Tag Archives: home

Promissory Note v. Mortgage

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Zing! quoted me in What’s the Difference Between a Promissory Note and a Mortgage? It opens,

Buying a home can sometimes feel like learning a new language. Preapprovals, appraisals and the fact that “concessions” don’t involve hot dogs at a baseball game can be more than a little bewildering for first-time homebuyers. If you’re in the market for a mortgage, the more you know, the more confident you’ll be with each transaction during the life of the loan. If you find yourself scratching your head over mortgage lingo, we’d like to make your contract a little clearer by explaining two items that are often confused for one another: a promissory note and a mortgage.

What’s a Promissory Note?

Essentially, a promissory note is an agreement that promises that the money borrowed from a lender will be paid back by the borrower. “It also includes how the loan is to be repaid, such as the monthly amount and the length of time for repayment,” explains David Bakke, a finance expert at MoneyCrashers.com.

Although the home loan process involves both a mortgage and a promissory note, a promissory note can be used singularly in a lending relationship between two individuals. In this case, a promissory note is simply a promise to pay back the amount of money that is borrowed in a set amount of time.

“Another way to think of it is that the promissory note is the IOU for the home loan,” says David Reiss, who teaches about residential real estate as a law professor at Brooklyn Law School in New York.

What Is a Mortgage?

The second part of the home loan involves a mortgage, also referred to as a deed of trust. While a promissory note provides the financial details of the loan’s repayment, such as the interest rate and method of payment, a mortgage specifies the procedure that will be followed if the borrower doesn’t repay the loan.

“The actual home loan (or mortgage) provides information as far as the lender being able to demand complete repayment if the loan goes into default, or that the property can be sold if the buyer fails to repay,” says Bakke.

In the case of a home loan, the promissory note is a private contract between the client and the lender, while the mortgage is filed in the regional government records office. “Once you have paid off your loan your lender will record a document that releases you from the liability of the deed of trust and the promissory note,” says Ross Kilburn, CEO of Ark Law Group, PLLC.

It’s a Package Deal

In the home loan process, a mortgage and a promissory note are not a question of one or the other, but rather, both play distinct roles in the relationship between the lender and borrower. “A home loan refers to a transaction where a borrower borrows money from the lender and in turn signs a promissory note that reflects the indebtedness as well as a mortgage that gives a security interest in the home in case the debt is not paid back,” explains Reiss.

Finding The Right Homeowners Insurance Policy

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Zing! quoted me in Find the Right Homeowners Insurance with These Tips. It opens,

For many of us, a tremendous amount of research and work goes into buying a home. When my husband and I bought our first home two years ago, I was surprised to learn that everything I thought I knew, I didn’t really know – including how to choose homeowners insurance.

I hadn’t thought about homeowners insurance until my mortgage company called and told me they needed my policy information. Panic poured over me. What policy? What are my options? How much coverage do I need? Where do I start? I was overwhelmed with questions and at a loss for answers. I had a whole lot of research to do and with a mortgage already underway, not a lot of time to do it.

Homeowners insurance policies can be confusing and complicated, especially if you’re not familiar. While these tips may be too late for me to use, I hope they can help you when considering your home insurance options.

Talk with Your Local Insurance Agent

If there’s one thing I recommend when it comes to homeowners insurance, it would be to talk to someone who knows your area like the back of their hand.

“Local agents are familiar with the city and surrounding areas – this means they should have a general knowledge of the market values and other information that may play a role in determining your coverage needs,” says Sarah Haun of Advanced Insurance Designs, Inc., who has been selling and servicing homeowners’ policies for more than 15 years.

Insurance agents can also help in determining how much coverage you need and if it makes sense to bundle your various insurance policies together. Bundling car and home insurance saves my husband and me a couple hundred dollars a year, but that’s not the case for everyone, so be sure to ask.

Haun also suggests working with an independent agent. “Independent agents have the ability to quote several different carriers, to find you the best coverage at the best value,” says Haun. “This may be a good option if you want to get several quotes without making several phone calls or filling out several online quote forms.”

My agent is an independent agent and I highly recommend using one. If ever I have a question about my policy, I call him directly. It also benefits me in the fact that he’s always looking for ways to save us money each year, and if he sees an opportunity, he shares it with us.

Shop for Home Insurance like You Would a New Car

“It pays to shop around,” says David Reiss, Professor of Law at Brooklyn Law School. “You want to shop around to get the best price, but you also want to get a sense of how each company you are considering treats claims when they are made,” he says. “Do they have a reputation for being difficult to work with and a reputation for not paying legitimate claims? You want to take that into account when you are making your decision.”

If you decide to go it alone, Haun suggests to get three estimates and compare.

What’s Covered and What’s Not

You wouldn’t get halfway through a good book and stop reading it, so don’t just give your policy a once over. Experts recommend you read through your policy in full detail to know what is and what is not covered.

According to Haun, insurance coverage may include damage from

  • Wind
  • Hail
  • Fire
  • Smoke
  • Lightning
  • Weight of snow/ice
  • Bursting of pipes
  • Theft

“Damage from normal wear and tear would not be covered,” adds Reiss. “If an old boiler gives out, that’s on you.”

Preparing for Surprise Closing Costs

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photo by Chris Potter

The Wall Street Journal quoted me in Buying a Home? Prepare for Surprise Closing Costs. It opens,

Note to house hunters on a budget: A home’s sale price isn’t really the sale price—there are lots of closing costs and expenses that jack up the final number.

According to online real-estate listings site Zillow, buyers typically pay between 2% and 5% of the purchase price in closing costs. So if a home costs $300,000, that buyer can expect to pay between $6,000 and $15,000. Since the financial crisis, there’s more transparency on the part of lenders when disclosing the costs associated with a mortgage, so buyers know in advance how much they’ll need for the closing. But experts say that might not be enough.

Lender fees are only one part of the total cost of homeownership. Buyers must also pay appraisers, home inspectors and settlement agents, as well as the cost of title insurance, homeowners insurance and property taxes. And the fees don’t stop at the closing. Utilities, regular home maintenance and unexpected repairs add up as well—and can derail even the most experienced buyer.

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Here are a few considerations to help you avoid surprises at the closing table.

Stash your cash. There is no real rule of thumb as to how much money buyers should put aside in addition to the balance of the purchase price and closing costs. But the more, the better. “You definitely want an emergency fund,” says David Reiss, a Brooklyn Law School professor who specializes in real estate. “Appliances have a habit of breaking right after you buy a house.”

Close on the last day of the month, or just before. One of the fees due at closing is prepaid interest, the daily interest charge accruing between the closing and the day on which your first mortgage payment is due. Closing on the last day of the month reduces this upfront cost.

Get an estoppel letter from the association. Your real-estate agent or attorney may obtain this letter, which lists the maintenance fee, when it’s due, any required escrows or membership fees and whether a special assessment has been levied. Review this letter carefully, and compare it with the purchase contract to make sure all fees are apportioned accurately between buyer and seller.

Buyer’s or Seller’s Market?

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GoodCall.com quoted me in Is This a Buyer’s, Seller’s, or Balanced Housing Market? It reads, in part,

When buying or selling a home, everyone wants the most advantageous situation. Both buyers and sellers want “the best price,” but this definition varies: Home buyers want to purchase the desired property at a good deal, while sellers want to receive their asking price. But how does the housing market determine who wins this tug of war? Is this a buyer’s housing market, a seller’s market, or a balanced market?

What are the signs of each housing market, and how does each affect buyers and sellers?

WHAT TYPE OF MARKET ARE WE CURRENTLY IN?

Eric D. Berman, director of communications at the Massachusetts Association of Realtors, tells GoodCall that the country is currently in a seller’s market. “We have near record-low inventory, which means the market benefits sellers,” Berman says.

Adam DeSanctis, economic issues media manager at the National Association of Realtors, agrees that most of the country is in a seller’s market. So what does this mean? “Given the imbalances in demand in relation to supply in most of the country, homes are selling quicker than a year ago and prices continue to rise,” DeSanctis explains.

While a balanced market would usually have a six-month supply, DeSanctis says the last time this happened was in June 2012. “Furthermore, total housing inventory has decreased year-over-year for 16 straight months.”

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FACTORS INDEPENDENT OF THE MARKET

Whether it’s a buyer’s, seller’s or balanced market, experts agree that some decisions should be made independently of the housing supply. Berman warns that consumers should not take on more debt than can afford – the monthly payment should always be an amount they’re comfortable paying. “On the other hand, sellers should understand there price is not the only factor when it comes to selling a home, and the highest offer may not always be the best offer,” Berman says.

David Reiss, professor of law and academic program director at the Center for Urban Business Entrepreneurship at the Brooklyn Law School in New York, agrees that buying or selling a home is a personal decision.

“Does a new home work for you and your family in terms of its size, its cost, and the length of time you expect to live in it?  Does selling make sense in terms of changes in your family, your work expectations, your retirement plans?” Reiss says these are the types of questions that will produce the best answers. “But if you try to ride a wave in the market, you may set yourself up for a lot of disappointment.”

Low Down Payment Mortgages, Going Forward

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TheStreet.com quoted me in Home Loan Down Payments Are in Decline: Will Uncle Sam Ride to the Rescue? It opens,

President-elect Donald Trump has enough problems on his hands as his administration takes shape, with the economy, health care, geopolitical strife and a divided country all on his plate.

 Chances are, dealing with a weakening real estate market, especially related to lower down payments, hasn’t entered his mind.
According to the November Down Payment Report, from Down Payment Resource, median down payments from first-time home buyers fell to just 4% of the home’s value, down from 6% in 2015. At the same time, home down payments for FHA-backed loans are also at 4%, signaling that homebuyers aren’t saving enough for home down payments, and thus face higher monthly mortgage payments.
There’s one school of thought that says homebuyers aren’t putting serious money down on a purchase, because they don’t have to.

“U.S. homebuyers are putting less down to purchase homes due to the wide availability of low- and no-down payment loans such as FHA loans, Fannie Mae’s HomeReady program, a resurgence of ‘piggy-back mortgages’ and other programs,” says Erin Sheckler, president of NexTitle, a full-service title and escrow company located in Belleview, Wash. “Meanwhile, USDA and VA loans also do not require any down payment whatsoever.”

Sheckler also notes that lending requirements have begun to ease nationwide, thus giving homebuyers more wiggle room with home down payments. “According to Ellie Mae’s Origination Insight Report, in August, home buyer down payments varied by loan program but, in nearly all cases, down-payments were near minimums,” says Sheckler.

Sheckler also doesn’t expect the low down payment trend to end anytime soon.

“How much money a person decides to put down on the purchase of a new home is a combination of risk and personal tolerance as well as the loan programs available to them,” she says. “As long as mortgage guidelines remain relaxed and with first-time homebuyers being an increasing segment of the market, we will likely see down-payments hover around the minimums into the near-term future.”

The risk with lower home down payments is real, however. “No one wants to find themselves house-poor,” Sheckler adds. “Being house-poor means that the majority of your wealth and monthly income is tied up in your residence. This can be a catastrophic situation if you find yourself suddenly faced with a loss of income or unexpected expenses.”

Homebuyers looking for more help from Uncle Sam, though, may come away disappointed in the next four years. “While Trump has been pretty silent on the housing market, (vice president-elect Mike) Pence and the Republican party platform have made it clear that they want to reduce the federal government’s footprint in the housing market,” says David Reiss, professor of law at Brooklyn Law School. “This is likely to mean fewer low down payment loan options being offered by Fannie Mae, Freddie Mac and the FHA.”

Housing Finance Reform, Going Forward

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President-Elect Trump

Two high-level officials in the Treasury Department recently posted Housing Finance Reform: Access and Affordability Going Forward. It highlighted principles that should guide housing finance reform going forward. It opened,

Access to affordable housing serves as a cornerstone of economic security for millions of Americans. The purchase of a home is the largest and most significant financial transaction in the lives of many households. Access to credit and affordable rental housing defines when young adults start their own households and gives growing families options in choosing the quality and location of their homes. Homeownership can be an opportunity to build wealth, placing a college education within reach and helping older Americans attain a secure retirement. Whether they are aware of it or not, some of the most momentous decisions American families make are shaped by how the housing finance system serves them.

Financial reform has sought to reorient financial institutions to their core mission of supporting the real economy. The great unfinished business of financial reform is refocusing the housing finance system toward better meeting the needs of American families. How policymakers address this challenge will be the critical test for any model for housing finance reform. The most fundamental question any future system must answer is this: Are we providing more American households with greater and more sustainable access to affordable homes to rent or own? It is through this lens that we will assess the performance of the current marketplace and evaluate a set of policy considerations for addressing access and affordability in a future system. (1-2)

These principles of access and affordability have guided federal housing finance policy for quite some time, particularly in Democratic administrations. They now appear to fallen by the wayside as Republicans control both the Executive and Legislative branches.

President-Elect Trump has not yet outlined his thinking on housing finance reform. And the Republican Party Platform is somewhat vague on the topic as well. But it does give some guidance as to where we are headed:

We must scale back the federal role in the housing market, promote responsibility on the part of borrowers and lenders, and avoid future taxpayer bailouts. Reforms should provide clear and prudent underwriting standards and guidelines on predatory lending and acceptable lending practices. Compliance with regulatory standards should constitute a legal safe harbor to guard against opportunistic litigation by trial lawyers.

We call for a comprehensive review of federal regulations, especially those dealing with the environment, that make it harder and more costly for Americans to rent, buy, or sell homes.

For nine years, Fannie Mae and Freddie Mac have been in conservatorship and the current Administration and Democrats have prevented any effort to reform them. Their corrupt business model lets shareholders and executives reap huge profits while the taxpayers cover all loses. The utility of both agencies should be reconsidered as a Republican administration clears away the jumble of subsidies and controls that complicate and distort home-buying.

The Federal Housing Administration, which provides taxpayer-backed guarantees in the mortgage market, should no longer support high-income individuals, and the public should not be financially exposed by risks taken by FHA officials. We will end the government mandates that required Fannie Mae, Freddie Mac, and federally-insured banks to satisfy lending quotas to specific groups. Discrimination should have no place in the mortgage industry.

Turning those broad statements into policies, we are likely to see some or all of the following on the agenda for housing finance reform:

  • a phasing out of Fannie Mae and Freddie Mac, perhaps via some version of Hensarling’s PATH Act;
  • a significant change to Dodd-Frank’s regulation of mortgage origination as well as a full frontal assault on the Consumer Financial Protection Bureau;
  • a dramatic reduction in the FHA’s footprint in the mortgage market; and
  • a rescinding of Obama’s Affirmatively Furthering Fair Housing Executive Order.

Some are already arguing that Trump and Congress will take a more pragmatic approach to reforming the housing finance system than what is outlined in the Republican platform. I think it is more honest to say that we just don’t know yet what the new normal is going to be.