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Purchases of houses are typically financed over time through a mortgage. Banks and other lending institutions provide mortgages. A seller can also provide financing to a buyer based on an agreement for sale. It is important to understand the obligations you take on when you finance the purchase of a house. There can be consequences if you do not live up to the terms of the financing.
When reading a mortgage document, the person borrowing the money is called the mortgagor. The institution lending the money is the mortgagee.
The most common way to finance a house purchase is through a mortgage. A mortgage is a type of loan where land is used as security for the loan. Mortgages are usually provided by a lending institution such as a:
To make sure that the lending institution will get back the money it lends, it registers the mortgage on the title of the property. This does not mean that the bank owns the house. A mortgage, when registered, serves as notice to everyone dealing with the property that there is money owing under the mortgage. If the money is not paid, the property can be taken and sold by the lender. The property acts as a kind of collateral or guarantee, helping ensure that the lender will get back the money loaned.
The most common way to finance a house purchase is through a mortgage. A mortgage is a type of loan where land is used as security for the loan. Mortgages are usually provided by a lending institution such as a:
To make sure that the lending institution will get back the money it lends, it registers the mortgage on the title of the property. This does not mean that the bank owns the house. A mortgage, when registered, serves as notice to everyone dealing with the property that there is money owing under the mortgage. If the money is not paid, the property can be taken and sold by the lender. The property acts as a kind of collateral or guarantee, helping ensure that the lender will get back the money loaned.
The term of a mortgage is the length of time a mortgage runs before it is due and must be renewed. Interest rates vary depending on the term the borrower chooses. The term of a mortgage can be open or closed. An open mortgage allows you to make additional mortgage payments or to pay out the balance of the mortgage without penalty. In a closed mortgage, only the payments specified in the mortgage agreement can be made. A closed mortgage may be modified to permit early payout or additional payments with an interest penalty.
Mortgages will also have an amortization period. This is the total length of time it would take to pay back all the money borrowed plus interest. In most cases, it will be a much longer time than the term. If you require mortgage insurance, the amortization period cannot be more than 25 years. The interest rate and the amortization period together determine the amount of the monthly payments.
For example, Robin needs a $150,000 mortgage to purchase a house. Robin chooses to amortize the mortgage over fifteen years. Interest rates have been dropping, so Robin negotiates an initial term of one year. Robin does not expect to be able to make any additional payments during this one-year term, so she decides to take a closed mortgage. Robin knows that each time the mortgage term is renegotiated, she will be able to choose an open or closed mortgage at current interest rates.
Buyers must usually provide a down payment of at least 20% of the property’s purchase price to qualify for a mortgage. However, if a buyer is able to obtain mortgage default insurance, they may be able to get a mortgage with a lower down payment.
The down payment can come from several sources including savings and gifts from relatives. If you borrow money to pay a down payment, lenders will consider this debt in deciding whether to give you a mortgage. If they do give you a mortgage, the interest rate may be higher.
Where a down payment of 20% or more is required, banks must assume that the interest rate on the mortgage will go up over the next five years. The law requires banks to do this when they are determining whether someone qualifies for a mortgage. The current minimum qualifying rate is 2% over the mortgage contract rate or 5.25%, whichever is higher. This rate is set by the Office of the Superintendent of Financial Institutions.
Any mortgage where the borrower's down payment is less than 20% will need to be insured. Only a few institutions provide this insurance, including:
Lenders require this insurance because mortgages with a down payment of less than 20% are considered high risk. The insurance will pay the lender if the borrower stops making mortgage payments. The minimum down payment, even with mortgage insurance, is 5% for property valued at $500,000 or less and 10% for any remainder over that amount. The maximum purchase price must be below $1,000,000.
Some restrictions apply to qualifying for mortgage insurance. The mortgage must not result in the household having a debt-to-income ratio higher than the maximum set by the government. Before approving the mortgage, the lender will arrange to have an appraisal of the property done. The borrower has to pay the appraisal fee even if the mortgage is not approved. Sometimes lenders charge a non-refundable fee to process an application for a mortgage with insurance.
The borrower pays a fee for mortgage insurance. Generally, the fee is a percentage of the loan amount. The percentage varies depending on the size of the down payment and other risk factors. The fee is usually added to the mortgage payments based on the amortization period.
Lenders require that buyers insure the property against loss in order to get a mortgage. The lender has an interest in your property while the mortgage is outstanding. Home insurance protects their interest in the property as well as yours. The insurance must be effective on the possession date and stay effective while you have the mortgage. Premiums for home insurance will vary.
A buyer may be eligible to purchase life insurance on a mortgage. The insurance will pay the outstanding balance of the mortgage in the event of the property owner's death. If there are joint owners, insurance may be bought for one or both owners.
Disability insurance may also be available on a mortgage. This insurance will make your mortgage payments if you cannot work due to injury or illness. Premiums for these types of insurance will vary.
It is sometimes possible for buyers to assume an existing mortgage. This depends on the seller's mortgage contract with the lender. When a mortgage is assumed, the buyer agrees to take over the seller's obligation to repay the lender. Assuming an existing mortgage can be beneficial for a buyer. For example, the interest rate for the buyer may be lower than what they could negotiate under a new mortgage.
A second or third mortgage is basically the same as a first mortgage. The amount of money available to the borrower for a second mortgage depends on the amount of equity in the property. The equity is the difference between the value of the property and the amount still owing on the first mortgage. Lenders charge a higher rate of interest on second and third mortgages. You may want a second mortgage to pay for major renovations to the property or the down payment on another property. A second mortgage gives the lender a claim to any money left over from a sale after the first mortgage has been paid.
Taking on a mortgage is often the biggest loan a person will ever have. It is important to know what can happen when the terms of the mortgage are not being met.
The lender has a right to get back all money lent along with interest. As discussed earlier, this is why a mortgage is registered against the title to the property. The registered interest gives the lender certain rights if the borrower defaults. A borrower defaults on the mortgage if they break certain terms in the loan agreement. Examples are when payments are not made or are late, the property is uninsured, or the taxes are not paid.
If a borrower defaults on the mortgage, the lender has a right to foreclose. Foreclosure is an action taken by a lender to collect all the money owed on the mortgage. This often includes obtaining title to the mortgaged property.
It may seem strange that the lender can get all the money owing simply because the borrower missed one payment. However, all mortgage documents contain an acceleration clause. This clause means that if the borrower defaults, the full amount owing to the lender is due immediately.
Foreclosure must be done through the courts. It can take several months to complete. A foreclosure is completed when the court issues a final order for foreclosure. A final order for foreclosure allows the lender to become the registered owner of the property.
Special rules apply to a foreclosure of farmland. People facing any type of foreclosure should seek legal advice. For more information on the foreclosure process, see Mortgage Foreclosure.
After defaulting, borrowers have the opportunity to pay the lender all arrears. This includes principal, interest and tax amounts that are unpaid, plus any costs to the lender as a result of late or missed payments. This must happen before there is a final order for foreclosure. If the borrowers take advantage of this opportunity, it stops any foreclosure proceedings. The borrower is then in the same position as if no default had occurred. This is called redemption or redeeming the mortgage.
When a foreclosure is complete, the lender becomes the owner of the property. If the lender were to sell the property in this case, they would receive the entire amount of the sale. This could even include amounts that exceed what is required to pay off the debt and cover costs. This surplus represents the borrower's equity in the property. To prevent this, the court can then grant an order for judicial sale. Borrowers who do not want to lose the equity in their home may want to object to a foreclosure. They can then request that the court order a judicial sale.
An objection and request for judicial sale must be made before a final order for foreclosure has been granted. A judicial sale is a court-ordered sale of the property. These sales are sometimes called sheriff's sales because the sheriff often conducts them. The proceeds from a judicial sale will be applied to pay off the debt, property taxes, legal costs, and the costs of the sale. Any money left over is paid to other creditors and then to the borrower.
When the mortgage has been paid in full, the borrower has the right to have the mortgage discharged. Discharge of the mortgage means that the registration of the mortgage is removed from the property’s title. The lender has no further claim against the property. You may want to consult a lawyer in this case to make sure that all matters about the discharge of the mortgage are completed.
An agreement for sale requires careful drafting. This ensures that the legal interests of both parties are adequately protected.
It is possible to buy property and have the seller finance the purchase. This is called an agreement for sale. To do this, the parties will usually have a lawyer draw up the agreement. The seller keeps title to the property until the buyer has paid the seller the full purchase price. The agreement sets out terms such as the purchase price, possession of the property, down payment, interest, and payments. Once signed, the buyer can register the agreement as an interest against the property.
If the buyer breaches any term of the agreement for sale, for example, by failing to make a payment, the seller can cancel the agreement for sale. However, the cancellation of an agreement must be done through the courts. This can take several months before the matter can be resolved. The court can refuse to order cancellation where it appears that the buyer will likely be able to pay the full purchase price. If the court orders cancellation of the agreement, the buyer could lose the money already paid to the seller. Once an agreement is cancelled, the buyer has no claim to the property.
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