Mortgages 101: What Every Homebuyer Needs to Know

For most people, buying a home is a dream come true. From pondering floorplans to picking paint colors, shopping for your first home can be a fun and fulfilling experience. Unfortunately, however, buying a home is much more complicated than many people expect. This is particularly true in light of recent changes to mortgage application and disclosure requirements.

When you’re purchasing your first home, it’s easy to think that you’re saving time and money by not working with a local real estate attorney. However, a good real estate attorney can help guide you through the increasingly complex process of securing a mortgage that works for you. This will not only help you save money over the long-term, it will also help you avoid the costly and traumatic experience of going through a foreclosure.

Mortgage Law Basics

It’s easy to believe that the hardest part of buying your first home is finding a house in your price range that suits all of your needs. To the surprise of many first-time homebuyers, they have quite a long road ahead of them even after they’ve found their perfect starter home. Even after you’ve found your perfect place and negotiated the best possible terms for the sale, you will more likely than not have to apply for and secure a mortgage.

Mortgages are loans that are secured by the property that the borrower is taking out the debt to buy. The vast majority of American homeowners hold mortgages. In fact, without access to mortgage lending, homeownership would be impossible for most people. Altogether, Americans hold over $14.5 trillion in mortgage debt, and thanks to rising interest rates this figure is steadily rising.  

In Illinois, mortgages are regulated by the state Mortgage Act. All mortgage arrangements must be made according to the terms and the requirements of the Mortgage Act in order to be lawful. Among other things, this law includes a suite of recording and disclosure requirements, rules regarding the time and amount of fee payments, and requirements for critical mortgage instruments to be in writing. It is critical to be prepared before applying for a mortgage, as these legal instruments are very specialized and highly specific.

From a legal perspective, a mortgage has two parts.  First, it includes a “promissory note,” which is a promise to pay the amount borrowed.  Second, it includes a document that establishes your home as security on the loan. These security instruments may take the form of deeds of trust, security deeds, or mortgage deeds depending upon the circumstances of your arrangement. This two-part structure gives mortgage lenders substantial rights over your property, including the right to foreclose upon it if you fail to pay on your note.

Foreclosure: A Very Real Risk

Mortgage contracts hold a borrower legally accountable for the sum of money owed on the loan. Failing to pay your note when it comes due or violating other important terms of your mortgage agreement can land you in default, which can lead to foreclosure.

When purchasing a home, the risk of losing it is often the furthest thing from your mind. However, foreclosures happen every day. In fact, the statistics on foreclosures are harrowing. Annually, one out of every 200 homes in America will be foreclosed upon. One child in every American classroom is at risk of homelessness because his or her parents cannot pay their mortgage, and this is a risk that can happen to just about any of us. Over half of working Americans live paycheck to paycheck, so it wouldn’t take much disruption to end up in dire financial straits. In fact, job loss is the reason for about one-third of all foreclosures in America each year. Someone in the family experiencing a health crisis – another terrifying life event – is responsible for 25 percent of foreclosures each year.

Mortgage default is most commonly triggered by late or missing payments, but other circumstances can lead a homeowner to foreclosure as well. For example, failing to maintain insurance or abide by homeowners’ association rules included in your deed can trigger a default. The terms and conditions of default are specific to each mortgage agreement, so it’s critical that every home buyer starts the mortgage process with a clear picture of what the end result will be.

Foreclosure is a very real risk that millions of Americans have to deal with during their lifetimes. From a broader perspective, foreclosures are damaging to the entire real estate finance market. Mortgage lenders tend to experience significant losses when they are forced into foreclosure proceedings, and often they are willing to work with you if your find yourself in default. This is particularly true in the Chicago area, where local real estate attorneys help clients manage mortgage default and foreclosure every day.

Illinois Foreclosure Law

Foreclosure is an expensive and stressful process that places your home, personal property, and other assets in jeopardy. In Illinois, the foreclosure process takes nearly a year. It is a judicial process that triggers notice and participation requirements, including the opportunity to defend your rights in court.

If a mortgage lender in Illinois wants to start foreclosure proceedings, it must first file notice to the borrower and the courts. If the buyer responds to the notice, then the foreclosure is reviewed by a judge. If the foreclosure is appropriate under the circumstances, the judge will issue a notice of sale. Foreclosed property can be forfeited to the lender or sold at a public auction based on the terms the parties agree to. Once the foreclosed property is sold or conveyed to the lender, the homeowner has terminated all rights to the property and must vacate possession.

Mortgages may be very common, but they are also complex legal arrangements. Having a thorough understanding of your rights under a mortgage agreement puts you in a more secure position for the future and minimizes your risk of default. However, the majority of U.S. homeowners polled in a recent national Freddie Mac reported that they survey wished they had understood the terms of their mortgage arrangement better before signing the documents. Rather than go at it alone, contact the skilled real estate attorneys at M&A Law Firm before starting the process of securing a mortgage.