If you have a mortgage or are considering getting one soon, you may be familiar with all the different types of mortgages. You might know the difference between a fixed-rate mortgage and an adjustable-rate mortgage, as well as how to make a decision between different lenders. You may even know how to negotiate for the best rates on closing costs.
Applying for a Mortgage
A mortgage is the largest loan most people will take out in their lives, so there are a lot of requirements in the process of applying for a mortgage. The lender will scrutinize you very carefully. Ultimately, they want to ensure that you can repay the loan, and here’s how they assess that:
Credit Check: Your credit evaluation serves as your brand for how you’ve repaid lenders in the past. It’s one of the most important factors lenders consider.
Your Income: Lenders won’t just take your word for how much you earn. They will want to see official documents like pay stubs and tax returns to verify that.
Your Debts: Any debts you have take money away from the lender and determine your ability to repay. That’s why the lender wants to know the details of every debt you have, which they will compare to your credit report.
Your Savings: Lenders want to ensure that any savings for your down payment are solely yours and not borrowed. They will check your bank statements for anything that could be a financial gift, and if you have one, they may ask for a letter from the person who provided it to you.
But it’s not just lenders who assess you. They will also carefully consider the property you wish to purchase. That’s because your mortgage is actually a product they create and sell to other companies. This way, they get an immediate return on the money they’ve invested in your home, and they can go out and make another loan to someone else before your loan is paid off.
For instance, you might work with a small local bank to get a mortgage, but once it closes, they are likely to sell it to one of the government-sponsored entities like Fannie Mae or Freddie Mac. In fact, in 2021, over 60% of all mortgages ended up being sold to one of these entities.
Depending on what type of loan you have and to whom they plan to sell your mortgage, the lender may need to ensure that your home meets certain requirements. For example, if you’re getting a VA loan, the lender may hire a private appraiser to come out and make sure it meets the Minimum Property Requirements (MPRs) from the VA. There may be similar requirements for other types of loans, such as USDA loans.
What Happens When You Get a Mortgage?
Once the dust settles from all the paperwork involved in buying a home, you are considered the owner of the home. You can find the title of the home – in your name – at the local county recorder’s office.
If you look at the title, you will notice that your lender is listed as the first lien on the mortgage. Don’t worry; this doesn’t mean the lender owns your home too. You own the home, and the lender owns the debt that you used to purchase it.
Having a mortgage on your home simply means that someone else has a stake in the value of your home. If you sell your home while having a mortgage, the lender is first in line to be paid from the proceeds of your home sale. It’s a way to ensure they will be paid back one way or another, especially if you violate the terms of your agreements (like defaulting on your mortgage; the lender can force you into foreclosure proceedings and sell the home to recoup their funds).
Mortgages
Real Estate and Other Property Issues
A mortgage is not the only type of lien that can be attached to your home title. When adding another type of lien, such as if you take out a second mortgage, it may be placed in a “junior” or “second” position. This means it will be paid after the first mortgage like the first mortgage. It is essentially a way for other creditors who may have a stake in your home to arrange among themselves who gets paid and in what order if your home is sold before the debt is settled.
Note: During foreclosure proceedings (and in some cases afterward), the borrower, or mortgagor, always has the opportunity to repay the entire debt and reclaim ownership. This is referred to as the “right of redemption,” which has been a legal feature of mortgages for hundreds of years.
Liens can be a serious problem because they can make it difficult or even impossible to sell your home. Lenders are unlikely to provide a mortgage to someone wanting to buy your home if it is attached to a lien, for example.
Tax Lien
If you do not pay your taxes, such as federal taxes or property taxes, a tax lien may be placed on your home. In this case, the government is considered your creditor.
This can also happen in other scenarios, such as if you obtain a PACE loan to pay for costs like solar panels. PACE loans are repaid indirectly through your property taxes, so they are a type of tax lien.
Judgment Lien
If you fail to pay other bills, such as healthcare bills or utility bills or your credit cards, your lender can sue you in court. If this occurs, the judge may grant you a judgment lien, meaning they now have a stake in your home if you sell it.
UCC Lien
If you finance expensive equipment to install in your home, such as solar panels, your lender may place a Uniform Commercial Code (UCC) lien on that equipment. In this way, they secure their rights to a specific part of your home, separate from the rest.
Mortgage Repayment
As you pay your mortgage payments each month, you will gradually pay down your loan balance through a process called amortization. Once your balance drops to zero and you have your mortgage paid off, you should check with your lender and/or your county recording office to ensure the lender’s lien is removed from your home. This will indicate that you own your home free and clear of any other claims.
Frequently Asked Questions (FAQs)
How do reverse mortgages work?
If you are over the age of 62 and are a homeowner, a reverse mortgage is one borrowing option. The lender gives you cash now in exchange for a share in your home. The loan balance grows over time and does not become due until you pass away or move out of the home. At that point, your home can be sold to repay the reverse mortgage.
How do second mortgages work?
Second mortgages are things like Home Equity Lines of Credit (HELOCs) and home equity loans. Like a regular mortgage, they are secured by a lien on the home, meaning the lender has a stake in the home. If you do not repay the second mortgage, your lenders can foreclose on your home and sell it to pay off their portion of the loan.
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Sources
Used
The Balance only sources high-quality information, including peer-reviewed studies, to support the facts presented in our articles. Read our editing process to learn more about how we verify facts and keep our content accurate, reliable, and trustworthy.
Consumer Financial Protection Bureau. “Creating a Loan Application Package.”
Federal Housing Finance Agency. “About Fannie Mae and Freddie Mac.”
Urban Institute. “Housing Finance at a Glance: August 2022.” Page 8.
Consumer Financial Protection Bureau. “What is a Second Mortgage or ‘Subordinate’ Mortgage?”
David Wadelof. “Why the Right of Redemption?” “Land and Credit: Mortgages in Rural Europe in the Medieval and Modern Eras.” Palgrave Macmillan, 2018.
Internal Revenue Service. “Understanding Federal Tax Liens.”
Department of Energy. “Property-Assessed Clean Energy Programs.”
Salal Credit Union. “Understanding UCC Liens.”
Consumer Financial Protection Bureau. “Reverse Mortgages: A Discussion Guide.”
Source: https://www.thebalancemoney.com/how-mortgage-works-1797817
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