A mortgage is a real estate lien on your property, placed by a bank or financial institution, for money that you borrowed from the financial institution in order to pay for the property. When a mortgage has been signed and approved, you will have the obligation to pay back the loan for the property, plus interest, and the financial institution will have the right to foreclose your property if you do not repay the mortgage.
A mortgage transaction involves two documents: the promissory note and the mortgage (or deed of trust):
- Promissory note: The promissory note is a contract. Under the promissory note, you (the borrower) agree to repay the financial institution (the lender) for the money borrowed, plus the interest agreed to. A promissory note holds the borrower responsible for repaying the loan even if the borrower sells the property.
- Mortgage (deed of trust): A mortgage or deed of trust document acts as a lien on the property. This means that if you do not repay the loan, the financial institution may force repayment by selling your property. Thus, the mortgage document guarantees that the financial institution will get their money back even if the borrower does not pay.
Choosing the right mortgage is important to ensure your financial stability in the future. Here are the main types of mortgages:
- Fixed rate mortgages: Under a fixed rate mortgage, when you take out a loan from a financial institution to pay for your house, the interest rate that you pay on the loan and the monthly payment will be determined before you accept the loan. These values will remain the same for as long as you agreed to pay off the loan.
- Adjustable rate mortgages: With an adjustable rate mortgage, the interest rate and monthly payment of your home loan will remain the same only for an initial period of time, ranging from six months to five years. After that time the interest rate and payments can be periodically adjusted, based on current market interest rates.
- Balloon mortgages: A balloon mortgage starts off with an interest rate and monthly payment that is fixed for the duration of the loan, but after a short amount of time set by the lender, the entire loan must be paid back.
- Interest-only mortgages: A bit of a misnomer, an interest-only mortgage is an interest-only payment method which can be combined with any type of traditional mortgage. Depending on the terms of the mortgage, during an initial period the borrower only pays for the interest portion of the loan, thereby reducing the payment. After that time, the payment amount will increase to include both the interest and the principal, often at an amount higher than payments would have been in more traditional payment methods.
Before applying for a mortgage, you must be able to provide the following information:
- Value of current assets (e.g. car(s), other property, etc.);
- Value and type of debts (e.g. student debt, medical debt, etc.);
- Employment history and current income;
- Source of down-payment (e.g. if parents contribute to down-payment); and
- Credit history/score.
- What is considered a good credit score varies between mortgage lenders, so it is important to know your credit score and to find out what score will qualify you for a mortgage with your mortgage lender.
One of the more common outcomes of a mortgage lawsuit is that the lender may be granted a lien, which would allow them to take possession of some of the borrower's property (aka the homeowner) to make up for the payments.
Once you fail to pay your mortgage or deed of trust, your lender has a right to begin the foreclosure process. Even after the lender begins the foreclosure process, you are given a grace period to pay your missed payment. If you do not pay your mortgage by the end of the grace period, your lender may report you to the credit bureau which will bring down your credit score and be on your credit history. You will also get a default notice and notification that foreclosure will begin on your property. If you are not able to pay off your missed payment plus interest in full by the time foreclosure begins, your lender or the courts will take control of and sell your home. Your lender is paid the remaining amount of the loan from the proceeds of the sale.
Other remedies may include garnishment of wages to make up for the missed payments. However, the parties can sometimes agree to a new debt arrangement that would be more beneficial for each party. If you are behind on your mortgage payments, be sure to look over your mortgage agreement to see if it is possible for you to create a new debt arrangement.
Buying a house is a complex and daunting task, but if done wisely, can save you a lot of money over the duration of your mortgage. A real estate attorney familiar with the market in your area can be a helpful guide through the process.