Mortgage Approval Process
Most people will need to borrow money to pay for the purchase of real estate. Generally speaking, the loans are arranged either directly through a bank, or through another financial institution using the services of a mortgage broker. If you are financing a purchase of a house, you will need to get preapproved for the loan. In the preapproval process, the lender decides how much it is prepared to lend you. At this stage, it’s assumed that the security for the loan is worth enough to give the lender a comfortable margin of safety. This process will take several days. Sometimes lenders will need you to pay off or reduce your other debts if your total loan burden exceeds their guidelines.
The second stage of the process involves a lender becoming satisfied that the property you are offering as collateral for the loan is valuable enough to support your loan. This appraisal process can take a further week, sometimes more. Then the legal validity of the collateral must be checked out.
The Lawyer’s Involvement
Banks and other lenders usually rely on a lawyer to guarantee that the security for their loan to you is perfectly legal in every respect. Banks, trust companies and finance companies will usually agree to use the same lawyer as the borrower, although this is not always the case. If the same lawyer represents the lender and the borrower, the lawyer must remain absolutely neutral and not preferred or the interests of one or the other. It follows that if the lawyer becomes aware of a conflict of interest (for example, if the lawyer learns of some reason why the borrower no longer qualifies for the mortgage), the lawyer must immediately declare a conflict of interest and stop doing any more work. Each of the lenders and the borrower would then have to hire their own lawyers to try to sort out the issues.
When the lender is not a bank or other lending institution, then both the lender and the borrower must have their own lawyers if the loan is for more than $50,000.00. The borrower is always expected to pay both lawyers’ bills.
In most cases, private mortgage funding is considerably more expensive than funding through an institutional lender. Examples of additional costs include higher interest rates, lender’s fees, mortgage broker fees, and higher legal costs.
The lawyer prepares the mortgage the way the lender wants it, makes sure it is registered properly and sends a written report to the lender.
Most mortgages contain sections dealing with:
- advance payments
- penalties for paying the mortgage off early
- keeping the property insured
- selling the property to an unqualified purchaser
- not making major renovations or a change of use without their approval
- anything else that alters the security for the loan
If the property is sold or transferred to somebody with bad credit, that could result in the creditor suing and then forcing a sale of the property, which will deprive the mortgage lender of its expected return on its investment. That’s why lenders want to control who owns the property.
Most mortgage loans cannot be paid in full before the maturity date without paying a compensating penalty to the lender. A typical compensating penalty (usually referred to as a “prepayment penalty”) would be the greater of:
(a) 3 months’ worth of interest on the amount being prepaid or
(b) an “interest rate differential.”
These differentials are based upon an often complex formula that is intended to compensate the lender for the fact that the loan has been repaid early, thereby depriving the lender of the ability to continue to earn the mortgage interest rate on the amount that is being prepaid.
Most mortgages require the property to be insured to its full insurable value. Some require the insurance coverage to be “replacement cost” coverage. The name of the mortgage lender must be added to the insurance policy as an additional loss payee. The theory is that if there is substantial damage to the property which reduces its value, the lender can collect the insurance proceeds to reduce the loan balance because the security for the loan is no longer what the lender would require.
All mortgages require that municipal property taxes be kept up-to-date. Property tax arrears trump mortgage lenders’ claims, so if the taxes are seriously in arrears, the municipality can sell the property to collect back taxes and penalties.
And the municipality gets to keep all the money! The mortgage lender and the property owner will get nothing.
Tax arrears are a very serious concern for a mortgage lender.
Any default allows the lender to take collection action. The lender has several tools in its toolbox to collect the money owing.
The lender will typically hire a lawyer (this would not be a lawyer who had ever acted for the borrower) to send out a formal letter, called a Notice of Sale. This is usually called a “power of sale notice.” It lists all of the money owing to the lender, including principal, interest to the date of the notice, administrative charges, and legal costs. It sets a deadline by which all of the money must be paid to the lender. By law, the deadline must be at least 35 days after the notice is issued, but in practice, it’s usually between 42 and 45 days.
The lender will probably have its lawyer start a lawsuit against the borrower, to grant a judgment declaring that the lender is entitled to all of its principal, interest, and costs, and to an eviction order (technically called a “writ of possession”).
When the Mortgage Loan is Repaid
Once the loan is repaid in full, the lender will have it removed from the title to the property. In the case of banks and other institutional lenders, this can take anywhere from 2 to 6 months. For private lenders, generally, the mortgage must be removed from the title at the same time that the loan is repaid.
There is much, much more that can be said about mortgages but which is beyond the scope of this article. The above information is not exhaustive, is general in nature and will not always apply to any particular situation.