After successfully completing this topic, you will be able to
• describe the essential elements of the mortgage instrument and the note, and
• describe the various features of a mortgage including down payment, loan-to-value ratio, equity, interest, loan servicing, escrow account, PITI, discount points and loan origination fee.
A mortgage is a legal document wherein the borrower pledges his or her ownership in property as security for the funds borrowed. In addition to the promise to repay the debt, the borrower must promise to pay all taxes on the property, to maintain property hazard insurance, to keep the property in good repair, and to not remove parts of the property. The borrower also promises that he or she owns the property, and that there are no encumbrances on the property except for those in the public records.
The most common mortgage used in residential transactions in Florida is the Fannie Mae/Freddie Mac Uniform Instrument. The form has uniform covenants for national use with some variations to comply with Florida law.
The borrower agrees to pay principal, interest, escrow items such as taxes, and insurance, and late payment charges. If any check is returned unpaid to the lender, the lender may require that the borrower make subsequent payments in the form of cash, money order, certified check, cashier’s check, or by electronic funds transfer.
If a borrower becomes delinquent on payments, the lender will apply future payments on the loan to the delinquent payment and the late charge.
The lender requires the borrower to pay all taxes and assessments which might attain priority over the mortgage. The lender also has the right to require an escrow fund, requiring the borrower to pay 1/12 of the annual charges for these items.
The borrower promises to keep the improvements insured against loss by fire, windstorm and other hazards including hurricanes, sinkholes, and floods. The lender determines the required amount of the coverage, and has the right to reject the borrower’s choice of insurance company. If the borrower fails to keep the property insured, the lender may purchase coverage (at significantly higher cost), and charge the borrower.
The borrower must promise to live in the property within 60 days and for at least one year unless the lender otherwise agrees in writing, or unless circumstances exist beyond the borrower’s control.
The borrower promises to keep the property in good repair to prevent deterioration. The borrower agrees not to damage or destroy the property. If insurance proceeds are paid because of damage to the property, the borrower promises to make repairs. The borrower remains responsible for paying the loan even if the insurance proceeds are not sufficient to make all required repairs.
The borrower agrees that the lender may inspect the property from time to time after reasonable notice to the borrower.
The borrower promises not to move the house or any improvements off the lot. For example, if a house has a detached garage (which is part of the real property), the borrower cannot have the garage torn down and removed from the property without the lender’s approval.
A prepayment clauseallows the borrower to pay the debt ahead of schedule. If a mortgage does not prohibit prepayments, Florida law does not permit the lender to charge a penalty. Most residential mortgage loans allow the borrower to pay the loan balance early.
If a mortgage requires a borrower to pay a fee to pay off the loan, the mortgage will include a penalty clause. In many cases, second mortgages have a higher interest rate than a first mortgage. Because of the high interest rate, lenders want the loan to stay in force for the full period, and will often insert a prepayment penalty clause into the mortgage.
The acceleration clauseallows the lender to require the borrower to pay off the entire balance of the loan immediately. This might occur if the borrower breaches any of the covenants in the mortgage, such as making monthly payments, or fails to correct the breach within a certain period (usually 30 days). If the borrower does not remedy the breach, the lender may foreclose and ask the court to have the property sold to pay the debt. If the lender failed to put an acceleration clause in the mortgage, the lender would have to sue for each monthly payment after it was in arrears.
The right to reinstate included in the Fannie Mae / Freddie Mac mortgage instruments, gives the borrower a right to stop foreclosure proceedings if, at least five days before foreclosure sale, he or she pays the lender all back payments, attorney’s fees and expenses.
The due on sale clause allows a lender to require immediate payment of the loan if all or any part of the property is sold or transferred without the lender’s prior written consent. The lender must give the notice of acceleration which gives the borrower at least 30 days to pay. If the borrower fails to pay these sums within 30 days, the lender may file suit to foreclose.
A defeasance clause requires the lender to give the borrower a release from the mortgage debt when the last payment is made. The borrower should record the release in the public records and must pay recording costs.
When an income property is financed with a mortgage, the lender usually requires that a receivership clause be included in the mortgage. A receivership clause gives the lender the right to get a court order appointing a receiver to collect rents, pay bills, and send the excess to the lender in order to pay the loan balance.