A mortgage is a transfer of an interest in real estate as security for repayment of a loan. The real estate lien on your property through your bank or financial institution for money borrowed to pay for the property. A mortgage transaction usually involves someone who is purchasing a home borrowing money from a lender in order to buy said home and entering into a written agreement with the lender for that loan. The real estate then exists as collateral for the loan. In the event the homeowner defaults on the loan, the lender may foreclose on the property and have it sold to reduce the debt.
The loan process begins where the borrower, who is also known as the mortgagor, obtains a mortgage loan by an application. The borrower submits an application to the lender, who is also known as the mortgagee. The lender conducts a risk evaluation to determine whether a mortgage loan will be granted. If the lender approves the borrower, the lender will issue a loan commitment that details the loan amount, repayment terms, interest rate, and other pertinent conditions. When the borrower accepts, a contract is formed between the two parties.
There are several different types of mortgages out there, including:
- Jumbo Mortgages: Jumbo mortgages are loans that exceed the loan limits set by corporations who buy mortgages from lenders. This type of mortgage also comes with a higher interest rate.
- Two-Step Mortgages: Two-step mortgages are mortgages that are a combination of fixed rate and adjustable rate mortgages. They usually begin with a fixed-interest rate followed by an adjustment which leads to a new fixed-rate for the remaining term of loan. These loans are ideal for those with bad credit.
- Assumable Mortgages: Assumable mortgages are loans given to a buyer or assumed by a buyer. Assumable mortgages reduce monthly payments and allow you to save on closing costs. The disadvantage is that sellers typically sell their houses for more to make up for using this type of mortgage.
- Sub-Prime Mortgages: Sub-prime mortgages are ideal for buyers with bad credit as they provide people with money. The disadvantage is that the loan is accompanied by a higher interest rate and more burdensome terms. Rates and terms vary, so buyers should do their research before settling on a lender for this type of mortgage.
- Bi-Weekly Mortgages: Bi-weekly mortgages are mortgages that provide buyers with an option to cut down on the length of the loan terms. However, it can be bad for a homeowner who cannot make frequent payments because the payments are close together, usually every two weeks instead of the typical schedule of once a month.
- Balloon Mortgages: A balloon mortgage is less common than other types of mortgages. It involves a substantial payment being required at the end of the term of the loan to cover the unamortized loan principal.
- Fixed Rate Mortgages: The trademark characteristics of a fixed rate mortgage are that the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15 or 30 years. Lenders often offer variations on fixed rate mortgages, including five- and seven-year fixed rate loans with balloon payments at the end of the mortgage term.
- Adjustable Rate Mortgages: An adjustable rate mortgage has an interest rate that fluctuates according to the interest rate in the economy. In the beginning of the mortgage term, the rate is typically discounted at a lower rate. Over time, the rate will go up and down in response to the market. Some adjustable rate mortgages can fluctuate more than others, and these mortgages will often cap at how much the interest rates can change over the life of the loan. “Option Adjustable Rate Mortgages” allow the borrower to choose, on a monthly basis, whether to pay a minimum amount, an interest-only amount, an ordinary principal plus interest amount, or an accelerated payment amount.
- Interest-Only Mortgages: Interest-only mortgages allow the borrower to pay only the interest amount each month without paying any of the principal for several years of the loan. However, these mortgages can be troublesome. Although they appear to afford anyone the opportunity to afford a home as it can reduce the initial payments owed on the mortgage, eventually the borrower must pay off the interest payments in addition to principal. The shift in the amount of these monthly payments can be a shock to many and result in foreclosures.
There are many documents that a lender will request from you when processing your mortgage. It is a good idea to have these documents together before applying for a mortgage:
- W-2 forms from the previous two years, if you collect a paycheck
- Profit and loss statements or 1099 forms, if you own a business
- Recent paycheck stubs
- The most recent federal tax return(s), possibly for the last two years
- A complete list of your debts, including student loans, credit cards, car loans, and child support payments, as well as the minimum monthly payments required for each debt and the current balances on each debt
- A complete list of your assets, including bank statements, mutual fund statements, real estate, automobile titles, brokerage statements, and records of other investments or assets
- Cancelled checks for your rent or mortgage payments
- A recent copy of your credit history to clear up any possible problems or issues with identify theft that will be apparent on a credit report, especially since good credit score will help you get a better chance of being approved by a lender and also provide you with a lower interest rate
When your lender approves you, the following are the most common mortgage documents you will encounter:
- Good Faith Estimate: These are the good faith estimated costs you will have to pay before closing. These estimates are provided by the mortgage lender or broker as required by the Real Estate Settlement Procedures Act (RESPA). The estimate must include an itemized list of fees and costs associated with the loan and must be provided within 3 business days of applying for a loan. The final closing costs may be different than the estimate, however the difference can only be 10% of the third party fees. Once a good faith estimate is issued, the lender/broker cannot change the fees in the origination box.
- Housing and Urban Development (HUD) Special Info Booklet: This booklet includes information about the home buying process.
- Truth in Lending Act (TILA) Disclosure Statement: This statement provides information about the cost of credit. It discloses calculations using the estimates from the good faith estimate with the estimated interest, assuming that you keep the loan for its stated term. A TILA disclosure statement will help you understand the full economic effect of your loan.
- Broker Agreement: This document is the contract about the terms of finding a loan with your broker.
- Loan Approval/Commitment: This document is a contract containing the exact terms of the loan itself.
- Settlement Statement: This document is a list of all closing costs and loan disbursements.
A mortgage lender provides the financial resources for the borrower in a mortgage loan relationship. The lender is usually a bank or a mortgage company. They provide the borrower with a variety of different loan products depending on the needs of the borrowers.
There are different types of mortgage lenders, such as:
- Mortgage Brokers: These individuals work as middlemen between banks and borrowers on the wholesale end to secure financing for homeowners. They do the legwork for the borrower in terms of finding a mortgage loan, and have the ability to compare wholesale mortgage rates from a large number of banks and lenders all at once. Additionally, brokers can finance trickier deals because of their knowledge and various lending partners.
- Direct Lenders: A direct lender is a bank or lender that works directly with a homeowner. Mortgage bankers fall in this category. An advantage to working with a direct lender as opposed to a mortgage broker is that direct lenders may have more flexibility regarding the guidelines that they must work with. They may set their own guidelines regarding a particular mortgage and may waive certain guidelines at their discretion.
- Secondary Market Lenders: Secondary market lenders finance their loans by selling mortgage-backed securities, debentures, long-term notes, and issuing common stock. Most government sponsored mortgage loan programs are comprised of secondary market lenders. These include programs such as Freddie Mac and Fannie Mae.
Although mortgage lenders are subject to laws that were created to protect the borrower, there are instances where a borrower may run into some legal issues when dealing with mortgage lenders. Some of the more common disputes are:
- Contract Disagreements: Every mortgage loan document must be formalized into a written contract. If a borrower was not presented with a written document, or if they disagree with any terms within the contract, they should seek legal help as they may have a claim against the lender.
- Lender Discrimination: As stated above, lenders may not discriminate against borrowers based on race, religion, gender, national original, and other factors.
- Predatory Lending: Predatory lending occurs when lenders target first-time buyers, younger buyers, or elderly persons to acquire loans that they cannot afford and in which they will likely default.
- Mortgage Fraud: Besides predatory lending, other types of mortgage fraud may arise, including the use of fake documents or the use of fraudulent tax information.
Disputes with a mortgage lender may require legal action. The following steps should be taken if you believe you have a dispute with your mortgage lender:
- Review your mortgage loan documents. If necessary, seek the aid of an attorney to help you review the documents. These documents should contain relevant information that will be useful when filing and stating your claim against the lender.
- Collect all documents related to the mortgage and the lender. It is important to gather all documents that are related to the mortgage contract and communications with the lender throughout the lending process. These include sale contracts for real property, mortgage contracts signed, and other legal documents related to your relationship with the lender.
These steps may seem obvious, but they should be the first and strongest defense to a foreclosure.
When dealing with the complexity of mortgages, the accompanying documents, and a mortgage lender, it is wise to consult with a real estate attorney to ensure that your rights are protected. A real estate attorney can review all the pertinent documents and ensure that you are protected throughout the entire process. Additionally, if you find yourself embroiled in a legal conflict with a mortgage lender, an attorney can protect your rights as you fight your claim.