This is the third installment of our 7 part series attempting to familiarize first time homebuyers with the real estate purchase process. Even if you are not a first time homebuyer, and have purchased or sold a home before, you may find this series an informative refresher.
In our last two articles, we have discussed the various roles of the professionals with whom you work when purchasing your home. The purpose of these articles is to attempt to take some of the unknowns out of the process so that it is less stressful, and more rewarding.
In this article, we will briefly discuss your lender.
The relationship between the borrower and the lender is not an area typically covered by the attorney client relationship. This means that you negotiate with your lender directly, without the aid of an attorney or an agent. This is primarily because your mortgage application is a typical, consumer transaction that is not often subject to a significant amount of negotiation outside of interest rates. The terms are typically set by the bank based upon things such as your credit score, your income, and the value of the property you are seeking to purchase. It might be helpful, however, for you to understand the role of the lender in the transaction.
What is a mortgage?
A first time homebuyer may be initially confused by what a mortgage is. More accurately, when referring to the legal instrument by which you borrow the money to purchase your home, the term is a note & mortgage. The Note is the loan, the document by which the money to purchase the house is leant to you, and repaid by you over time. The mortgage is the security interest in the physical property, which guarantees the loan. The mortgage is the instrument that permits a bank to foreclose on a non-paying borrower, taking the house and selling it to cover all or part of the debt on the loan. While there are entire law school courses on the issue of securitized financial instruments, you do not need an in depth understanding of securities law to understand the primary difference between a mortgage, and any other loan or line of credit.
If a consumer defaults on a credit card, a typical credit card lender’s options are to bring an action to recover the debt (a lawsuit), or to enlist the aid of a collection agency. If a borrower defaults on a mortgage, the property purchased with the loan secures the debt, meaning the bank can foreclose upon the property (a fancy way of saying they can take title to the property away from you through a court order), and sell the property to cover the outstanding balance, and other fees associated with the foreclosure. The area of law involved with foreclosures could be the subject of many other articles on its own, and it is wound up tightly with other areas of practice including bankruptcy. This article is not intended to be a primer on foreclosures, and you should not let this otherwise deter you from making an investment in a property that you can afford.
When applying for financing, the lender conducts their own, internal due diligence regarding your application for a mortgage. This, of course, does not apply to privately financed mortgages, cash sales, or some other non-traditional financing arrangement for the purchase of residential real estate. Those researching financing for commercial transactions are also not likely to gain any insight from this article. However, for a first time homebuyer, there are resources available to you, and you may find this article informative.
There are two main categories in which to understand the source of your mortgage: Banks and Non-Banks. A typical non-bank source for your mortgage is a mortgage broker. A bank is typically the ultimate lender in a traditionally structured sale, and holds the mortgage on the property. A mortgage broker does not lend money, but finds a lender for you, taking a fee for herself or himself. In today’s real estate market, it is virtually essential that you obtain pre-approval by a lender in order to seriously consider purchasing a home. The pre-approval is not a commitment to lend to you, but It is a statement by the bank that they are tentatively willing to lend to you, up to a certain amount. Without pre-approval, a typical seller will not consider your offer.
While the pre-approval is the most important step to take with your lender before contract, the bank does play a pivotal role after contract, which we will address in more depth in subsequent articles. Stated briefly, the lender issues a mortgage commitment letter (required to move forward with the sale), clears you for closing once the closing date approaches, brings physical checks to the closing table, and ultimately grants funding approval, typically at the closing table itself. Because of this, the Bank is typically the first, and last, player you will work with when purchasing your new home.
When deciding on your lender, you may also want to consider the following variables. Does the lender or broker have any outstanding discipline or negative treatment by a government agency? Are there any penalties associated with pre-payment? What is the current prime interest rate for a thirty year mortgage?
Our office would love to be part of this fantastic step, and to help guide you through one of the most important steps you can take to secure a bright future for you and your family. If you would like to discuss a potential home purchase, don’t hesitate to call us. You can reach us by phone by navigating to our contacts page, or by calling us a (914) 214 9032 or (718) 614 8739.
You can learn more about mortgages through government offices and trade associations, such as the following:
Fannie Mae - Resources and information on financing
Freddie Mac - Financial resources for Home Buyers
The The Consumer Financial Protection Bureau (CFPB) Consumer Tools for Mortgages - Information on mortgage lenders and borrowing
The State of New York Mortgage Agency (SONYMA) - Information and programs for borrowers.
The New York State Department of Financial Services General Information and Resources for the Mortgage Industry - NYS publications about the mortgage industry.
NY Association of Realtors - Links to helpful industry sites about mortgage financing and other homebuyer tools.