A mortgage is a device used to create a lien on real estate by contract. The mortgage is an instrument that the borrower (called the mortgagor) uses to pledge real property to the lender (called the mortgagee) as security for a debt, also called hypothecation. The mortgage, as a rule, consists of the promissory note and the pledge. For example, when somebody wants to buy a house to live in it with his family, but does not have enough money at the moment. Thus that person needs to take a credit. But nobody will give this person such a large sum of money, without having trustworthy and firm guarantees. But what kind of guarantee can meet these criteria? Of course it is not a word of honour or just a promissory note. But the house, which a person wants to buy, will probably be the best guarantee for the creditors.
Consequently, the person, who needs a credit, writes a promissory note, which serves as the evidence of the debt and the promise to repay money with a certain interest rate, and formalizes a lien. This lien must be registered in the public records. After the repayment of the debt within a certain period of time, creditor returns the promissory note to the debtor and the lien becomes annulled. In the case when the debtor can not fulfill his engagements, the pledge (the house in our example) will be sold by the auction and the proceeds pass into the hands of the creditor.
Sometimes there occur such conditions, when a creditor needs money with expedition and the credits maturity date is too late. In that case the creditor can resell the lien to other holder, which will receive the interest rate and the credit. This kind of financing is very popular in the United States of America and there exists two governmental organizations Home Owners Loan Corporation and Federal Housing Administration, which provide mortgage loans with very law interest rates and of course there are plenty of private loan companies, mortgage companies, credit unions etc.
There are many types of mortgage loans exist: adjustable rate mortgage, fixed rate mortgage, capped rate mortgage, discounted rate mortgage, reverse mortgage and other.
Adjustable rate mortgage is characterized by the changing interest rate. Thus the borrower benefits if the interest rate falls and loses out if interest rates rise.
Fixed rate mortgage is characterized by the constant interest rate and, in turn, constant monthly payments.
Capped rate mortgage is the mortgage when the borrower pays the accrued interest with a constant rate, but if the actual rate falls below the capped rate, then the borrower pays on the lower rate.
Discounted rate mortgage is a mortgage when the borrower repays the loan with the discounted interest rate for a certain period of time.
Reverse mortgage is a kind of loan, when old people want to receive money while living in their homes. When the borrower dies his property is sold and the credit is repaid from the proceeds.
In order to obtain a mortgage a person should fill a loan application and prepare all the required by the lender documents (see below), and then deliver them to the lender. Within three days the lender has to return the disclosures, required by the law Good Faith Estimate and Truth in Lending, to the borrower.
Commonly, lenders demand for the following documents to be presented by the borrowers: - verification of income; - verification of assets; - information about the purchase; - information about the debts; - some kinds of additional personal information. Verification of income includes the following: earning statements for the two past years; profit and losses from the self-employment (if applicable) for the past three years; additional income (if applicable) such as interest or social security. Verification of assets includes the following: list of bank accounts numbers, list of saving bonds and some other. Information about the purchase anything that may be considered important from the point of view of the lender copies of the purchase agreement and the sale agreement, because he is concerned a lot if the borrower is not a swindler. Information about the debts is important because in the case of borrowers bankruptcy there can occur the line of his creditors each of which has a legal priority to receive debts.
This information might contain the following: credit card bills, consumer debt bills, information about alimonies (if applicable) and some other. Lenders usually interested in the origin of the future down payments (will the borrower pay them from the salary or interest from some equity etc). Additional personal information can include divorce decree or explanation letters about any credit problems. Of course, the list of the required documents may very different from one lender to another and it will be wisely to make them more precise by the means of communications beforehand. But borrowers should take into consideration that fact that different types of mortgage imply specific requirements (for example, reverse mortgage requires the borrower to be at least sixty-two years old). I also want to mention that there is a kind of mortgage when no or very little documents are required to be presented except for income and losses, but it can be given only to self-employed borrowers.
When the lender processes and analyses the information about the borrower, he determines the size of the loan, which he can give to the borrower. This size depends on the borrowers ability to repay the debt. When the borrower knows the amount of the possible loan he or she can negotiate the terms of the mortgage and its type (main types of the mortgage were described above). Then it comes time to open escrow, provide title report, credit report and the appraisal of the property in other words, to form mortgage package and send it to the lender, which would finally determine to give a loan to the borrower or not.
If the loan is approved by the lender, it is time to sign all the documents (with the signing agent of course) and deliver them to the lender. The lender reviews the document once more and funds the loan, then all necessary records are made and the loan closes.
Mortgage loan implies different additional fees for the borrower (or the lender, which is very seldom, but it depends on the prior negotiations) among of which there may be the following: discount fee (this fee usually reduces interest on the pro rata basis), loan origination fee (it is the compensation for the lender because of his operation costs for organizing the mortgage), application fee (it is usually paid when the borrower competes the application form for the debt), appraisal fee (this fee increases directly on the pro rata basis with the price of the house; it is paid for the independent appraisal of the house, which lender wants to know in order to assess how much money he can lend you; Factors to be considered in determining market value of the property are: present cash value; use; location; replacement value of improvements; condition; income from property; net proceeds if the property is sold, etc; moreover, lenders usually suggest a mortgage which not exceeds ninety five percent of the assessed property), credit report fee (this fee is paid for the independent assessment of the borrowers solvency), title search and insurance fee (these costs are related to the investigation of the propertys history), flood certification costs (related to the investigation if the property is not situated in the flood zone and if it is so than it implies flood insurance costs), survey fee, paperwork fee, costs of attorneys, real property taxes (regulated by the state law), escrow account costs (lenders often require borrower to create such account as a guarantee that the borrower pays insurance fees and taxes on the real estate in time, in order not to lose his pledge; usually governmental loan companies require an escrow account, private companies may not require it) and some others depending on the situation. In this part there also must be mentioned, that most lenders require an immediate down payment at the certain rate of the purchase price (different lenders require different down payments from three up to thirty percent; low down payment percentage are stipulated by the private mortgage insurance).
During the process of obtaining the mortgage loan there are also needed signing agents services. This need is stipulated by the following circumstances: both the lender and the borrower need to ascertain that they have a deal with the right people, they want to ascertain that the documents are accurate enough, that all the necessary procedures are performed in the appropriate way, that all the essential signatures and dates are made in the appropriate way and that all the documents notarized correspondingly. But as it was already stated above, the loan signing agent must not give any legal advice or comments.
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