When prospective homeowners are wanting to purchase a home, oftentimes they will require some form of financing to assist them with purchasing the home. In most cases, the homeowner will seek out a lender, such as a bank or other lending institution, to loan them the money required to purchase the home. The most common form of a home loan arrangement between a prospective homeowner and a lender is a mortgage.
In legal terms, a mortgage is a type of security interest that attaches to property that is paid with borrowed money. Mortgages are the most common method of financing the purchases of home. Mortgagors, also known as the prospective home buyer(s) are the party transferring the interest in land to a mortgagee, which is usually a bank providing the loan or other interest in exchange for the security interest in the land.
However, it is important to note that there are also government sponsored mortgage lenders, such as the United States Department of Veteran Affairs (“VA”), the United States Department of Housing and Urban Development (“HUD”), and the Federal Housing Administration (“FHA”) which also provide funds to prospective home buyers that qualify for their programs.
In simple terms, a mortgage allows a prospective home buyer the funds necessary to purchase the home, and in exchange that homeowner gives the bank an interest in the home being purchased. Then, should the homeowner fail to pay back the money loaned to them, the bank will have the interest necessary to foreclose on the loan and sell the home in order to pay off the loan.
Mortgages come in many different forms, each with different payment plans and stated interest rates. The most common payment plan is monthly payments, which if payments are timely made, eventually allows the borrowing prospective homeowner to become the full owner of the property.
It is important to note that home loans can also cover other aspects of home ownership, such as financing home repairs or home improvements. Home repair or improvement loans are often taken out by the home owners for the purpose of making needed repairs or upgrading their property.
What Are Legal Issues to Consider When Taking Out a Home Loan?
Most often, a home loan will be the biggest transaction undertaken by an individual. Therefore, it is not an understatement to say that home loans are major legal transactions that can have long lasting effects on a buyer. The following is a list of legal issues that may be involved in a transaction involving a home loan:
- Contract Issues: Although contracts can be either written or oral, contracts involving real estate sales must be in writing in order to be valid, binding, and legally enforceable. There are various different state and local contract laws involved in a home loan contract. When a party to the contract does not fulfill their obligations under the contract, such as a borrower not timely making their mortgage payments, the other party can sue for a breach of the contract. The most common remedy sought by lenders is full repayment of the loan and interest, or foreclosure;
- Foreclosure: As mentioned above, the most common legal issue surrounding home loans arises when a borrower falls behind on making payments on the mortgage. Foreclosure is the process by which a lender can then leverage the security interest they hold on the borrower’s property, and sell that property at an auction in order to satisfy the borrower’s debts. It is important to note that there are specific rules and processes that must be followed during the foreclosure process;
- Mortgage or Home Loan Fraud: Mortgage fraud occurs when there was false or incorrect information provided on a home loan application. Therefore, if either party lies during the application process, they may be charged with the crime of mortgage fraud. A common charge against mortgage lenders is forging a mortgage contract. If a mortgage lender commits mortgage fraud, the borrower may then use evidence of the fraud as a legal defense to any foreclosure actions filed by the lender. It is important to work with experienced attorneys and licensed mortgage representatives when purchasing a home to avoid mortgage fraud;
- Discrimination: Federal law states that mortgage lenders are prohibited from discrimination against borrwers based on protected classes. Protected classes include race, age, gender, religion, sexual orientation, national origin, or other federally protected characteristics outlined in the Fair Housing Act and Equal Credit Opportunity Act. Both of those federal acts serve to protect prospective home buyers from being discriminated against while seeking out home loans;
- Interest Rates: Interest rates are important when it comes to home loans. Lenders profit from real estate transactions by arranging for the borrower to pay back additional money over the total money they are seeking to borrow. The difference between the money that is lent to the borrower and what is returned to the lender is known as interest. The interest on home loans is determined through an interest rate, which is often expressed as a percentage of the amount of the loan.
- While some home loans have fixed interest rates, other loans have interest rates that change over time. There are various laws regarding interest rates, such as what can be charged and how they can be changed; and/or
- Predatory Lending: Lenders sometimes will target susceptible home buyers, such as first time borrowers or elderly borrowers, and get them to enter into a loan at abusively high interest rates or repayment terms. In these cases, the mortgage lender may be considered to be predatory lenders, and will be held criminally and civilly liable for their actions.
As can be seen, there are many different disputes and legal issues that may arise in connection with a home loan. Therefore, it is important to carefully and thoroughly review your home loan contract before signing the agreement. It is important to discuss home loan contracts with an attorney, and voice any concerns with the contract prior to entering into the contract. Good communication between a lender and a borrower will often prevent the above issues from occurring.
In addition to the laws and legal issues discussed above, there are various other areas of the law that could be involved in home loans. One of the most common areas of the law involving home loans is bankruptcy.
Bankruptcy is a legal proceeding which allows an individual to eliminate some of their debts with their creditors. With regard to a home loan, when an individual files for bankruptcy they may be permitted to keep their home. This will depend on the type of bankruptcy the individual files for, as well as any state exemptions that protect one’s home.
It is important to note that there are both state and federal exemptions that protect an individual’s homestead, and some states require the use of state exemptions over federal exemptions. It is important to understand your state’s laws on home exemptions and bankruptcy if you decide to file for bankruptcy, while you have an active home loan.
Do I Need An Attorney For Home Loans?
If you are involved in a real estate transaction, whether as the buyer or the seller, you should consult with an area mortgage attorney. An experienced and local real estate lawyer will be best suited to helping you understand your state’s specific laws surrounding home loans, as well as what your legal rights and options are according to those laws.
Additionally, your real estate lawyer will also be able to review the documents related to the home loan, and advise you of your best course of action. Finally, an attorney will also be able to represent you in court, as needed, should any issues arise requiring legal intervention.