Purchasing a home is one of the most significant financial decisions most people will ever make. For many, this process involves obtaining a mortgage loan from a bank. Understanding the different types of mortgage loans available, as well as the critical role banks and real estate attorneys play in this process, is essential. In this legal blog post, we will delve into the various mortgage loan options, discuss the importance of title insurance, and explain why having a real estate attorney involved in bank closings in Massachusetts is crucial.

Types of Mortgage Loans

With today’s home prices and interest rates, it is very rare for an individual or a married couple to be able to pay for their new home in cash. Most buyers rely on financing their purchase through a loan from a bank or a private money lender. When it comes to financing a home purchase, several mortgage loan options are available. Here’s a detailed look at some of the most common types:

1. Conventional Loans

Conventional loans are not insured or guaranteed by the federal government. They typically require a higher credit score and a down payment of at least 3% to 20% of the purchase price.

• Pros: Generally, they offer lower interest rates than government-backed loans. They are also more flexible regarding property types and loan terms. Lastly for many buyers, these are the most well-known types of loans, leaving buyers feeling more comfortable with a conventional loan due to its familiarity.
• Cons: Higher credit score requirements and larger down payments can be a barrier for some buyers. There are also additional fees to consider, such as Private Mortgage Insurance (PMI) which most lenders require if a borrower’s down payment is less than 20% of the purchase price. This expense adds nothing of value to the buyer, and is only a requirement since it protects the lender from financial loss on the loan if the borrower defaults.

2. Adjustable-Rate Mortgages (ARMs)

ARMs, also referred to as a variable-rate mortgage, have an interest rate that may change periodically depending on changes in a corresponding financial index that is associated with the loan. Typically, the initial rate is lower than that of a fixed-rate mortgage.

• Pros: Lower initial interest rates can make them more affordable in the early years of the loan. This initial phase of the loan is referred to as the fixed-rate period, and typically lasts anywhere from 5-10 years where the rate won’t change.
• Cons: The interest rate can increase after the initial fixed-rate period, potentially leading to higher monthly payments. Since the rate is susceptible to fluctuate, it can also make it more difficult to budget how much you will be spending on your mortgage each month.

3. FHA Loans

• Pros: Easier qualification requirements, lower down payment requirements, and flexible credit guidelines. While mortgage rates are dynamic and primarily affected by the economy and the Federal Funds Rate, FHA loans frequently offer better fixed interest rates.
• Cons: Mortgage insurance premiums are required, which can increase the overall cost of the loan. Mortgage insurance typically amounts to 1.75% of your loan amount with a portion that must be paid upfront at the time of the closing, and a portion built into your monthly payments. FHA loans often have stricter property requirements compared to standard loans. This is because the loan is approved and backed by the federal government, and accordingly they require much stricter standards on things like safety and security standards, and inspection requirements. FHA Loan requirements can also present a barrier to securing financing for investment properties, as FHA loans require that the property be "owner-occupied," typically for at least the first 12 months of the loan. 

4. VA (Veteran Affair) Loans

Guaranteed by the U.S. Department of Veterans Affairs, VA loans are available to eligible veterans, active-duty service members, and some members of the National Guard and Reserves. These loans are also made available to the surviving spouses of deceased veterans. They often require no down payment and have competitive interest rates.

• Pros: No down payment, no private mortgage insurance (PMI), and often lower interest rates. The qualifications are often very straightforward where you simply have to provide documentation as to your veteran or active-duty status. These loans also provide more lenient standards when it comes to the possibility of bankruptcy or foreclosure due to nonpayment.
• Cons: Eligibility requirements are strict, and there may be a funding fee. The funding fee is paid at closing and typically ranges from 1.25% - 3.5% of the loan amount. There can also be property restrictions, and you will also start out with next to no equity in the property since you don’t have to put money down upfront.

5. USDA Loans

These loans are backed by the United States Department of Agriculture and are designed for rural and suburban homebuyers who meet certain income requirements. They offer 100% financing with no down payment.

• Pros: No down payment required, competitive interest rates, and lower mortgage insurance premiums. These types of loans also have relaxed credit requirements, and do not require PMI.
• Cons: Strict income requirements and geographic restrictions. These types of loans also have property restrictions and occupancy requirements. While these types of loans are far less common in Massachusetts, there are certain areas and counties where they can be secured based on meeting the eligibility requirements.

The Role of Banks in the Home Buying Process

Banks play a pivotal role in the home buying process. For most of us, purchasing a home would be next to impossible with current prices and interest rates without financing from a bank or some other financial institution. Banks provide the necessary financing for most home purchases, and their involvement includes several key steps:

Pre-Approval

Before house hunting, buyers often seek pre-approval from a bank to determine their loan amount and interest rate. This step gives buyers a clear budget and strengthens their position when making an offer. When conducting the initial search for which bank you will use for your home purchase, it is recommended to speak to a loan originator to talk through the details, and how they can benefit you as a buyer. You will discuss your budget, credit scores, income, and if you meet the criteria for any of the aforementioned loans. Once you receive a pre-approval letter, it strengthens your offer significantly because it lets the seller and their real estate broker know that you are not only a serious buyer, but most importantly that you can actually afford the property, as evidenced by the bank pre-approval letter.

Loan Processing

Once a buyer finds a home, submits the offer, and officially signs the Purchase and Sales Agreement (P&S), the bank processes the loan application, verifying the buyer’s credit, income, and assets. This step occurs much faster if you are already working with the same bank that provided your pre-approval letter.

Underwriting

The bank’s underwriter assesses the risk of the loan, ensuring the buyer meets all requirements and that the property’s value justifies the loan amount. This process is typically accompanied by an appraisal to ensure that the value of the home is greater than the value of the loan.

Closing

During the closing process, the bank disburses the loan funds to the seller, and the buyer signs all necessary documents to finalize the purchase. For a detailed overview of the buying process, the purchase and sales agreement, and the closing process, you can read our legal blog here.

The Importance of Title Insurance

In Massachusetts, title insurance is a critical component of the home buying process. Here’s why it’s essential:

Protection for Lenders:

Banks require title insurance to protect their investment. It ensures that the property’s title is clear of any liens, claims, or encumbrances that could jeopardize their loan.

Protection for Buyers:

Title insurance also protects buyers, safeguarding them against potential issues with the property’s title that could arise after the purchase. Since the settlement agent, attorney, escrow agent or title agent is already issuing a title insurance policy for on behalf of the lender (the bank), the buyer has the opportunity at that time to obtain an owner’s policy of title insurance at a cost substantially less than the buyer would pay if the policy was not written simultaneously with the lender’s policy. This policy is a one-time fee, and protects you for as long as you own the property, making it an invaluable investment. This insurance covers defects in the title that were unknown at the time of closing, such as:

• • Unknown liens or encumbrances
  • Fraud or forgery in the title documents
  • Errors in public records
  • Misrepresentations of marital status
  • Signatures of mentally incompetent persons or minors which are unknown to the party reviewing the title

For a full overview of title insurance and why it is essential to your real estate purchase to protect you for years to come, read our full legal blog here.

Why You Need a Real Estate Attorney in Massachusetts

In Massachusetts, having a real estate attorney involved in the closing process is not just beneficial, but it is required by law. The closing attorney acts as the true “quarterback” of the entire closing process to ensure that you receive the keys to your new property on time. What many borrowers don’t realize is that they may request any real estate attorney of their choosing to conduct the closing, and they do not have to simply use the bank-provided attorney. Just like you have the right to choose your own real estate broker or the bank that will finance your loan, you can pick any real estate closing attorney that you wish. Among the many benefits of using a knowledgeable closing attorney, such as the Real Estate Attorneys at Lane, Lane & Kelly, the primary services that they provide are the following:

Legal Expertise

An experienced real estate attorney can review and explain all closing documents, ensuring that your rights are protected and that the transaction complies with state laws. The closing attorney represents you in the transaction, and as such they can assist in negotiating terms in the Purchase & Sales Agreement, and working with the seller and the seller’s attorney to get all necessary documents in place for a smooth transaction. The closing attorney is also in constant communication with the bank to coordinate the payoff and discharge of any previous mortgages, and to ensure the proper amount of funds are held in escrow to be distributed to the seller from the bank the day of the closing. There are a lot of necessary documents involved in the sale of real estate, such as the deed, the final utility bills, the final water bills, the smoke/CO2 certificates, and the 6(d) certificates (for condominium’s only). The closing attorney assists the brokers in aggregating all of these required documents to ensure the property is ready to be closed.

Title Examination

Attorneys conduct thorough title examinations to uncover any potential issues that could affect the property’s ownership or the buyer’s rights. The closing attorney is responsible for thoroughly examining the title to the property, and typically will go back a full 50 years to analyze the property. If there are any defects in title, it is the closing attorney who will work with all parties involved to resolve them. Assuming there are no defects in the title, then you will be ready to close on your new house.

Facilitating the Closing

Attorneys coordinate with all parties involved, including the bank, the title company, the buyer that they represent in the transaction, and the seller to ensure a smooth and legal closing process. At the closing, the buyers will sign what feels like countless documents that have been diligently prepared by the closing attorney, including:

• • The mortgage and promissory note
  • The closing disclosure
  • The HUD-1 Settlement Statement
  • Transfer tax documents
  • The new deed to your property which will be recorded in the Registry of Deeds or the Massachusetts Land Court

Contact the Experienced Real Estate Attorneys at Lane, Lane & Kelly for More Information

Purchasing a home involves navigating various mortgage loan options and ensuring all legal and financial aspects are properly addressed. Whether you are a first-time homebuyer or looking for your next investment property, understanding the role of banks, the importance of title insurance, and the benefits of having a knowledgeable real estate attorney can make the process seamless and secure.

At Lane, Lane & Kelly, we are dedicated to guiding you through every step of your real estate transaction so you can close the deal with confidence. Contact us today to learn how we can assist you in making your home buying journey as smooth and stress-free as possible.

This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By reading this blog you understand that there is no attorney client relationship between you and Lane, Lane & Kelly, LLP.