Everything You Need To Know About Mortgages For The New Jersey Real Estate Exam | Blacktree

July 14, 2021

 

Some terms are so obscure that you may have never come across them. Terms like "mortgagee" and "mortgagor," for example, are hardly ever used outside of the world of real estate. And yet, they're both important to know if you want to pass your exam. This article will cover the key terms you'll need to know about mortgages when taking your real estate exam. 

What is a mortgage?

Mortgage: A pledge of real property that serves as collateral for a loan. There are two documents involved in a mortgage; the note, which explains the terms of repayment (sometimes known as a bond, depending on the area), and the mortgage document itself, which is a security instrument in which the borrower says, "If I don't pay you as promised you can foreclose on the property and sell it at an auction to use the proceeds to pay the debt I owe you."

This sometimes trips people up since we often say that we need the bank to "give us a mortgage."

Actually, we need the bank to give us a loan, not a mortgage.

In return for the loan, we'll give the bank a mortgage, or a promise to repay the loan under specific terms, with the property as collateral in case we default on our agreement.

Who is the mortgagee?

Mortgagee: The mortgagee is the bank. They get the mortgage or promise to pay from the borrower they lent money to. If the borrower does not hold up their end of the agreement, the mortgage document allows for foreclosure on the collateral, the home, in this case, and stipulates that the bank can sell the home at auction to recoup the debt they are owed.

Who is the mortgagor?

Mortgagor: The borrower, also known as the home buyer or property owner. The mortgagor takes a loan from the bank, and in exchange, gives the bank a promise to pay that lays out the terms of repayment. That document is called a promissory note, or sometimes just a note, for short.

Hypothecation is a term you'll very rarely use in practice when working as an agent, but it's in our book as an important term, and there's a chance you may see it on the exam. Hypothecation is just a term used to describe the pledging of property as collateral for payment of a loan without the borrower being required to surrender possession of the property.

What are the six obligations a borrower must follow?

A mortgage document is a contract between the borrower and lender. It defines who will own the real estate and what rights they have to it, which would not be possible without both parties agreeing in advance on these terms.

The person borrowing from this type of loan must sign off that they understand the responsibilities they are taking upon themselves with their signature before any money can change hands - after all, your home is usually going to become collateral for making sure you pay back your debt responsibly!

Failing to adhere to the responsibilities in the mortgage document, known as the duties of the mortgagor, can lead to default. There may be a 30 day grace period to allow the borrower to cure the issue, but the lender may foreclose after that.

 

There are six common obligations a borrower must follow.

  1. Paying the debt under the terms of the note. You need to make payments following the terms of the note. Paying on time shows that you are a reliable borrower, which can help you get approved for future loans.
  2. Paying all real estate taxes on the property given as security. If you want to protect the investment that you made in your home, then it is important to be sure you are paying all of your real estate taxes. It goes without saying that if you do not pay them on time, then there will be penalties, or possibly a tax sale and tax foreclosure if they remain unpaid for more than 6 months.
  3. Maintaining adequate insurance to protect the lender if the property is destroyed. It's essential to make sure you have the right insurance. For example, if your home is destroyed in a fire, the lender will be able to recoup their money as long as the insurance policy covered fire damage.
  4. Obtaining the lender’s authorization before making any major alterations. Don't add an addition or build a large inground swimming pool without touching base with the bank first.
  5. Maintaining the property in good repair at all times. Failing to repair a leaky roof can lead to property damage, mold issues, and more. That's bad news for the homeowner and the bank since the bank has more financially invested in a home early on.
  6. Until the mortgage has been in place for 30 days, obtaining the lender’s authorization before placing a second mortgage (junior lien) against the property.

A mortgage may include an acceleration clause that stipulates that if the borrower is in default, then the whole loan becomes due and payable on demand immediately. This accelerates the payment schedule, hence the name, acceleration clause.

The charging of an unreasonably high rate of interest is known as usury. For the exam, we want to remember that usury exempts most regular lending institutions and applies to sellers holding a private mortgage, also known as take-back financing.

State usury laws also bind other private parties lending money.

In New Jersey, sellers can't charge more than 16% on a first mortgage unless it's their primary residence, in which case they can charge a maximum of 30% interest.

Other mortgage terms to know for the exam:

Alienation Clause: This clause is found in a mortgage document and says that the borrower will not sell, transfer, or otherwise alienate any of their rights to the property without the lender's written consent. The lender will typically require the remaining debt to be due immediately (upon the sale) or that it can be transferred to the buyer, allowing them to assume the mortgage.

When a borrower defaults in making payments or fulfilling any of the obligations outlined in the mortgage, the lender can ask the court to order a foreclosure sale

 The lis pendens is a legal notice filed in the public records to show that there could be litigation involving foreclosure. Essentially, it's the first step in the foreclosure lawsuit the bank will file, starting the process to take back the property.

 A Sheriff’s sale is a sale ordered by the court to sell someone’s property to satisfy their debt. It's advertised in local papers and is the final step of the foreclosure process before the property is sold.

Successful bidders at the auction must pay 20% in cash immediately and the balance in cash within ten days. During that ten-day period, the homeowner may redeem the property by paying the entire amount due, including all late fees and court costs in addition to the total mortgage amount. If they're able to do that, they will avoid foreclosure and redeem their property. At the end of the ten days, a sheriff's deed will be delivered to the winning bidder, and they become the new rightful owner of the property with no further redemption rights. (Note that this redemption process is specific to New Jersey, and other states may have a different redemption term up to one year long.)

 

There are two main methods to avoid foreclosure.

  1. A Deed in Lieu of Foreclosure also called a friendly foreclosure or cash for keys program.
  2. A Short Sale

A deed in lieu of foreclosure is when the borrower voluntarily transfers their property to the lender to satisfy the debt. The bank knows the entire foreclosure process will cost somewhere around 75-80k, so it's in their best interest to avoid the long, lengthy process if at all possible.

Banks may help homeowners with moving costs, allow them to stay as tenants for a limited time, or work out amicable agreements to help the homeowners move on. In exchange, the homeowners will sign the deed over to the bank, avoiding the foreclosure on their record and credit scores.

A short sale occurs when a seller enters into an agreement with a bank where they'll sell their home for less than what's owed on it. Any remaining amount may become part of that person’s liability via a deficiency judgment, which is a personal judgment against the signer of the note.

Conclusion

We hope this guide has helped you understand everything there is to know about mortgages for your real estate exam. If you have questions, we want you to reach out and let us know what topics need more clarification or explanation to provide the best information for our students to make sure the next time you take the real estate exam is the last.

 

 

 

 

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