Key Terms:
• Mortgage: a document that makes property security
for the repayment of debt
• Mortgagee: the party receiving the mortgage, the
lender
• Mortgagor: the party making the mortgage, the
borrower
• Foreclosure: the procedure by which a person’s
property can be taken and sold to satisfy a debt
• Power of Sale: allows a lender to conduct a
foreclosure sale without going to court
Key Terms:
• Deed of Trust: a document that conveys legal title to a
neutral third party as security for a debt
• Trustor: one who creates a trust, the borrower in a
deed of trust
• Beneficiary: one for whose benefit a trust is created,
the lender in a deed of trust
• Trustee: one who holds property in trust for another
• Release: a document used to extinguish the right of a
mortgagee
• Reconveyance: a document used to reconvey title
from the trustee back to the trustor
Key Terms:
• First Mortgage: the mortgage loan with highest
priority for repayment in the event of foreclosure
• Subordination: voluntary acceptance of a lower
mortgage priority than one would otherwise be entitled to
• Junior Mortgage: any mortgage that is subordinate to
the first mortgage in priority eg. Second Mortgage
• Promissory Note: a written promise to repay a debt
• Obligor/Maker: someone who has given (made) a
promissory note to repay a debt, the borrower
• Obligee/Holder/Payee: someone to whom a debt is
owed, holding a promissory note, the lender
Key Terms:
• Acceleration clause: requires immediate repayment
of the loan if ownership transfers; a/k/a due-on-sale
clause
• Deficiency judgment: a judgment against a borrower
if foreclosure sale does not bring enough to pay debt
• Alienation clause: gives lender right to call entire loan
due if property is sold, a/k/a due-on-sale clause
• Assignment of Rents: establishes the lender’s right to
take possession and collect the rents in the event of loan
default
Key Terms:
• Amortized loan: a loan requiring periodic payments
that include both interest and partial repayment of
principal
• Balloon loan: any loan in which the final payment is
larger than the preceding payments
• Equity: the market value of a property less the debt
against it
• Principal: the balance owing on a loan
• PITI: loan payment that includes principal, interest,
taxes and insurance
• Maturity: the end of the life of the loan
Key Terms:
• FHA: Federal Housing Administration, insures certain
real estate loans
• VA: Department of Veterans Affairs, guarantees certain
real estate loans
• Conventional Loan: real estate loans that are not
insured by FHA or guaranteed by VA
• Impound or Reserve account: an account into which
the lender places monthly tax and insurance payments,
a/k/a escrow
Key Terms:
• Loan origination fee: the expenses a lender incurs in
processing a mortgage loan
• Point: one percent of the loan amount
• Loan-to-value ratio: a percentage reflecting what a
lender will lend divided by the sale price or market value
of the property, whichever is less
• PMI: Private mortgage insurance-a private mortgage
insurance source to insure lenders against foreclosure
loss
Key Terms:
• Truth-in-Lending Act: a federal law that requires
certain disclosures when extending or advertising credit
abbreviated as TIL
• Regulation Z: federal regulations that implement the
enforcement of the Truth-in-Lending Act
• APR: the annual percentage rate as calculated under
the federal Truth-in-Lending Act by combining the
interest rate with other costs of the loan
• Finance Charge: the total amount the credit will cost
over the life of the loan
Key Terms:
• Fair Credit Reporting Act: a federal law giving an
individual the right to inspect his or her file with the credit
bureau and correct any errors
• Credit Report: a report reflecting the credit worthiness
of a borrower by showing past credit history
• Liquid asset: asset that is in cash or is readily
convertible to cash
• Redlining: a lender’s refusal to make loans in certain
neighborhoods
Chapter 9
_______________________________________
Mortgages and Notes
Note the original presentation
has been edited by the presenter
South-Western Publishing©2002
“Loans” to Finance the
Purchase of Real Estate
• Contract for Deed: aka Land Contract
– Single Document, title remains with seller until
final installment, buyer only has “equitable title”
• Lease with Option to Purchase
• Most Bank loans involve at least two
documents
– Promissory Note
– Document pledging the real estate as collateral:
• Mortgage
• Deed of Trust
Promissory Note
• Contract between a borrower and lender
• Obligor sometimes referred to as Maker or
Promisor
• Obligee sometimes referred to as Holder or
Promisee
• Principal
• Interest
– Arrears vs. Advance
• Signature of borrower
• Note is not usually recorded
Note and Mortgage Sequence
• Step 1 Buyer gives note to lender
and receives $$
• Step 2 Buyer pays $$ to seller
and receives deed
• Step 3 Buyer has clear title
and gives mortgage to lender
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Promissory Note Secured
by Mortgage
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The Mortgage Instrument
A separate agreement from the note that
provides collateral to the lender to back up
the promise made in the note by the
borrower/mortgagor.
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Security for Debt
• Mortgage pledges collateral
– Hypothecation (debtor retains right to possess)
– Pledging (debtor gives up possession)
• Conveyance Type
– Lien theory
– Title theory
– Intermediate theory
Mortgage Basics
• Borrower signs mortgage
• Parties
– Borrower = Mortgagor
– Lender = Mortgagee
• Lender should provide constructive notice of
lien to prevent other loans from gaining
priority
– Recorded at Register of Deeds
– Requirements for recording:
• Legal Description
• Acknowledgment
Mortgage
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Acceleration Clause
Alienation Clause
Mortgage (continued)
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Particular Provisions Reviewed
• Defeasance clause: “mortgage and estate
created hereby shall cease and be null and
void”. . . when paid
• Assignment of rents
• Covenant to pay taxes
• Covenant against waste and removal
• Covenant of preservation and repair
• Covenant of insurance
Mortgage Satisfaction
• Return Note marked “PAID”
• Mortgagee issues either a “satisfaction of mortgage”
or a “release”
• Partial payment may be partially released
• Release should be recorded with register of deeds
Recordation
• Promissory note not usually recorded
• Mortgage should be recorded by bank/lender
– Recorded at Register of Deeds
– Requirements for recording:
• Legal Description
• Acknowledgment
Debt Priorities
•
•
•
•
•
First mortgage / Senior mortgage
Second mortgage / Junior mortgage
Subordination
Chattel liens
Foreclosure / Power of Sale
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Chapter 10
_______________________________________
Deed of Trust
Note the original presentation
has been edited by the presenter
South-Western Publishing©2002
Deed of Trust Parties
• Borrower = Trustor
• Lender = Beneficiary
• Neutral Third Party = Trustee
–
–
–
–
–
Bank or Savings
Attorney
Real Estate Broker
Title Company
Trust Company
Comparison of a Mortgage
with a Deed of Trust
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Comparison of a Mortgage
with a Deed of Trust (continued)
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Sample Deed of Trust
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Sample Deed of Trust (continued)
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Sample Deed of Trust (continued)
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Conveyance Type
• Naked or bare title: note conveyance language,
“grants and conveys . . . in trust”
• Trustee holds “title” until paid
• Satisfaction through “Reconveyance”
• COMPARE TO: Mortgage Title Theory
Clauses
• Unique to Mortgage: Defeasance
• Unique to DOT: “In Trust” & Reconveyance
• All other clauses and covenants (pay taxes,
etc) are similar
Payment in Full of Note
Secured by Deed of Trust
• Return Note marked “PAID”
• Beneficiary requests that Trustee “Reconvey”
property to Trustor
• Trustee executes and delivers “Deed of
Reconveyance”
• Partial payment may be partially released
• Only the Deed of Reconveyance need be recorded
Request for Full Reconveyance
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Full Reconveyance
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Shifting of Obligation
Applies to Mortgages and Trust Deeds
• Property may be sold “subject to” (original
mortgagor remains liable, buyer not liable)
• Assumption (original mortgagor remains liable,
buyer liable)
• Substitution or Novation
• Assignment by Lender
• Transfer with or without recourse
(Deed in lieu of foreclosure would be without
recourse)
Comparison of a Mortgage,
Deed of Trust and Land Contract
Foreclosure Methods Reviewed
• Lease with Option - Eviction & Quiet title or
perhaps a judicial foreclosure
• Land Contract - judicial foreclosure
• Mortgage - judicial foreclosure
• Deed of Trust - judicial foreclosure or exercise
of power of sale (advertisement and sale)
Deed of Trust Advantages
• Upon default, Lender can take possession of property
& collect rents
• Time between default & foreclosure is short
• Power of sale provision
• Trustee already has title
• Usually no statutory redemption
• Borrower’s Right to Cure
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Proceeds of Sale
• If excess proceeds, balance is returned to
mortgagor/trustor
• If proceeds do not cover loan:
– Collection and
– Action for Deficiency Judgment
Chapter 11
_______________________________________
Lending Practices
Note the original presentation
has been edited by the presenter
South-Western Publishing©2002
Loans
• Term loan – interest payments only until due.
• Amortized loan – regular equal payments for
life of loan including both principal & interest.
• Balloon loan – any loan that has a final
payment larger than any of the previous.
• Partially amortized loan – series of amortized
payments with a balloon payment at maturity.
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Repaying a 6-year, $1,000 Loan
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Carrying 9% Interest per Year
on the Loan
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Balance Owed During Each
Year of the Loan
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Amortization Table: Monthly
Payment per $1,000 of Loan
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Balance Owing on a $1,000
Amortized Loan
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Loan-to-Value
• The relationship between the amount the
lender is willing to loan and the market value
of the property
• Market value = $100,000
Loan = $80,000
What is the loan-to-value ratio?
80%
• Note: LV ratio is based on lesser of purchase price or FMV
Equity – the difference between the value of
the property and outstanding debt.
Points – one percent of the loan amount.
Origination fee – fee lender charges for
making loan usually stated in terms of a
percentage of loan amount.
Discount points – lender’s charge to raise the
return on the loan usually stated as a
percentage of the loan amount.
South-Western Publishing©2002
Government Sponsored Loan
Programs vs. Conventional Loans
•
Government Sponsored:
–
–
–
•
FHA: Federal Housing Administration
VA: Veterans Administration
RHSA: Rural Housing Services Administration
Non-Governmental Loans:
–
–
Conventional
Private
VA and FHA in Comparison
FHA
VA
Insures loans
UFMIP
Guarantees loans
Funding fee
Veterans only
Rate negotiable
Points
No down payment
100% L-T-V
(up front mortgage
Insurance premium)
Anyone qualified
Rate negotiable
Points
3-5% down
97-95% L-T-V
South-Western Publishing©2002
VA and FHA Similarities
•
•
•
•
•
Owner-occupied
1-4 family dwellings
Refinancing allowed
Assumption allowed (with approval)
VA borrowers must obtain
– “Certificate of Eligibility”
– “Certificate of Reasonable Value”
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Chapter 12
_______________________________________
The Loan and the Consumer
Note the original presentation
has been edited by the presenter
South-Western Publishing©2002
APR
• Annual percentage rate combines the interest
rate with the other costs of the loan into a
single figure that shows the true annual cost of
the loan.
South-Western Publishing©2002
Regulation Z
• Requires lender to show the borrower the cost of the
credit.
• Requirements include:
–
–
–
–
Amount financed
Finance charge
Annual percentage rate
Total payments
• Exempt: 1) business, commercial and agricultural; 2) loans
over $25,000 secured by personal property
South-Western Publishing©2002
Regulation Z
Right to Rescission
•
•
•
•
Borrower’s right to cancel a credit transaction.
Three business days after signing to back out.
Includes Saturdays
Does not apply to credit used for the
acquisition or initial construction of your
principal dwelling.
South-Western Publishing©2002
Regulation Z
Triggering Items and Disclosures
Mention these
Triggers disclosure
• Down payment
• Any payment
• Number of payments
• Period of payments
• Amount of any finance charge,
or statement: no charge for
credit
• Cash price or the amount
of the loan
• Down payment (or none)
• Number, amount,
frequency of payments
• Annual percentage rate (APR)
• Deferred payment price
or total payments
Getting a Loan Can be Challenging
The dream of the older generation was to pay
off a mortgage.
The dream of today's
young families is
to get one.
Loan Process
Lenders Qualify:
• Borrower
• Property
• Title
South-Western Publishing©2002
Loan Application/Approval
• Universal Loan Application
– Monthly housing expense (PITI) 25%-30%
– Fixed Monthly Expenses less than 33%-38%
• Positive net worth
• Appraisal: loan to value ratio
South-Western Publishing©2002
Other Factors
•
•
•
•
•
•
•
•
Income stability
Employment history
Monthly debts in relation to your income
Savings amount and methods
Mortgage type
Property type and value
Down payment amount
Timeliness of rent and utilities payments
Debt to Income Ratios
(Conventional Loans)
• 28/36 qualifying ratio
28% = Maximum percentage of your monthly
gross income that the lender allows for
housing expenses (note typical ranges between 25% and
30%)
36% = Maximum percentage of your monthly
gross income that the lender allows for
housing expenses plus recurring debt. (note
typical ranges between 33% and 38%)
Debt to Income Ratios
(Conventional Loans)
• Example:
28/36 qualifying ratio
– $3,750 Monthly Income
x .28 = $1,050 allowed
for housing expense
(PITI)
– $3,750 Monthly Income
x .36 = $1,350 allowed
for housing expense plus
recurring debt
PITI
Recurring
Other
Debt to Income Ratios
(FHA Loans)
• 29/41 qualifying ratio
29% = Maximum percentage of your monthly
gross income that the lender allows for
housing expenses (note typical ranges between 27% and
32%)
41% = Maximum percentage of your monthly
gross income that the lender allows for
housing expenses plus recurring debt. (note
typical ranges between 36% and 44%)
Debt to Income Ratios
(FHA Loans)
• Example:
28/36 qualifying ratio
– $3,750 Monthly Income
x .29 = $1,087 allowed
for housing expense
(PITI)
– $3,750 Monthly Income
x .41 = $1,538 allowed
for housing expense plus
recurring debt
PITI
Recurring
Other
Credit Report
• Provides lender with independent means of
checking borrower’s credit history.
• Fair Credit Reporting Act – consumer right to
their file at credit bureau.
• Credit Scoring – method used today to
evaluate credit risk.
South-Western Publishing©2002
FICO Scores
• It is an acronym for the creators of the FICO
score, Fair Isaac Credit Organization
• Using mathematical models, the FICO score
takes into account various factors in each of
these five areas: payment history, current level
of indebtedness, types of credit used and
length of credit history and new credit in
determining credit risk.
General Guide to A Credit
Source: www.mortgage101.com
•
•
•
•
•
Quality level/Credit score:
Quality level/Credit score:
Debt ratio:
LTV Ratio
Delinquency:
A+ 670+
A- 660
28 - 38%
to 95%
– Mortgage
None within last 24 months
– Installment: 1 of no more than 30 days in 24 mo.
– Revolving: 1 of no more than 60 days in 24 mo.
• Good to excellent credit within last 2 to 5
years. No bankruptcy within last 2 to 10 years.
General Guide to B Credit
•
•
•
•
•
Quality level/Credit score:
Quality level/Credit score:
Debt ratio:
LTV Ratio:
Delinquency:
B+ 640
B- 620
50%
75-85%
– Mortgage
2-3 over 30 within last 12 months
– Installment: 2-4 over 30 within last 12 moths
– Revolving: 2 of no more than 30 days in 12 mo.
• 24-48 months since bankruptcy. No 60 day
mortgage lates.
General Guide to C Credit
•
•
•
•
•
Quality level/Credit score:
Quality level/Credit score:
Debt ratio:
LTV Ratio:
Delinquency:
C+ 600
C- 580
55%
75%
– Mortgage
3-4 over 30 within 12 months
– Installment: 4-6 over 30 within 12 moths
– Revolving: 4 of no more than 60 days in 12 mo.
• 12 - 24 months since bankruptcy. No 60 day
mortgage lates.
General Guide to D Credit
•
•
•
•
•
Quality level/Credit score:
Quality level/Credit score:
Debt ratio:
LTV Ratio:
Delinquency:
D+ 560
D- 540
60%
65-70%
– Mortgage
4-6 over 60 last 12 months
– Installment: 4-6 over 60 days in 12 moths
– Revolving: Poor payment record
• Bankruptcy discharge within last 12 months.
Judgments to be paid w/ loan proceeds. Not in
foreclosure