Mortgages

A mortgage is a type of secured loan that a person or entity uses to buy or refinance a home, land, or other type of real estate. Because a mortgage is a secured loan, the lender obtains a lien on the property, and should the borrower default, the lender can repossess (or foreclose) the property. This lien stays on the property until the mortgage is fully paid off.

The process of obtaining a mortgage starts with an application for pre-qualification for a loan amount, followed by house shopping. Once the borrower's offer has been accepted on their chosen house and they are under contract, their application and all documentation are reviewed for a pre-approval and loan processing begins. An appraisal, title review, and property inspections are ordered, and once those reports are completed they are reviewed by Underwriting for the final approval or "Clear to Close." The closing date is then confirmed by all parties and the borrower can move into their new house after their mortgage has been closed.

There are four components that make up a mortgage payment.

Principal
The principal is the original amount of money that is borrowed when a borrower takes out a mortgage. Paying towards the principal balance will lower the amount of interest that the borrower pays over time. This is often why some borrowers will make "principal-only" payments in addition to their normal mortgage payment. In the beginning of a mortgage, a very low amount of the payment will go towards principal, however, as time passes, more and more of the monthly payment will pay off the principal amount.

Interest
Part of the mortgage payment will go towards interest. The interest that is paid is essentially the cost for borrowing money. Some mortgages have a variable interest rate, meaning that the amount charged for interest can change, while others have a fixed interest rate, meaning that the interest rate will always stay the same.

Taxes and Insurance*
The last part of the mortgage payment is made up of taxes and insurance. The taxes that are paid in the mortgage payment are often collected and held by the lender in an account called an escrow account. When these taxes are due, the money gets pulled from the escrow account to pay them.

The part of the payment that covers insurance is also often held in an escrow account and paid on the borrower's behalf to the insurance company. There are usually two types of insurances that can be included in the mortgage payment. These are homeowners insurance, which covers the house in the event that there is damage done to the home, and mortgage insurance, which protect the lender in the event that the borrower fails to make their mortgage payments.

*Not all mortgage programs have escrow. Check with your lender for details.

Conventional Loans
A conventional loan is a mortgage that is not guaranteed by a government entity. Conventional mortgages are offered through banks, credit unions and mortgage brokers. Lenders may require private mortgage insurance coverage to provide protection against losses on a mortgage in default. Benefits of a conventional loan includes lending flexibility as there are less restrictions and requirements compared to a government loan. These loans typically follow guidelines of government agencies such as Fannie Mae and Freddie Mac.

Portfolio Loans
A portfolio loan is a mortgage in which the lending instituition is flexible with some of the terms and requirements of a conventional loan product. The investor of the mortgage loan is the lending institution directly and may require private mortgage insurance based on the down payment or property equity. These programs can offer flexibility when compared to conventional or government loans, however may have higher rates or fees to offset the additional risks posed by waiving traditional mortgage terms.

MaineHousing Loans
MaineHousing (MSHA) is a Mortgage Insurer and lending investor for mortgages issued in the state of Maine for first-time and non-first time homebuyers. They are a financial guarantor when mortgage insurance is required on government programs and can be combined with Federal Housing Administration, Rural Development or Department of Veteran Affairs lending programs. The MaineHouisng mortgage offers low fixed rates, down payment and closing cost assistance for first time homebuyers. There are income and purchase price limits based on household size and property location that will determine eligibility for the loan program.

FHA Loans
An FHA (Federal Housing Administration) loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration. These loans are designed for low to moderate income borrowers who are unable to make a large down payment. FHA mortgage insurance provides lenders with protection against losses as a result of the homeowner defaulting on their mortgage loan. Borrowers are subject to a one time up front mortgage insurance premium as well as an annual mortgage insurance premium that is collected monthly until the loan is paid in full. The benefits of this product is that they offer a low down payment, lower credit score requirements, no income limits (unless combined with an income capped program), and no pre-payment pentaly. This program can be combined with MSHA if the borrower is a first time homebuyer.

Rural Housing Loans
The Rural Housing Service (RHS) program provides rural residents with low- and moderate-income levels better access to affordable housing finance options with little or no down payment. The loan is guaranteed by the USDA Rural Development and protects lenders in the event of the homeowner defaulting on the mortgage. Benefits to the Rural Housing program include no down payment, no maximum loan limits and no recapture fees. The property must be located in an eligible area as determined by USDA. This program can be combined with MSHA if the borrower is a first time homebuyer.

VA Loan
A VA loan is a mortgage loan guaranteed by the United States Department of Veteran Affairs (VA). These loans are designed to offer long-term financing to eligible Veterans or their surviving spouses for the purchase or refinance of a home. The VA loan guarantee protects lenders in case the borrower defaults on the mortgage loan. Benefits to the VA program include 100% financing available to qualified Veterans, no mortgage insurance, no prepayment penalties, no income limits (unless combined with an income capped program), VA limits certain closing costs a Veteran can pay. This program can be combined with MSHA if the borrower is a first time homebuyer.

- Appraisal: The process where an unbiased professional determines the house's value.
- Closing Disclosure: A multi-page document that gives the terms and conditions of the mortgage loan you have selected.
- Deed-in-lieu of Foreclosure: A voluntary process where you turn over ownership of your home to the lender to avoid foreclosure.
- Down Payment: The cash the buyer pays upfront.
- Earnest Money: An amount of money the buyer puts down to show their financial commitment towards the purchase of a home. This is also known as a good faith deposit.
- Equity: The difference in value of one's assets after deducting the debt owed.
- Escrow: An account held by a third party that receives and disburses funds for designated use.
- Foreclosure: The action taken by a mortgage lender to take possession of a mortgaged property when the borrower defaults on their mortgage payments.
- HOA Dues: A fee charged by a Homeowners Association to pay for services they provide. These are often seen when purchasing a condo or a mobile home in a park.
- Home Inspection: The examination of the condition of a house. This determines if any repairs or updates need to be made to a home, or if it is up to code.
- Homeowner's Insurance: Insurance that covers the financial expense in the event of loss or damages to a private residence.
- HUD (Department of Housing and Urban Development): The Federal agency that is responsible for the policies and programs that address housing needs in America.
- PMI (Private Mortgage Insurance): A mortgage insurance that protects the lender in the event that the borrower stops making payments.
- Property Taxes: A tax on real estate by local government that is paid by the property owner to help fund public services.
- Short Sale: A process in which the homeowner sells their home for less than they owe on the mortgage. The lender recieves all funds from the sale and either forgives the remaining balance on the mortgage or requires the borrower to pay what is left.
- Title Service Fees: Part of the closing costs that cover the title search, title insurance policy premiums, and other costs that come with title insurance.