as the “debt”);
- A statement indicating that the borrower is conveying the property to the trustee as security for the loan;
- Terms and conditions for repayment, which reference the promissory note;
- Provisions outlining the rights and responsibilities of the borrower and lender;
- A clause describing the process of foreclosure in case of default; and
- A statement indicating that the lien will be released once the loan is fully repaid.
What Are the Different Types of Mortgages?
Mortgages come in many different forms to accommodate the unique financial situations of borrowers. Below, we will look at some of the common types of mortgages.
Fixed Rate Mortgages
These mortgages feature a predetermined interest rate and monthly payment amount, offering stability and predictability for the borrower.
For example, John decides to buy a house that costs $300,000. He secures a 30-year fixed-rate mortgage with a 4% interest rate. His monthly mortgage payment is calculated based on this interest rate and will remain constant throughout the loan term. This means that for the entire 30 years, John will make the same monthly payment, which offers him predictability and stability in his financial planning.
Adjustable Rate Mortgages
These mortgages start with a fixed interest rate and payment amount for an initial period, after which the interest rate and payments may be periodically adjusted based on market conditions.
For example, Samantha is looking to purchase a $250,000 home. She chooses a 5/1 adjustable-rate mortgage (ARM) with a 3.5% initial interest rate. This means that for the first five years (60 months) of her mortgage, Samantha’s interest rate will remain fixed at 3.5%, resulting in consistent monthly payments.
After this initial period, the interest rate may be adjusted annually based on market conditions, potentially leading to changes in her monthly payments. The adjustments could result in higher or lower payments, depending on the prevailing interest rates at the time of each adjustment.
These mortgages have a fixed interest rate and payment amount for the loan’s duration but require the borrower to repay the loan balance after a specified period, as determined by the lender.
For example, Tom is interested in purchasing a $200,000 property. He opts for a 7-year balloon mortgage with a 3.75% fixed interest rate. For the entire 7-year term, Tom’s monthly payments will be based on this fixed interest rate. For the entire 7-year term, Tom’s monthly payments will be based on this fixed interest rate. However, after 7 years, the remaining loan balance will become due. At that point, Tom must either pay off the outstanding balance in a lump sum, refinance the loan, or sell the property to cover the balloon payment.
Balloon mortgages can be advantageous for borrowers who expect a significant income increase or anticipate selling the property before the balloon payment is due.
Mortgage Application Requirements
To apply for a mortgage, borrowers must supply the following information:
- Value of current assets and debts;
- Employment history and current income;
- Source of down payment; and
- Credit history and score.
What is Mortgage Fraud?
Mortgage fraud involves intentionally falsifying information on a loan application to obtain a more favorable mortgage rate. It is a rapidly growing form of white-collar crime and can take many forms, including:
- Income Fraud: Overstating income to qualify for a larger loan or better rate.
- Loan as a Gift: Misrepresenting a loan as a gift to reduce apparent debt, potentially securing a loan that would otherwise be denied.
- Occupancy Fraud: Falsely claiming to live on a property that will be used as an investment property in order to secure a lower interest rate.
- Appraisal Fraud: Appraisal fraud involves deliberately overvaluing or undervaluing a home to either obtain more money or secure a lower price on a foreclosed property.
- Employment Fraud: Falsely claiming self-employment or an elevated position within a company to misrepresent income for mortgage purposes.
- Fraud for Profit: A complex scheme involving multiple professional mortgage lenders collaborating to defraud a lender of substantial sums of money.
Is Mortgage Fraud Considered Criminal Fraud?
Yes, mortgage fraud is a form of criminal fraud. When someone knowingly provides false information in a transaction, resulting in harm to the other party, fraud has been committed. A borrower intentionally lying to a lender about key facts is committing criminal fraud, which can lead to serious consequences.
What Are the Potential Consequences of Criminal Fraud?
A criminal fraud conviction may result in prison time, parole or probation, fines, and restitution (compensating victims for their losses).
The specific penalties for criminal fraud depend on the severity of the fraud, the victim(s) involved, and the amount of money or property taken due to the fraudulent actions.
Do I Need an Attorney to Help with Mortgage Fraud?
If you believe you have been the victim of mortgage fraud, it is highly recommended that you seek the advice of an experienced fraud attorney who can guide you through the legal process and protect your rights. An attorney can help you determine the best course of action, whether to pursue a civil lawsuit or report the fraud to law enforcement.
LegalMatch can help you find an attorney who handles mortgage fraud cases. By submitting your case details on LegalMatch’s website, you will receive responses from multiple attorneys interested in representing you. You can then review their profiles, credentials, and client reviews.
Use LegalMatch to help you choose the right attorney for your case.