Legal Term Tuesday: Mortgage

Law

Legal Term Tuesday: Mortgage

Justin Lavelle

August 12, 2015

Tired of renting? Have your eye on a new pad with three bedrooms and a built-in swimming pool? Well, unless you’ve hit the lottery or have a Trust Fund, you’ll likely need some form of a mortgage in order to secure that dream home or property.

That’s because a mortgage is a legal contract that allows for the transfer of a property in exchange for regular payments on a set schedule. This agreement is typically registered by a mortgage note, which is signed by both parties, according to The Free Dictionary by Farlex.

Mortgages are the primary instruments for the exchange of homes and property in the US as most people are not able to pay for such things in full with cash at the time of purchase.

There are many different types of mortgages and the rules governing them will vary by state. It’s important to fully understand the terms of any legal contract you agree to, but particularly with mortgages, as the sums at stake are typically high and the penalties for non-payment are almost always life-altering (think: bankruptcy).

There are three major types of mortgage loans in the US: conventional (issued by Fannie Mae or Freddie Mac) FHA and VA, according to Bankrate.com. Conventional loans are the most common and pose the fewest hurdles in terms of qualifying, whereas FHA loans tend to have income requirements and VA loans are designed for those who have served in the military.

The type of loan may influence the structure of the mortgage. Typically, homebuyers will choose between fixed-rate and adjustable rate mortgages (ARMs) for either 15 or 30 year periods, according to Bankrate.com.

While each type of mortgage has its own set of pros and cons, the 2008 financial crisis had its roots in the issuance of ARMs to subprime buyers who could not afford a suitable down payment and then had to bail out of their mortgage agreement. For this reason, ARMs are considered less predictable and not ideal for many homebuyers, according to Investopedia.

In situations such as the one described above, buyers who can longer afford to make payments on their mortgage and/or walk away from their homes will inevitable face the prospect of a short sale or begin the foreclosure process, both of which will have a detrimental impact on the homebuyer’s credit and personal finances.

Typically mortgage records (or deeds of trust in some states) will appear on the mortgage holder’s public record. A public records search allows the searcher to look up information both on the property itself and its owner.

Disclaimer: The above is solely intended for informational purposes and in no way constitutes legal advice or specific recommendations.