You know you want to buy a home, and that getting a mortgage is likely a necessity. But you probably haven’t spent a lot of time thinking about the documents and contracts you’ll have to sign to get it.
Sure, you know you’ll need to fill out a whole host of forms, and sacrifice a portion of your income for the next 30 or so years to pay off your new home. But how exactly does a mortgage become legal? And what gives your lender the authority to foreclose on your home if you stop paying?
Enter your mortgage agreement, more commonly known as your mortgage documents. Your mortgage documents will include a couple of key contracts you’ll sign with your lender at closing that set the terms for your home loan.
By now, you’re probably feeling a bit overwhelmed picturing yourself sifting through hundreds of pages of legalese on closing day. But let’s take a deep breath and walk through this thing step by step.
We enlisted Jessica Sanchez, Director of Underwriting & Loan Management at HomeLight Home Loans, to talk us through the basics on mortgage documents. Here’s what you need to know.
What’s a mortgage agreement (also known as your mortgage documents)?
When you get a mortgage, there are two major contracts that make up the bulk of your mortgage documents: the mortgage note (the terms of your repayment) and the security instrument (the terms of the property’s ownership, usually called the Deed of Trust or the Mortgage).
You need to sign and follow both, or your home could be at risk of foreclosure.
The mortgage note
If you’re buying a home and using financing, a mortgage note comes along with the deal.
“The mortgage note is going to spell out all the details of how you as the buyer are agreeing to repay that mortgage,” Sanchez explains.
“It’s a promissory note, so as a buyer, when you sign that mortgage note, you’re agreeing to the repayment terms of that loan.”
What’s included in a mortgage note?
Your mortgage note will include some key information from your lender: namely, the details of your loan and how you’ll repay it. Here are some of the major elements you can expect to see in the agreement.
- Loan amount
- Down payment amount
- Your interest rate
- Type of interest rate you have, whether fixed or adjustable
- If you’re using an adjustable rate, the terms under which your rate will adjust
- Duration of the loan
- Payment amounts and due dates
- Information about where to make your payments, and what penalties you could face (like late fees and foreclosures) if you don’t meet the terms of the note
A mortgage note isn’t particularly long. Usually it’s just a few pages, and it’s pretty straightforward to read through. Contrast that with the security instrument, which is a lot lengthier and stuffed to the brim with legalese.
What are the different types of mortgage notes?
Mortgage notes are pretty standardized forms, which is to say most lenders use the same forms with the same required information.
“The reason why these forms are standardized is that these loans are generally being sold to the same end investor,” Sanchez explains.
“The loans are mostly being sold to Fannie Mae and Freddie Mac. These forms have basically been approved by Fannie and Freddie to be used by lenders across the country.”
And even when the loan isn’t sold to Fannie or Freddie, many lenders utilize the standardized format approved by these entities to keep these loan documents uniform and transferable.
That’s not to say every mortgage note is exactly the same. The details of your loan are unique, meaning your loan amount, interest rate, down payment amount, and monthly payments won’t be the same as the next buyer’s.
Another way notes can differ? Adjustable-rate and fixed-rate mortgages have slightly different — though still standardized — agreements.
“If you get an adjustable-rate, the note will differ because you’ll have different language on how your interest rate will adjust, and how often it will adjust,” Sanchez shares.
For government-backed loans like FHA, VA, or USDA, you’ll still get a standardized mortgage note with either fixed-rate or adjustable-rate terms, but the form may be slightly different from what you’d see with a conventional loan.
The security instrument
What if you don’t hold up your end of the contract? That’s where the security instrument comes in.
The security instrument is called the Deed of Trust, or in some states, it’s just called the Mortgage (confusing, we know!). Security Instrument is the contract you sign that sets the terms of the property’s ownership. It’s typically publicly recorded with the county, and it defines the terms under which the lender can claim the home from you. Those terms could include anything from failure to maintain home insurance, to non-payment of taxes, and of course, not paying back the loan itself.
“If you don’t follow the terms of the note, meaning you don’t pay your mortgage on time, or you don’t make the minimum monthly required payment, the lender can start foreclosure proceedings on you and take your home from you, according to the terms of the security instrument,” says Sanchez.
Of course, a lender probably isn’t going to foreclose on your home because you’re late on one payment, but the longer you’re in default (i.e., not paying your mortgage), the higher the risk of losing your home.
Further, since your lender has a major financial stake in the property, a Mortgage or Deed of Trust contract will include terms about how you can use the property.
If you own a property outright (let’s say you paid the full cost in cash, or you’ve paid off your mortgage), you can do what you want with it — within the laws of your municipality, that is. But when you have a mortgage, you need to be careful to stay within your agreement with the lender and to only use the property as outlined in your contract.
For example, you can’t just tear your house down without notice, as that would severely impact your lender’s investment in the property.
The security instrument painstakingly lays out what you can and can’t do with your home, as well as who gets the money if the home is sold or if there’s an insurance claim paid on it.
If you’re uncertain about any of the terms in your security instrument, talk to your agent or a licensed real estate attorney, who can walk you through anything you don’t understand. It’s crucial that you know what obligations you have to your lender, and the potential consequences of breaching your agreement.
When do you sign a mortgage agreement?
“You sign your mortgage documents when you’re signing your closing documents,” Sanchez says. This is what’s known as a closing appointment, and it happens at the very end of the homebuying process. “Your mortgage documents will be part of that big package you’ll sign to purchase your home.”
Be prepared to sign a lot of forms on closing day. But soon it will all be worth it when you’ve got those new keys in hand, and you can step through that threshold for the first time — finally home.
Header Image Source: (Aubrey Odom / Unsplash)