A first mortgage is the primary lien against your real estate, taking precedence to all other mortgages. If the property is sold or if the borrower defaults, the first mortgage is paid before any other mortgage lien on the property. Usually, the loan used to purchase the property is secured by the first mortgage. When you obtain a mortgage loan you will sign a promissory note, or a promise to repay the amount borrowed, according to the terms of the note.
You will also sign a mortgage, giving the lender a lien, or security on the property. In the event you do not pay back the loan, the lender, through the mortgage, is given the right to sell the property to complete repayment of the note. If there is more than one mortgage, the first mortgage is paid before any secondary mortgages are paid.
You purchase a house for $200,000, paying $30,000 down and financing the remaining $170,000 with first mortgage. Several years later, you obtain a second mortgage for $10,000. You then experience financial difficulties and the lender is forced to foreclose on the mortgage. The land is sold to satisfy the mortgages, but only brings $175,000 through the sale. The first mortgage holder will receive $170,000. The second mortgage holder will only receive $5,000 because the sale did not bring sufficient proceeds to pay both in full.
FIRST MORTGAGES VS. SECOND MORTGAGES
The lender will not own the property through a first mortgage, only retain a lien on the property. You are generally free to do with your property as you wish, but cannot usually transfer the property without the lender’s consent, unless you are paying off the mortgage. Because the first mortgage gets paid first in the event of default, you do not usually need the lender’s consent to obtain an additional or secondary mortgage.
On the other hand, the secondary mortgage lender will want to be assured that you can continue making payments on both mortgages. The lender will need to be assured that you have sufficient equity in the property so that, in the event of a default and foreclosure, their interests would be protected.
As the primary method of financing to complete your real estate purchase, the choice of selecting the proper first mortgage is important. The professionals at First Foundation specialize in assisting you to obtain the right first mortgage for you.
If you are interested in learning more about first mortgage, please feel free to contact us today!