A mortgage is a large loan, usually paid off over thirty years to buy a home or property. Mortgages are valuable to people who do not have the cash to purchase outright or only have a small percentage of money upfront.
Your comprehension of mortgages and what they are will depend on your understanding of specific key terms. The key terms you will need to have a good understanding of are:
The down payment is the amount you initially borrow or pay out of pocket to make the first payment on a home or property once you have been approved for the mortgage.
Typically, making a twenty percent down payment is advisable when signing up for a mortgage. Many first-time homebuyers make as little as a six percent down payment.
The loan is the amount you borrow from your bank or lender to cover the remaining portion of the home’s purchase value after the down payment.
As the name suggests, a loan term is the set time you have to pay your mortgage in its entirety. It is in your best interest to make your monthly payments on time to ensure you pay your mortgage off on time.
Also, your credit score will benefit from it, making it easier to obtain mortgages in the future.
The interest rate is the rate or amount it costs you to borrow for the loan.
➗Calculation: For example, fs your take a loan for $100,000 at a 3 percent interest rate, you will pay $3000 in interest annually.
A mortgage has pros or benefits, such as the standard thirty-year fixed-rate mortgage. With the payoff or repayment period being a significant amount of time, monthly payments are minimal.
Another good factor is having a fixed rate; you can rely on equal monthly payments. Taxes and insurance costs will vary over time.
The flexibility of a 30-year mortgage also draws many people to this payment plan. You can also increase your monthly payments if you want to clear your mortgage quicker than the initial loan term.
If you fall into financial hardship, you can fall back on making the original monthly payments without jeopardizing the integrity of your credit score by being late or incurring late fees.
Despite the flexibility a 30-year mortgage can offer, you still need to be aware of and analyze the drawbacks.
Interest rates tend to be slightly higher with this payment plan because the risk of not getting paid is spread out over a more extended period. Even though you will pay a lower monthly payment, you will pay more in interest, making the overall price significantly higher because of the accumulated interest payments over such a long time.
People tend to overborrow sometimes when they qualify for a bigger loan and have such a long repayment period. A pricier home will come with higher maintenance costs.
Collateral is the term used when referring to an asset a bank or lender uses to secure a loan. Collateral can be vehicles, real estate, or property such as expensive jewelry. The kind of collateral used in a loan depends on the purpose of the loan.
The purpose of collateral is to act as protection for the lender. If you default on your loan, not only does your credit score take a hit, but the lender also loses money.
To prevent the lender from losing money, in case you default on your loan, they hold something of equal or higher value they can sell to recuperate any losses in such an event.
🧠Remember: Loans secured with collateral usually come with lower interest rates than an unsecured loan, as they offer the lender a level of security and safety.
There are several different types of collateral. The various kinds of collateral that exist are:
So, to recap, a mortgage is a form of secured loan in which the real estate or property is the collateral.
When you take out a mortgage, the bank or lender has a lien on the collateral (the home, property, or real estate). The lien on the property is the legal rights or claim or legal rights against the collateral if the borrower defaults to recuperate lost funds.
Once you enter into a mortgage, whether you go through a bank or private lender, one significant aspect they will want to know is the value of the home being purchased (collateral). This is a substantial variable in their decision to loan the money.
To determine the value of a home or property, the lender does not have the authority to make those calls. Most lenders rely on an appraiser to determine the monetary value of the collateral offered for the loan.
📝Key Fact: An appraiser is a trained professional who evaluates specific areas of a house to decide a property’s economic value.
The appraiser will assess the floor plan and appliances, obtain the property’s square footage, and examine the current market trend for houses of a similar caliber in the area.
After the appraisal is completed, their findings will be passed to the lender to review the loan application.
🧠Bear in Mind: If you fall behind on your mortgage payments, the consequences can be severe. Not only will you lose any money invested in the property, but your credit score will be negatively impacted if the bank decides to begin the foreclosure procedure.
You are not alone if you are behind on your mortgage payments. The pandemic has put many Americans and people worldwide in a bad position economically. At the beginning of COVID, many people were laid off from their jobs, causing a housing crisis with evictions and foreclosures going through the roof.
There are several options you have if you fall behind on your mortgage.
You can refinance your home, and you’ll obtain a new mortgage with a new set of terms.
✅Criteria: To refinance, you need to have a 620-credit score. Your debt-to-income ratio cannot exceed 43%.
If the adjustable-rate mortgage is causing your interest rate to change sporadically, refinancing into a fixed-rate loan will help stabilize your payments. Before proceeding with the loan, it is advisable to consider how long it will take to recuperate the upfront cost, which averages $5,000 on refinancing loans.
A mortgage forbearance suspends or reduces payments for a specified amount of time without incurring extra fees or interest.
🔥Hot Tip: Be sure to check how they will report your account to the credit bureaus when you call your lender to inquire about the forbearance program.
A loan modification is an option to consider when reconciling a delinquent mortgage.
While forbearance programs are temporary and subject to change at any time, a loan modification is a permanent agreement that permanently changes the terms of your loan forever.
The bank or lender can choose to extend your current loan term or reduce your monthly interest rates. The end goal of this program is to lower your monthly payments, but you won’t be required to qualify for a new mortgage or pay closing costs out of pocket.
There are several other ways you can assist yourself in lowering your monthly payment.
The first way is to reduce your homeowners’ insurance bill. Many insurance companies give discounts to people who bundle their home and auto policies. You can get quotes from other companies to see if you can get a lower rate or raise your deductibles(link).
A tax abatement allows you to dispute anything with your bill and correct billing errors. The result is a lower tax bill and lower mortgage payments- research and study the tax abatement laws for your local jurisdiction.
A repayment plan can be negotiated if you miss installments, but you will have a higher mortgage payment. Loan terms are one hundred percent up to the lender, and you are at their mercy for the term and rates you get.
The process of foreclosing on a home allows the bank to recover money owed from an unsettled loan. The bank can either sell the property or take ownership.
Almost half a million properties were in one stage of foreclosure just last year alone.
🔑Key Fact: The United States has the highest percentages of foreclosure, eviction(link), and homelessness in the world.
By law, the borrower is given 30 days to repay their debt before the foreclosure process can begin.
Foreclosures are a lengthy process, and most lenders would prefer not to go through them. It opens massive windows for mistakes and could leave them with unwanted property for a while.
Below we have summarized the six key steps to the foreclosing procedure; however, remember that process can vary slightly between each state.
If you are looking for more information, take a lot of our posts solely on foreclosure, for further guidance.
Your home is collateral as long as you still owe any money to the bank. There are many things you can do to lower your monthly payments.
If you fall behind on your mortgage, there are steps you can take to alleviate some pressure. Failure to do this will result in foreclosure, which means you will lose your home or property.
Check out one of our previous posts, for some key tips to managing your mortgage and some possible ways to get out of an agreement you cannot afford.
First-time and repeat home buyers may find it challenging to understand the terms and abbreviations used in the real estate industry, making it difficult to sell or buy a property. A sub-agent is one of the unknowns in this scenario.
While we’ve all heard of real estate agents, have you ever heard of sub-agents? If you haven’t, continue reading out guide on What is a Sub-Agent in Real Estate?
A licensed real estate agent or firm that another person or firm has appointed to represent them as sellers in a real estate transaction is a sub-agent in this context. For example, a real estate broker is a subordinate agent and acts in the agent’s place.
Because the sub-agents work under the supervision of an agent, they are responsible for all interactions and transactions with prospective buyers and sellers. Due to this, the establishment of a fiduciary duty becomes necessary.
In the legal world, a fiduciary duty is a promise or requirement that someone entrusted with a mandate over something must act honestly and with integrity on their behalf. This is the relationship between the sub-agent and the agent in this case.
A legal obligation exists between the parties to act in their mutual best interests. Unless otherwise stated, the sub-agent is the fiduciary tasked with the responsibility.
The beneficiary, or principal, is the other party to whom the sub-agent responds.
Key Point: All agents, whether sub-agent, principal-agent, or substituted agent, are bound by fiduciary obligations.
The fiduciaries’ responsibility is to account for their losses if they violate the contract. Even though they played no role in the mistakes, the principal is liable for them.
When two people agree to collaborate on a project, a fiduciary agreement should be signed, and both parties should acknowledge their fiduciary responsibilities in writing.
Additionally, there are fiduciary responsibilities to the buyer or seller, which include the following:
Unless ordered by a court of law, all information exchanged between the two parties should be strictly confidential.
The money and finances belonging to the client entrusted to the sub-agent must be appropriately accounted for and used as planned.
The client and the principal should expect the sub-agent to be obedient and refrain from engaging in illegal activities.
Both the principal and the client must share a sub-agent loyalty. There should be no use of information to their advantage, and no other interests should take precedence over those of the client and the principal.
Before you can answer the question what is a sub-agent, do you know how to determine the difference?
In most cases, you wouldn’t be able to tell whether your agent is subject to the directives of another agent within or outside the same company unless you looked carefully.
There may be tell-tale signs, such as business cards or direct information from the sub-agent, indicating that they are representing or working for someone else, which can be identified.
The most effective method is to sign a contract with the listing agent and agree not to work with their sub-agents. If you have a problem with your sub-agent, you can reassign it to another representative.
An exclusive contract is a type of contract that can be signed to ensure that you work with only one agent from beginning to end throughout the entire process. If there is a point of agreement between the two parties, you both sign the document for a set period to formalize the agreement.
A sub-agent in the real-estate industry
If you are buying or selling a house through a sub-agent, you may not be able to refuse to work with the agent.
Did You Know: There are several benefits to proposing a cash offer on a house? Read more here, where we outline the key advantages for both buyer and seller.
You should always check with the principal company’s regulations to see if the sub-agency is legal.
Hot Tip: You should also ensure that you follow the proper procedures in your transactions.
Don't worry, there are not many people who know the answer to what is a sub-agent simply because they are really uncommon.
Transactions involving a sub-agent are virtually unheard of these days for various reasons. Even though it may be more convenient to have someone assist you with your transactions, this may not always be the best option.
The sub-agents responsibility is to report to the agent, who is responsible to the principal. The hierarchy must be followed when a sub-agent is used in a transaction.
As a result, the principal does not have direct control over the sub-agent, posing a significant risk to their company’s reputation if something is discovered to be a mistake or omission. In addition, this is risky because the law is frequently involved in preparing legal documents and the transfer of ownership between the two parties.
Definition: Vicariously liable is when a person who hires an agent is held responsible for that person’s actions.
If a homeowner or buyer prefers not to work with a sub-agent, they can select their own agent to work with.
The homeowner may still conduct transactions through communication or confirmation with the original agent, even if a sub-agent is assigned to them in certain circumstances.
Sub-agencies are not permitted in some states. Uncertainty can arise when dealing with an agent representing someone else in the business world.
Because the earnings are based on commissions, the sub-agent may decide to raise the prices to create a profit window for themselves.
There is also a duty on the part of the sub-agent to the principal-agent.
The authority granted to an appointed agent to act on behalf of the principal-agent in the transaction is referred to as a real estate agency. When the agent reports to the principal, they are considered to be under their authority.
The principal may be a representative of the agency or the agency itself. Moreover, because they represent their employer’s brand, real estate agents are held liable by the company they work for.
A sub-agent is a delegation from an agent, whereas a substituted agent is a delegation of a specific task another agent carries out on behalf of the principal.
Extra Information: Do you dream of becoming a real estate agent? Check out the guide for some extra tips and figure out just how long the process takes!
How do they come about?
We will look at the Latin maximums to better understand the difference:
"Qui facit per alium facit per se."
Put another way; it means that someone who does something through another is responsible for the other person’s actions.
As a result, if an agent reports to the principal, a contract completed under the principal’s name subjects the principal to any lawsuits or suits brought against the principal, even if they did not complete the contract.
"Delegata potestas non potest delegari."
When translated, this means that no delegated powers can be transferred to another party under any circumstances. This is true unless the agency allows it to happen or it’s a common occurrence in their business environment.
The following is an example from the real estate industry: a real estate agent is accountable to the sales agent as a sub-agent. However, the sub-agent has landscaping and interior designers responsible to them. In contrast, a substituted agent is accountable to the principal, which is the real estate corporation.
When attempting to determine the answer to What Is a Sub-Agent, there are various factors to consider.
A sub-agent is subordinate to an agent. The agent commands the project over which the sub-agent has been entrusted with responsibility. All directives are communicated to the sub-agent through the agent for which the sub-agent works.
The principal cannot give directives to the sub-agent directly; instead, the commands must be routed through the agent.
Whereas a substituted agent is directed and assigned by the principal in all aspects of the job.
An agent can only appoint a sub-agent per the nature of the rules of the real estate company in question. It is only possible if the agency permits delegation of authority to third-party agents.
A substituted agent is appointed by the principal when the agent in charge of completing the project requests that the principal appoint a different agent.
This is most common in situations where the agent cannot complete the project due to a lack of necessary skill sets, such as when a real estate attorney is required to handle legal issues in the transaction.
The sub-agent is compensated by the agent with a commission on the final payment that has been agreed upon. This is funded by the agent’s portion of the commission.
The principal is responsible for paying the substituted agent directly.
In contrast to the substituted agent, the sub-agent can’t sue or be sued by the principal directly.
However, if there is a legal violation against the principal or the sub-agent, the rules may differ.
In the event of a dispute or miscommunication, a substituted agent is liable to the principal, whereas the original agent is not.
A sub-agent is delegated agency responsibilities by another person tasked with performing the responsibilities but who was not delegated the responsibilities by the clients.
When a third-party acts on behalf of another party at their request, this is a sub-agency.
There are those days when you have too much on your schedule even to complete anything. Unfortunately, this can also be the case for a real estate property.
Being encumbered means being dragged, inconvenienced, restricted, or slowed down. Encumbrances can also arise from steering. A house may be encumbered by factors that make its sale, inhabitation, or use difficult or impossible.
In this article, we will expound your knowledge on ‘What Is An Encumbrance in Real Estate?’ and the type of restrictions or hindrances you may encounter.
A third party may claim ownership, possession, or hold property even though they are not the owner. Various situations may lead to this landing in the following categories:
These claims may restrict the owner’s ability to sell or use the property, or transfer ownership. They may also reduce the property’s market value.
These are negative aspects of the property caused by financial issues.
Liens
A lien is a debt from third parties that use the owner’s assets as collateral. They claim the assets as a means of payment or leverage for payment.
They do not affect the owner, but they stick to the property only. This means that a change in ownership would still affect the new owner, but a legal change in ownership would mean paying off any liens on the property.
To clear their property of encumbrance, the owner can pay off their debts.
Some types of liens include
This is also called the “artisan’s lien.”
If a service is delivered to the property and not paid, they can apply a lien against it. These services may be plumbing, construction, furnishing, renovation, among many others.
If a property owner fails to pay the necessary property taxes, the government seizes the property through a court order until the taxes are paid. If the property has a mortgage, the tax lien will take over, and this may be a headache for the mortgage lenders, who will have to protect it by paying off the taxes and then seeking payment from the owner.
This is a lien against payment for storage services rendered to someone. Failure to pay the fees allows the holder to withhold the property at hand till the lien is covered.
This is a lien on items that may change in nature, but the lien remains. A house may have a lien on antiques, and the lien remains even if these are switched or replaced.
A floating lien is held by valuable assets that are the collateral for payment.
These are liens that do not rely on laws or statutes but depend on contracts for their existence. A typical example is a mortgage.
This lien is mostly questionable as other liens do not require the owner’s permission, but in this case, contracts are signed by the owner.
Mortgages allow the owner to pay off the property without paying the total price as a one-time payment. The house is used as collateral, but nothing will happen to it, provided that the mortgage is paid at the agreed time.
Well, one may think they are getting off without electricity, water, or sewer bill payments, but when it comes to selling the house, they will find liens for the unpaid utility bills on the property. These service liens have to be cleared before the home can be sold.
These encumbrances affect the house’s title, preventing it from being sold or used.
Liens have a general toll on the property title, preventing it from being sold. Involuntary liens are placed without the owner’s knowledge or approval.
Lis pendens is a term used to mean pending legal action and is placed on the property by a party awaiting the intervention of the law in a dispute. It restricts sales or transfers of ownership until the case is settled.
Some instances where a lis pendens may be filed include:
Private homeowners may restrict land use for particular reasons. These are stated in the deeds, and, most of the time, they affect large pieces of land that are sold off as smaller parts.
A huge piece of land may have restrictions on, let’s say, growing specific types of plants or building certain types of buildings that are specified in the deed.
The deed restrictions are on the land, and even if the property ownership changes, they are still in place as they run with the grounds.
Planned unit developers and homeowner associations may use deed restrictions to regulate land use in the area. These may include parking regulations and maximum or minimum house sizes to maintain the value of the neighborhood.
Hot Tip: An aspiring home buyer should check to see if there are any restrictions on the land or property use before acquisition.
These are agreements between two parties to use or rent a particular piece of property for an agreed period. Any dues are decided on and paid within a specified time frame.
The lease gives the leaseholder a right to use the property within the agreed conditions.
Leases prevent any use or sale of property by the owner or a third party while still active. Unless there is a violation of the lease terms, this calls for legal action but not direct action by the violating or violated party.
This is a legal right that allows a non-holder of a property to acquire it within the state’s specified terms. One of its supporting beams is eradicating non-used land all over the state by putting it to use through someone else.
This law gives rights to squatters to claim your property if they meet the legal requirements. These may include
| ✅Criteria: |
| Being open and obvious about their stay on the property and not hiding it. |
| Paying any fees or taxes on the property for the specified amount of time. |
| Maintaining and doing any repairs on the property, such as landscaping and fixing any damage. |
| Staying on the property continuously for the minimum time stated by the law, for example, five years without leaving to go elsewhere. |
If a squatter meets these criteria, they may file an adverse possession claim, which entitles them to the property even if the owner is aware of the claim.
Did you know: Your neighbor could also be a squatter by encroaching on your property, but the adverse possession laws may entitle them to the area.
The squatter must present any documents that defend their claim, like tax payment documents or color of title. This law may strip the property’s original owner of legal action against them if they try to claim it illegally.
These are inconveniences affecting the use or condition of the property.
A third party or court may restrict a property undergoing ownership disputes.
Banks can also seize property if it was the liability during a loan application, especially for high-interest loans, which give a small window for payment. If a bank holds a property, access is restricted to the owner or public unless auctioned or the loan settled.
A house with hanging payments like maintenance fees, utility fees, and property taxes may be withheld until the fees are settled. Liens often lead to property seizures until the debts are paid.
Environmental restrictions also come into play in cases like constructing buildings at a distance from water bodies or forests as a conservation method.
This is the use of land by the neighbor by building or putting up a structure like a fence on the owner’s land. They often happen unintentionally.
When the owner wants to sell the property, there may be issues with the boundaries that have to be resolved.
This is the right of another party to use an owner’s property. Easements happen once the owner signs a legal document that gives these rights, such as a deed.
Easements may often affect the process of obtaining a building permit. The permit may be denied if the building plans go against the easements on the land.
There are various types of easements, some of which correlate with others:
These occur when someone uses your property without your permission for their own reasons. It is often subject to adverse possession claims that legally allow this to happen and may even give the intruder rights over the intrusion.
This occurs when an easement is written after an agreement and put down in a deed.
These easements come about due to local custom but are not written down. An example is a common route through someone’s property that’s the only way to access the destination.
This is an easement between two linked properties, the servient (offering) and the dominant (benefiting). It is tied to the land and could include direct access to the road by a neighbor whose access is cut off by the neighboring land.
These are easements tied to someone benefiting from them.
These allow utility companies to access and use the land to lay sewage, gas, or water pipes.
These are restrictions in areas with historical or architectural significance. There may be strict rules on the types of buildings built or stringent rules permitting no construction at all.
Restrictive covenants also come into play in areas that govern building architecture and appearance. In many cases, a governing body enforces these rules and determines whether a piece of property complies with the regulations.
Some of these covenants are enforced in:
These are self-sustaining communities where the homeowners own the property and land, and various amenities make it seem like a small town. Some amenities may include grocery stores, medical centers, parks, and restaurants.
Roundup: To protect the value of the homes and reputation of developments, volunteers or appointed boards develop a set of rules that every member has to adhere to.
As much as the individual owns the land, these restrictive covenants withhold their freedom to use it outside the agreement.
These are condos often developed by a single contractor and have similar-looking houses and buildings. Since the development agency often owns the land, the residents are restricted to written rules and regulations defining their roles and rights.
Residents have to pay fees to the governing body for maintenance and other costs stated in their contracts.
Run the property through a title search to find out if any encumbrances will limit your use or prevent you from accomplishing any plans you have.
An easement may be terminated by:
1. Ending by necessity
This terminates the easement when it is no longer applicable.
2. A merger
People in the dominant state can get a court order to get the servient to give up their right of way.
3. Express agreement
This is a decision by the affected parties to lift the easement.
4. Abandonment
It occurs when an owner stops enforcing an easement over some time until it’s permanent.
