Residential Mortgages Lawyer
TABLE OF CONTENTS
- The reasons for obtaining a mortgage
- The steps in a mortgage transaction
- The Lawyer's Role in the Mortgage Transaction
- The borrower's role in the Real Estate Transaction
- The signing up meeting with the Lawyerr
- The Closing date
- The Post Closing
- Mortgage Remedies
The reasons for obtaining a mortgage, are varied, and include:
A. Financing of a home purchase by borrowing upon the equity of the home.
This involves the borrower using the equity of the property he or she is purchasing, to provide security to the lender in exchange for the advance of the mortgage funds. Residential mortgages are usually obtained from a financial institution, can be given back to the vendor, can be assumed, or can arise from the refinancing of the borrower’s other real property.
In the typical mortgage scenario, a borrower will approach the financial institution of his/her choice, for the purpose of financing the purchase of a home and will apply for and obtain a mortgage in an amount which is based upon the purchase price, the borrower’s financial situation and other special needs.
In certain other case, where the vendor’s mortgage interest rate is low, and where the terms of the Vendor’s existing mortgage permit the mortgage to be assumed by the Purchaser, it may be advantageous for both the Vendor and the Purchaser to cooperate in ensuring that the Purchaser is approved by the financial institution to assume the existing mortgage. The Vendor avoids having pre-payment penalties, if this is not an “open” mortgage, which could cost thousands of dollars, and the Purchaser assumes an existing mortgage at a low interest rate, and with the expenditure of a minimum of fees. There is a drawback here for the Vendor in that the Vendor usually remains liable on the mortgage in the event of a default by the Purchaser unless the Vendor is able to obtain a release of the Vendor’s covenants under the mortgage from the Mortgagee.
Where the Purchaser is unable to qualify for normal mortgage financing, or, where the Vendor wants to provide an inducement to the Purchaser, and, provided that the Vendor is prepared to take the risk, the parties could negotiate a clause in the Agreement where the Vendor agrees to take back a first or second mortgage from the Purchaser. This ensures that the Vendor is able to sell the property without having to wait for the Purchaser to qualify for regular financing, and often is able to benefit from a higher than market rate on the vendor take-back mortgage. The Purchaser has the benefit of being able to afford a home in cases where the Purchaser would not normally have qualified for mortgage financing. Careful and thoughtful drafting of the Agreement of Purchase and Sale in cases where assumable or vendor take-back mortgages are applicable could therefore be of significant advantage to both parties in the transaction
B. Re-financing of an existing mortgage is usually done when the existing mortage term expires, or for the purpose of taking advantage of lower current interest rates.
C. Borrowing to finance a major purchase or vacation is often best accomplished by placing a mortgage against the equity of real estate property, or by increasing an existing mortgage. In most cases, financial institutions will provide preferential interest rates to home owners, as the home is usually considered to the best form of security for mortgages.
D. Financing of a business venture is usually accomplished by placing a mortgage on the family home or other real estate property. As in the case where financing is obtained to make a major purchase or vacation, a mortgage on real estate, particularly residential real estate, will usually attract the lowest interest rates. Caution should be exercised when pledging the family home as security for a business venture, as the failure of the business can mean loss of the family home, and the consequent stress on the family.
The steps in a mortgage transaction may be summarized as follows.
A. The borrower chooses the financial institution through which he/she intends to obtain financing. Due to the great number of banks, trust companies, credit unions, independent lenders and mortgage brokers available, the prudent borrower should make inquiries from several of these lending sources before making the decision as to where the mortage financing will be obtained. The Interest Rate and the other terms and conditions of a mortgage will vary widely between one financial institution and another, thus requiring the borrower to spend some time in researching in order to get the most advantageous mortgage terms available on the marker.
B. The completion of the mortgage application form is the next step to be taken by the borrower once the financial institution has been chosen. The borrower will be required to provide the borrower’s name, address, assets, liabilities and financial situation. Based upon the borrower’s needs and circumstances, the financial institution will review the application and will determine whether or not the borrower will be able to qualify for the financing sought.
C. The appraisal of the property to be mortgaged is obtained by the lender once the borrower’s financial and personal situation are found acceptable by the lender. This appraisal is to advise the lender as to the approximate market value of the property, so that the lender will have sufficient security in the event that the borrower defaults on the mortgage.
D. A pre-approval of the borrower will be provided by the lender to the successful applicant and which will indicate that the mortgage has been approved, pending satisfactory returns being received by the lender with respect to the credit history of the borrower, the employment status of the borrower, and the borrower’s financial position. It is important that the borrower obtain a “pre-approved” mortgage from the financial institution before signing any Agreements of Purchase and Sale for a home. This means discussing with the loans officer the maximum amount of money which the borrower will be able to borrow for the purchase of the home. With this important information, and knowing how much savings are available to the lender, the lender will then known exactly how much money he/she can afford to spend on the purchase. This has two definite advantages:
(a) The borrower will not waste his/her time or the time of his/her real estate agent looking at homes which the borrower cannot financially afford;
(b) the borrower will not need to make the Agreement of Purchase and Sale conditional upon the borrower obtaining financing. In todays market, this will ensure that the borrower’s offer has a better chance of being accepted, as vendors are more likely to accept unconditional offers than offers containing numerous conditions.
The lender will also discuss with the borrower the advantages of obtaining “mortgage insurance” which will pay off the mortgage in the event that the borrower dies. This would ensure that the bereaved family of the deceased will not be forced to sell the home, leaving the spouse and children homeless.
E. Mortgage instructions are forwarded to the borrower’s lawyer for the purpose of conducting the requisite searches and for papering the mortgage transaction, as set out under the section entitled “The lawyer’s role in the mortgage transaction”.
The Lawyer’s Role in the Mortgage Transaction consists of a number steps.
A. The initial meting with the lawyer can occur at any stage of the mortgage application
procedure, but usually occurs once the borrower obtains the pre-approval. At the initial meeting with the lawyer, the borrower should provide the lawyer with certain information in order to better assist him/her. This would include the complete legal names and dates of birth of all the Purchasers to the transaction, a copy of the mortgage pre-approval, and the name, address and telephone number of the insurance broker from which the lender will be insuring the home purchase.
At the conclusion of the meeting with the lawyer, the borrower will usually sign a retainer agreement with the lawyer which confirms that the lawyer has been retained to act on behalf of the purchaser in the transaction, sets out the duties and responsibilities of the lawyer, and sets out the fees and disbursements which will be charged. This information will be summarized in the retainer letter which will be given to the borrower or mailed to the borrower’s home, following the initial meeting.
B. A review of the Mortgage Instructions is the first step a lawyer will take in order to understand the particulars of the mortgage transaction.
C. Where the lawyer represents both the borrower and the purchaser in the mortgage transaction, the lawyer will explain to the borrowers that as a result of this dual role, there will be no confidentiality between the borrower, the purchaser and the lawyer, and that the lawyer is required to disclose to the other party any facts which are provided to the lawyer by a party which might be detrimental to the interests of the other party to the mortgage transaction.
D. The lawyer conducts the various searches necessary to ensure that the borrower
has good title to the property to be mortgaged, and to provide the lender with a satisfactory Letter of Opinion or Title Insurance Policy. This starts with the lawyer conducting a title search of the property where the history of the property being purchased or mortgaged is reviewed, and any problems or encumbrances are brought to the attention of the lender. In addition to the title search, execution searches are to determine whether the borrower has been sued and judgment recovered, as the lawyer cannot certify to the lender that the mortgage is a good and valid mortgage unless these judgments are satisfied. Various searches are conducted of the municipal records to ensure that the property can be legally used as a residential dwelling, that there are no work orders registered against the property, that all structures located on the property have been built legally and comply with the relevant zoning by-laws, that all taxes have been paid, and that there are no outstanding utility accounts..
Should title insurance be applied for, instead of the lawyer’s Letter of Opinion, then many of the municipal searches will not be necessary as title insurance will insure over these matters. Title Insurance provides the lender with a direct claim against the insurance company if a specified title risk causes a loss, regardless of the source of the loss. Under the traditional lawyer’s Letter of Opinion, the lender has a claim against the lawyer only if the lawyer acted negligently. However, a loss arising from any error made by a third party on which the lawyer has reasonably relied, does not make the lawyer liable to the lender. Due to the different degrees of risk associated with different aspects of the title search, only certain losses will be covered by a title insurance policy. Although Title Insurance is paid by the borrower as an additional disbursement, whereas the solicitor's Letter of Opinion of title is included in the legal fees, the cost savings which are achieved in not having to pay for the costs of the additional searches and the Surcharge Levy, frequently make Title Insurance the more cost-effective alternative, especially in cases where a survey of the property is not available, as Title Insurance insures against most deficiencies which an up-to-date survey would have revealed.
Whether the borrower chooses the Letter of Opinion or the Certificate of Title Insurance, the lawyer will, in either case, still conduct the required title search to ensure that the registered title to the property being mortgaged is clear of any other mortgages, liens and other registered encumbrances. However, whereas in the traditional Letter of Opinion the lawyer would, in addition, certify that there are no work orders, Sub-Division Agreement problems or occupancy problems (having determined this through additional searches), with the Title Insurance Option it is not necessary to conduct these expensive searches, as the Title Insurance Company will issue you a policy that will provide the lender with compensation should problems in these areas occur in the future.
E. The survey is a document which illustrates the location of a home and all other
structures, including fences, porches, decks and swimming pools, in relation to the boundary lines of the lot and should be provided to the lawyer as soon as possible in the mortgage transaction. Any survey which is not recent and up-to-date may not accurately depict the location of fences, buildings, pools, or additions to the building as they may presently exist today, and the lawyer’s Letter of Opinion will, of necessity, be qualified when commenting on the compliance of the property with the relevant zoning and other by-laws. The lawyer will only be able to certify to you as to any defects or problems which the existing survey shows. In many cases, the lender will insist that the borrower have an up-to-date survey prepared. This may be necessary in the event that the financial institution through which you are obtaining financing, as a condition of financing requires you to obtain an up-do-date survey. While the requirement of an up-to-date survey is no longer necessary with the purchase of Title insurance, as discussed below, certain private lenders and financial institutions do not yet accept Title Insurance. In addition, a prudent Purchaser who wishes to have certainty when it comes to the legality of the home he is purchasing, may still wish to have an up-to-date survey prepared.
The borrower’s role in the Real Estate Transaction essentially consists of obtaining
the mortgage commitment, and arranging for the placing of home insurance. Home insurance must be in place before a lender will release the mortgage proceeds to the lawyer.
The Signing up Meeting with the Lawyer will usually occur a few days before the
closing date. At the meeting the lawyer will review the results of the various searches performed and the mortgage documentation (the purchase documentation will also be reviewed at this time if the borrower is using the mortgage proceeds to purchase real property. Assuming that no problems were found, the documentation will be signed by the borrower.
The Closing Date represents the culmination of the lawyer's role in the transaction.
The lawyer or agent will attend in the land Registry Office where the property is registered. After updating the title search and the execution search, the lawyer registers the Charge/Mortgage of Land on title.
The Post Closing period consists of the lawyer providing the lender and the purchaser
with a Reporting Letter containing the Lawyer's certification of good title, and copies of all the documentation received, sent or signed pertaining to the transaction.
Mortgage Remedies are the options available to a lender where the borrower has defaulted under the terms of his mortgage. The lender may take one of the following steps.
A. Commence Power of Sale proceedings to sell the home.The home is listed for sale by the borrower, is sold, and the proceeds of sale are applied towards the cost of the Power of Sale, then to the payment of the outstanding mortgage. Should there be any funds remaining, these funds would be paid to subsequent mortgagees. Should there be any deficiency when the property is sold, then the original borrower will remain liable for any deficiencies.
B. Commence Foreclosure proceedings to have title to the home transferred into the name of the lender. The lender will not be compensated for any resulting loss.
C. Sue the borrower directly on the borrower’s covenant to pay which requires the lender to sue the borrower directly in court, in cases where there is no equity in the home, and where the lender does not want to commence Power of Sale proceedings.