Here in South Florida, most home buyers purchase their new single family home or condo with the help of a mortgage and home loan. Real estate buyers have all sorts of places to look for that mortgage — online from places like Quicken Loans as well as at more traditional mortgage lenders, like the neighborhood bank or credit union.
At the closing, because of all of the State and Federal laws to protect borrowers, there are a large amount of documents for the buyer/borrower to review and sign (for details, read our post on buyer’s documents you’ll see at closing). Among them will be disclosure documents required by their lender about things like the right to receive a copy of their appraisal and whether or not it is likely their home loan will be sold to a third party.
And, of course, there will be the Promissory Note (read about that here) and the Mortgage.
10 Things To Know About Your Mortgage Before Closing On Your New Home
In light of what happened during the foreclosure crisis, it’s important that a buyer understands and knows his or her obligations under a mortgage before closing. After all, it’s going to impact his or her life for many years into the future (until the debt is paid off). Here are ten things a Florida home buyer should know about their mortgage before coming to the closing table:
1. FHA Mortgages: FHA (Federal Housing Administration) Doesn’t Lend Money To Buyers
The FHA has been around since 1934, and almost every home buyer is at least aware of a FHA Loan. However, what most buyers don’t know is that the federal government isn’t loaning money under a FHA Loan or FHA Mortgage. What the FHA does is to help buyers insure their mortgage and loan. The FHA provides an insurance policy to the bank or other mortgage lending institution.
How? The bank gets an insurance policy from the FHA for 96.5% of the appraised value of the property (as a general rule). This means that the lender can feel safe in loaning money to the buyer, because if the buyer should fail to pay then the FHA will cover almost all of the mortgage debt (96.5%).
2. You Can Have More Than One Mortgage On A Home
Many buyers think of a first mortgage when they consider applying for a mortgage. However, home owners are also able to get a second mortgage when they buy residential real estate (a second mortgage is different from a “home equity line of credit” or an “equity loan” where the home owner has the ability to get money to pay for things like college tuition or making home renovations). However, there are limits as to the amount a buyer may borrow when using a second mortgage.
Also, just like with a first mortgage, the second mortgage can be a fixed monthly payment for the life of the mortgage and, in the event of default, the holder of the second mortgage can foreclose on the home.
3. Who Are The Parties To A Mortgage?
In Florida, a mortgage to buy residential real estate is called a “purchase money mortgage.” The “mortgagor” is the borrower/buyer of the home. The “mortgagee” is bank or party lending the money to the buyer to pay the seller for the home. The mortgage is given as security for the Promissory Note. The Promissory Note is evidence of the unpaid balance of the purchase price of the property, along with interest due and owing.
4. The Mortgage Secures The Promissory Note
The reason that a mortgage is given to the lender is that it acts as security (or collateral) for the repayment of the debt (repayment of the promissory note). The bank or lender that is advancing the money in a lump sum wants a document to memorialize and protect its interest in the real estate in the event of a default by the borrower.
5. What Terms Are Included In A Mortgage?
The Mortgage will have terms to protect it for all funds advanced by the Mortgagee to the Mortgagor. It will also have provisions that cover any changes to the Promissory Note (amendments in the future, or modifications, or extensions, etc.), escrow payments (insurance and tax payments), protection of and changes to the condition of the property and what happens if the property is transferred before the debt is repaid in full to the lender.
Additionally, the Mortgage will provide for the lender’s reasonable attorneys’ fees and court costs to be covered by the Mortgagor in the event of a default and the right of the lender to collect any unpaid balance and, if necessary, institute foreclosure proceedings on the property.
6. How Does the Mortgage Protect The Lender?
The mortgage document protects the lender (Mortgagee) by creating a “lien” under Florida law that secures the payments to the Mortgagee of the indebtedness (the principal, interest, etc.). The lien is created by the language found in the mortgage document, where the Mortgagor grants to the Mortgagee a mortgage lien in things that include:
- The land itself;
- All buildings on the land, now and in the future;
- Any improvements on the land, now and in the future;
- All easements, rights, and privileges pertaining to the land or the improvements;
- All furniture, fixtures, and equipment owned by the Mortgagor and located on, or used or intended to be used in connection with the Land or the Improvements (like the central air conditioning system, etc.).
7. Other Protections: Covenants By The Mortgagor
As well as creating a legal lien as security for the Mortgagee (lender), the mortgage document will also have the home buyer making promises (covenants) to the lender about things like:
- The buyer (Mortgagor) will make the monthly mortgage payments as set out in the promissory note;
- The buyer will occupy the property as its principal residence;
- The buyer (Mortgagor) will pay all the property taxes, condo assessments, etc., that come due; and
- The buyer (Mortgagor) will make sure to keep insurance on the property current.
8. What Is An Event Of Default?
The mortgage documents will define when there is a “default” under the mortgage, also known as an “event of default.” These events are generally things like not making the payments on the Promissory Note, not paying the property taxes, not keeping the property insured or not fulfilling any of the other obligations under the mortgage and/or promissory note.
9. What Can Happen After A Default Under The Mortgage?
The mortgage document will also define in writing what can happen if there is a default on the mortgage. These are called the “remedies” of the Mortgagee. General remedies provided in most Florida residential mortgages include:
(1) accelerating things and legally declaring the unpaid balance of the principal and accrued interest of the sums due under the Promissory Note as immediately due and owing;
(2) getting a receiver appointed for the property, even if the Mortgagor is not insolvent;
(3) starting foreclosure proceedings to take title to the property; and
(4) recovering all costs incurred in collection and enforcement of the Note, including reasonable attorneys’ fees from the Mortgagor.
10. Grace Periods
The Mortgage will have some leeway for the home buyer (Mortgagor) built into the language of the document. These protections include having defined “grace periods” where the Mortgagor has some time before the remedies can be used. Grace periods generally include ten calendar days to make the mortgage payment and 15 calendar days to fix a default other than not making the principal and interest payment after getting a written notice of non-payment default.
Having a Florida Real Estate Lawyer for Your Residential Closing
A good piece of advice when you and your family are purchasing a home in one of the biggest transactions of your life is to at least talk with a Florida real estate lawyer. Getting someone to review all of the paperwork including the all important mortgage, isn’t as costly as most of us think it is. Most real estate lawyers, like Larry Tolchinsky, offer a free initial consultation (over the phone or in person, whichever you prefer) to answer your questions.
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