Mortgage 101 – Explaining basic mortgage terms

AS a potential homeowner, you may stumble across a few unfamiliar terms while acquiring the necessary documents and information for your purchase. Sometimes unfamiliarity with these terms may even lead you to make poor decisions, as often no one explains the impact of what you sign until something serious pops up.

Owen K Ferguson, branch manager at JMMB Bank (Jamaica) Ltd, shares below some basic mortgage terms to help you gain insight into the ins and outs of mortgage payments. Other information is provided by the National Housing Trust (NHT).

Mortgage

A mortgage is a loan in which one can obtain funds from a bank or building society to purchase property or real estate. This type of loan is called a ‘secured loan’, so collateral in the form of the property or land is used in exchange for it. The borrower makes monthly payments for a period of time to repay the lender. During that time the title for the property or real estate is given to the lender. If the mortgage is paid off then the borrower receives the title; if not, the lender can foreclose (take and sell the house).

Downpayment

Before a mortgage is obtained, a downpayment needs to be made on the house of your dreams. It is advised that you save a percentage of your income towards this goal. Preparations made now can put you in a better position to purchase a home hassle free. The recommended savings plan is 20-25 per cent of the purchase price to cover the downpayment, taxes, and closing costs. Not preparing for this may put you in an uncomfortable position where you’d need to rent for a longer period of time, take money from other savings accounts, lose your chance at purchasing to a higher bidder, or reduce your wealth altogether.

Joint tenants vs tenants-in-common

The difference relates to co-ownership of property and the rights of the co-owners.

For joint tenancy, the ownership is undivided and the co-owners own the entire rights to the property jointly. The co-ownership changes when any of the co-owners die, in which case the rights to the property transfers to the survivor(s). As a result properties with joint tenancy cannot pass under the will of a co-owner.

In tenants-in-common, the co-owners own a separate share of the rights to the property. This separate ownership allows each co-owner to sell, transfer, mortgage or will their interest in the property without reference to the other co-owner(s).

Some mortgage providers make a distinction as to which ownership they will accept. JMMB Bank does not make that exception of providing a mortgage for tenancy-in-common or joint tenancy. JMMB Bank will accept either form of co-ownership, as long as all parties agree to the mortgage and sign the relevant documents, Ferguson said.

Cash back

In order to make a mortgage more attractive for buyers, a few lenders provide a ‘cash back’ option.

“Cash back is a feature of some mortgage products which lenders design as part of the financing of the purchase. The cash back is achieved by way of reimbursement of some of the upfront costs that a purchaser may incur. It is accessed depending on the specific terms the mortgage provider sets out,” Ferguson said.

Developer’s closing cost vs banker’s closing cost

Developers’ closing costs are a feature of the arrangements each developer makes with purchasers. They vary in each case and could include:

• Escalation — Developers are allowed to include a certain portion of increased costs incurred from the changes in building costs (material and labour), which may have occurred after entering into the agreement with purchasers.

• Further payments — The agreement with the developer may be structured to include more than one payment towards the purchase price during construction

• Administrative costs —Bankers’ closing costs include fees and costs associated with the mortgage, and this could be as much as the developers closing costs, so prepare to spend another half a million dollars or so on this.

CRTD

In recognising the challenge faced by many prospective home buyers with finding their deposits, the NHT in 2010 introduced the Contributions Refund Towards Deposit (CRTD) loan. This product is available to NHT contributors who are purchasing a property being funded by a NHT mortgage to assist with the required deposit and has a loan tenure of eight years.

The CRTD allows contributors to borrow up to 100 per cent of their available contributions, which are not yet due for refund, providing that it does not exceed 15 per cent of the selling price of the property being purchased.

NHT eligibility letter

An eligibility letter is a letter that the NHT prepares and issues for applicants in either of two instances:

1. For the Joint Financed Mortgage Programme (JFMP).

2. For confirmation of loan limit.

Under the JFMP, applicants access a mortgage loan through another institution. All the relevant documents are processed by that institution and forwarded to the NHT’s Loans Department after which the eligibility letter is prepared. Once the documentation is complete, this eligibility letter is provided within 24 hours of receipt of the request and carries an expiration date of six months.

Otherwise, potential homeowners can visit the NHT offices for an eligibility letter which will state how much they are entitled to borrow.

Credit report

This is required by the lender from all borrowers before the mortgage will be approved. According to the Bank of Jamaica, a credit report represents a comprehensive credit profile of a borrower. This includes, for example, personal information (eg borrower’s name, ID number, date of birth, etc) and a credit summary (eg credit accounts held by borrower, whether accounts are current/past due, and a record of recent credit enquiries made about the borrower).

Ferguson implores buyers to ask questions and get answers.

“Potential homeowners should ensure they fully understand the financial and legal implications of the decision. They should also ensure that they read the documents carefully, ask questions, and insist on answers that they understand. It is a good idea to get independent assistance, including legal guidance, before signing documents,” he said.