In order to understand our rights and obligations under a mortgage loan, we must first understand the legal documents involved in the financing of home loans. Few people read these documents before signing them. Even if they read them, few understand the legal consequences of each and every term. There are two documents that bind the borrower and lender when financing a home loan:
1. The Promissory Note is a promise by the borrower to repay the loan with specific terms outlined. That includes the loan amount, interest rate, duration of loan and maturity date. Some loans have riders. These are addendums that specify some changes to the original terms. For example, with adjustable loans, the initial interest rate may change after a certain period of time and at intervals thereafter. These loans were popular a couple of years ago and a lot of homeowners got into loans with initial low interest rates that are now adjusting and making the monthly payment difficult to keep up with.
2. The Deed of Trust gives the lender the right to foreclose on your home if you default on the terms of the promissory note. While most of us know that if we do not pay the mortgage payment, the lender will foreclose, few realize that default on the note can occur for other reasons besides non-payment of mortgage payments. For example, non-payment of real estate taxes, non-payment of homeowners insurance and transfer of title to another person, will trigger the lender’s right to foreclose in most instances. When a borrower faces foreclosure, the trustee appointed by the lender, will start the foreclosure proceeding.
Borrowers should be familiar with the players involved with a mortgage loan. The borrower, who signed the promissory note and the deed of trust, has the responsibility to perform as promised or risk losing the house. The lender is the individual or institution that actually lent the money to the borrower. These lenders often sell the loans to other lenders and/or transfer the rights to service the loans to mortgage servicers. These servicers collect payments from borrowers and then disburse the monies to the lender, government and insurers. When a borrower defaults on a loan, the loan is often transferred to the loss mitigation department or sold to a different servicer. This complicates matters for the borrower because more people are involved, and it is difficult to ascertain who is doing what for whom. One thing to keep in mind-mortgage servicing companies retain a portion of the money they collect. In cases of default, they can charge all sorts of fees, if permitted by the original promissory note.
For the borrower in default, a Chapter 13 bankruptcy may be an option to stop the foreclosure. During the bankruptcy proceeding, the creditors, including the mortgage companies, must file a proof of claim in order to get paid. In those claims, charges can creep up that are not permitted under the terms of the promissory note. Careful examination of all relevant documents, as well statues that deal with these issues, is crucial to avoid paying unnecessary fees.
For more information on these or other related issues regarding Real Estate and Bankruptcy, please contact Susana B. Tolchard, Esq. at 661-287-9986.