Among the most important documents you`ll be required to sign at the closing are the note, the mortgage and the deed.
The note represents your promise to pay the lender or its assignee according to the agreed terms. It sets forth the principal amount, the name of the lender, the address of the property, the interest rate, the date on which your payments must be made and the location to which they must be sent.
If your loan has an adjustable rate, the note will specify the index used, the margin, the caps (if any), the adjustment dates and the method by which the adjustments will be calculated.
The note also explains your rights to prepay the loan and specifies any prepayment penalties that will apply if you do. In addition, the note details the penalties that will be assessed against you if you default and describes the conditions under which you can be required to repay the full outstanding amount before the end of the loan term. The loan usually can be ”called” by the lender if you fail to make the required payments, if you transfer all or part of your interest in the house to someone else without the prior written consent of the lender or if you violate the terms of your note or mortgage in any other way.
One additional point about the note: It`s a negotiable instrument, like a check, so you should never sign more than one copy of it.
The mortgage
The mortgage is the legal document that secures the note and gives the lender a claim against your house if you default on the note`s terms. It represents an ”encumbrance” on the property until the loan has been repaid. The mortgage restates much of the information contained in the note: the borrower`s name, the lender`s name and address, and the amount being borrowed. In addition, the mortgage specifies the date by which the last payment must be made under the note. Its basic terms provide that the principal and interest and any tax and insurance payments required will be paid in a timely manner;
that the buyer-borrower will not permit the attachment of any liens (for nonpayment of local property taxes, for example) that might take priority over the mortgage; that the borrower will maintain hazard insurance as agreed; that the property will be adequately maintained and not allowed to deteriorate;
that mortgage insurance, if required, will be maintained by the borrower; and that the lender will have the right to inspect the property after giving reasonable notice.
The mortgage also provides that if the borrower fails to comply with these requirements and continues not to comply after receiving notice, the lender can demand full payment of the loan balance. This last provision is subject, in some cases, to the buyer`s rights to reinstate the mortgage, guaranteed by law in many states.
In addition, the mortgage provides that if the borrower defaults, the lender can foreclose on the property, sell it and use the proceeds to pay off the outstanding loan and the foreclosure costs, returning anything that might be left to the borrower-that is, unless there are second mortgagees standing in line who would have to be repaid first.
The bottom line is that as long as you pay what you have agreed to pay when you have agreed to pay it, and take good care of the property, you won`t have any problems. But if you don`t, you could lose your house, along with some or all of the equity you have in it.
While I`m on this unpleasant subject, there`s one additional point to make. If you default on your mortgage, the lender is not limited to foreclosing on the property in order to satisfy the note. In fact, the lender doesn`t have to deal with the property at all; it can simply sue you on the note alone. That`s not common, but it is possible. For example, if the real estate market was depressed and the borrower had significant assets other than the house, the lender might decide that pursuing the note alone would offer better and faster prospects of recovery than selling the house.
Riders
In addition to the mortgage itself, there will often be a number of riders that are incorporated into the mortgage and become part of it. If you`re obtaining an adjustable-rate loan, for instance, there will be an adjustable-rate rider, which will simply restate the terms of the note you signed.
If you`re buying a condo, there will be a condo rider to set forth some of the additional requirements that apply to condos. Chief among these is the requirement that the buyer comply with the condo documents and maintain appropriate hazard and liability insurance. This rider will also specify what will happen in the event that the entire condo building is condemned-that is, declared unsafe for occupancy or taken by the state or local government under its power of eminent domain. Finally, the rider will outline the lender`s rights if the buyer does not pay the condo dues or assessments. Generally the lender has the right to make those payments itself and add the cost to the borrower`s loan balance.
If you`re buying a two- to four-family house, then a two- to four-family rider will normally be required. This will provide that the property must be used in accordance with its current zoning classification (unless the lender agrees to a change) and that the borrower must comply with all laws and regulations applicable to the property. The rider also will typically state that, except in certain limited instances, the buyer will not permit the attachment of any liens without the lender`s prior written permission. In addition, the rider will require the borrower to maintain rent-loss insurance and will limit the borrower`s rights to reinstate the mortgage in the event of a default. (The reinstatement rights are usually more liberal for a single-family homeowner.) Finally, the rider will provide for the transfer of existing leases and rent payments to the lender in the event that the buyer defaults on the mortgage.
The deed
The deed is the document that transfers ownership from the seller to you. The seller should bring (or send) the deed, properly signed and notarized, to the closing. The deed will specify how you will own the property, so there are some essential decisions to be made before you get to the closing.
One such decision is what name or names to put on the deed. Do you want to own the property in your name alone, or do you want to own it jointly with your spouse or with another individual, related or not? Your choices here will depend in part on the lender`s requirements. For example, if the mortgage is approved for you and your spouse, the lender will want both of your names on the deed. If the mortgage is solely your obligation, then the lender will want the property owned in your name alone. The reason for this is that should you happen to default, it will save the lender the trouble of foreclosing on a party who has no obligation at all under the mortgage.
There are some differences in how ownership interests are defined in different states. But the chief options are fourfold:
1. Sole ownership: Self-explanatory.
2. Joint tenancy: A form of joint ownership in which the surviving owner automatically gets the deceased owner`s share in the property.
3. Tenancy by the entirety: A joint-tenancy form for married couples only, which typically can be severed only by the mutual consent of the parties. If one owner dies, the share passes automatically to the other owner. 4. Tenancy in common: With this agreement, the property is owned jointly, but if one owner dies, his or her shares go to his or her heirs instead of to the other owner.
