Mortgage Application and Commitment

The word “mortgage” is typically used to refer to a loan to buy real property. Technically, however, the document that evidences the borrowing of money is called a “Note” or a “Promissory Note”. The note outlines the terms and conditions of the loan. A “Mortgage”, on the other hand, is the document that ties the real property to the loan as collateral or security for the repayment of the loan. If the Note is not paid in accordance with the agreed upon terms, the Mortgage allows the lender to sell the real property in order to pay off the loan. Contrary to popular belief, the fact that the bank holds your mortgage does not mean that the bank “owns” your house. You own your house. The bank simply has the right to use the value in your house to pay off your obligation to them, if you fail to do so.

If there is no application fee or other cost associated with making the application, you may wish to do so once the seller has accepted the purchase offer. Certain lenders permit prospective buyers to apply before they even make a purchase offer. The bank then will “pre-approve” the buyer for a certain loan amount, subject to the buyer finding an acceptable house. If the lender will be charging an application fee or other non-refundable fee, you should delay making your mortgage application until both attorneys have approved the contract and certain “preliminary” contingencies (if any) have been satisfied.

There are many different lenders and many different types of mortgages available. Mortgages vary in the interest rate, the length of the loan, the method of paying for taxes and insurance, the costs associated with borrowing and the rules and requirements of the lender. Each buyer needs to “shop” for the mortgage that best meets his/her needs. In determining where to apply, make sure to consider the fees and closing costs charged by the lender, as these vary greatly. Many of the costs associated with the purchase of a home are “hidden” in the fees charged to you by the bank and it is important that you are aware of these fees up front.

A “mortgage broker” is someone who finds a mortgage for you that best suits your needs and requirements. (Not to be confused with a “real estate broker” who sells or finds a suitable home for you). In effect, the mortgage broker “shops” for your mortgage so you don’t have to. Typically, the lender will pay for the services of the broker, as compensation for bringing them the business—you! Be aware, however, that not all brokers work with all lenders. As such, it is important to determine how many lenders your broker works with and the type and diversity of these lenders. Otherwise, you may be limited in your choices. It is something like buying a car from a dealer. Although a Ford dealership will have various different types of vehicles to offer you, they will only offer you a Ford, and you will never know of the many other options that were available to you.

A “private mortgage” is a loan to purchase property, which is obtained from a source not typically in the business of lending money. Often this will be a relative or the seller. Unless the private mortgage lender is a relative, a lender who is not in the business of lending money is usually not able to provide the borrower with terms that as are attractive as the traditional lenders. However, if a buyer is unable to qualify for a traditional loan (i.e. bad credit, no credit history, insufficient income, etc.) a private mortgage lender may be willing to take the additional risk in exchange for the higher return on the loan. A seller may be willing to do so in order to sell the house, which might not otherwise be possible if a prospective buyer couldn’t get a mortgage.

The amount you borrow depends on the amount you need as well as the value of the property being purchased. Most mortgage lenders will only agree to loan a percentage of the value of the house (known as the “debt-to-equity ratio”). Other types of loans and lenders allow the buyer to borrow the entire purchase price and sometimes even more, to cover closing costs and expenses. Remember that the size of the loan, the length of the loan and the interest rate all go into determining the size of your monthly payment. Also, when determining if you can afford a house, and the mortgage required to buy the house, it is important to realize that the purchase price is just one of the expenses involved. Taxes, insurance, utilities, maintenance costs and other necessary expenses are often overlooked.

You will be subject to the prevailing rates when you close. However, most lenders allow you to “lock-in” your rate within a certain period of time after your application. If you lock-in your rate, your loan will be at the rate when you locked in and you will not be required to pay a higher rate if the rates go up before you close. Of course you usually won’t benefit from a decrease in rates either.

You want to lock-in when you feel the interest rates are as low as they are going to go before your lock-in period has expired. There are many publications and financial advisors who will offer opinions in this regard. However, the ability to anticipate changes in interest rates is far from an exact science.

Your mortgage lender will have a procedure for advising them or your intentions in this regard.

A “bridge loan” is a temporary, short term loan that is intended to “bridge” a financial gap during a short period of time that someone needs money temporarily. It is usually required when someone is buying a house but cannot schedule the sale of his/her existing home before his/her purchase. Consequently, the buyer does not yet have the money from his/her sale to put toward the purchase, as was intended. In this case, the buyer obtains a “bridge loan” for this amount, to bridge the gap of time between the purchase and the sale. When the sale occurs, the buyer uses the money received to pay off the bridge loan.

An “ARM” is an “Adjustable Rate Mortgage”. Unlike a conventional mortgage, where the interest rate is fixed throughout the life of the loan, the interest rate for an ARM will adjust at fixed intervals throughout the life of the loan in proportion to increases or decreases in certain stated economic indicators. The benefit of ARM’s is they are usually at lower initial rates. The risk to the borrower is that rates may increase above what they would have been for a fixed rate mortgage.

Each of these are specialized types of mortgages offered by various governmental organizations, usually to encourage certain types of prospective buyers by offering mortgages at lower rates to those who qualify. You may wish to ask your real estate agent or mortgage broker if you qualify for any specialized mortgage program.

“PMI” stands for “Private Mortgage Insurance” and “MI” (previously referred to as “MIP”) stands for “Mortgage Insurance”. PMI is charged by banks and conventional lenders and MI is charged in conjunction with VA and FHA loans. Both PMI and MI are types of insurance, which are required by the lender if the borrower does not provide a substantial amount of cash (typically at least 20%) toward the purchase of the property. In such cases, the property is less likely to provide adequate security for the loan, since it may not sell for enough to pay off the loan and foreclosure expenses if the borrower defaults on the loan. PMI and MI provide insurance to the lender to cover this potential loss. Although the borrower pays the cost of this insurance, it is entirely for the benefit of the lender and not the borrower.

Interest is charged on the amount that is borrowed (called “principal”). As payments are made to reduce the principal, the amount of interest owed each month is less, since it is being calculated on a lower amount of principal. However, in order to avoid confusion, the amount of each monthly payment does not change as the amount of interest due decreases. Instead, the monthly payment remains the same and a calculation, called an “amortization”, is made which allocates a smaller portion of each monthly payment toward interest (since the amount of interest due decreases as the principal of the loan decrease) and allocates a larger portion of each monthly payment toward principal. Therefore, at the beginning of the loan, the largest portion of the payment is going toward interest, whereas near the end of the loan, most of the payment represents a reduction in the principal.

A “balloon payment” is a mortgage payment that pays off the entire outstanding unpaid balance owed on the mortgage and which is made before the monthly payments would otherwise pay off the mortgage.

A “prepayment” refers to paying all or a portion of the mortgage before it is due or required to be paid. Some lenders do not permit prepayments and some lenders will charge a penalty if prepayments are made.

By making prepayments, you will finish paying the loan quicker and in this way you will owe less interest over the life of the loan. However, it is important to understand that making prepayments does not reduce your monthly payment throughout the life of the loan, nor does it relieve you of the obligation to make the regular monthly payment as is required by the loan.

In most cases, you do. If you have any questions regarding what you are asked to provide, ask your attorney.

If you want them to lend you their money—yes! Although you are fully entitled to refuse to provide them with any information, they are equally entitled to refuse to lend you their money as a result.

There are various types of title insurance. The type of title insurance required by a mortgage lender is called “mortgagee” insurance. This insures your lender from any financial loss if a problem is discovered in the future with respect to your title to the property. Your lender requires you to get this policy to protect their interest in your home as security or collateral for the money they are lending you to buy the home. This insurance does nothing to protect you or your interest in the property.

Yes. There is a type of title insurance that protects a buyer’s/owner’s interest in the property. This is called an “owner’s” or “fee” policy. The word “fee” is a legal term referring to the nature of ownership of the property, not to the cost of the policy. A fee policy insures the owner from financial loss if a problem is discovered in the future with respect to the ownership of the property.

It is always beneficial for the buyer of a home to purchase a fee policy of title insurance. Although your attorney may be in a position to review and approve the title you are acquiring when you purchase a property, he/she is not in a position to guarantee that problems will never arise with respect to the title to the property you have purchased. This is not a reflection on the ability of your attorney, since there are potential problems that may arise that cannot be determined at the time of your purchase. Therefore, even if your attorney does his/her job perfectly, certain legal situations may arise that could jeopardize your claim to title to your property. A fee policy of title insurance is the best way to guard against any potential financial loss as a result of any such unforeseen situation. Your attorney can advise you of the cost of a fee policy of title insurance and can assist you in obtaining such a policy.

The rates for all title insurance policies issued in New York State are regulated and fixed by the state. Therefore, you will pay the same amount for title insurance, regardless of where you purchase it.

You are permitted to order title policy from whatever company you wish. Therefore, if you wish, you can request your lender to order the insurance for you. However, our firm has a relationship with a title insurance agency which enables us to obtain title policies for our clients. Given this relationship, we benefit financially if we purchase the policy for you. However, we feel that obtaining this policy for you affords us a greater degree of control over this process and we also believe it allows us to provide you with the best service available. In that title insurance rates are set by the state, you are charged neither more nor less as a result of allowing us to order the policy for you.

No. By entering into a contract containing a mortgage contingency, you are agreeing to use your best efforts to obtain a mortgage commitment. Your refusal to cooperate with your lender, in good faith, would be deemed a breach of your contractual obligations.

A “point” is 1% of the mortgage amount. Bank charges are often calculated based on a percentage of the amount being borrowed. For example, a lender may be willing to agree to a lower mortgage interest rate upon the payment of 2 points, or 2% of the amount being borrowed.

A “Good Faith Estimate” is the statement provided by a lender to a borrower which estimates the various costs and expenses the borrower is likely to incur in buying a house. Although this statement can assist a buyer in determining his/her potential costs, it is only an estimate as to many of the costs recited and may not reflect all the costs you may actually incur. Therefore, it should not be relied upon as a complete or accurate statement of your costs. However, the Good Faith Estimate is a useful tool in determining, with a high degree of accuracy, the fees to be charged to you by your lender.

When a lender approves a borrower for a mortgage, they “commit” to lending a certain amount to the borrower upon certain terms. A “mortgage commitment” is the written statement to the borrower from the bank, committing to lend funds to the borrower and setting forth the terms of the loan.

The bank will send it directly to you once you have provided them with all the information requested and they have approved your application.

Yes. You should do so as soon as you receive it to make sure that the terms and conditions recited are consistent with what you had agreed to.

Contact your lender immediately to correct any errors in the commitment and/or to answer any questions you may have.

Yes. If it is acceptable to you, you need to sign it and return it to your lender to notify them that you agree to borrow the money under the terms of the loan commitment. However, you should not sign it until all your questions or concerns have been addressed and any necessary changes have been made to the written commitment.

No, not unless you have any questions or concerns. However, your attorney does need to be advised when you receive and accept your commitment and your attorney does need to receive a copy of your commitment once you have accepted it. Do not rely on your bank to do so. Send your attorney a copy of your commitment letter once you have received and accepted it.

It depends on the nature of the information requested. Some of the items will be provided by your attorney. However, some of the information typically required in a mortgage commitment is in the possession of the borrower. You can provide this information directly to the bank. If you are not sure if you are expected to provide certain information or if you have problems obtaining or providing the requested items to your lender, make sure you discuss this with your attorney. Do not assume someone else will take care of it or it may not get done in time!

Your lender commits to lending you the money you have requested for a limited period of time. The “expiration date” is the date following which the lender will no longer commit to lending you the money. Therefore, it is necessary to close the purchase on or before the expiration date.

Most banks will agree to extend the commitment beyond the expiration date. However, you may be charged a fee to do so, and you cannot extend the commitment indefinitely. Therefore, it is important to make every effort to be ready to close the purchase before the commitment expires.