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 persons

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 lenders 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 lenders refusal to make loans in certain

neighborhoods

Chapter 9
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Mortgages and Notes

Note the original presentation has been edited by the presenter

South-Western Publishing2002

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
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Deed of Trust
Note the original presentation has been edited by the presenter

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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 Borrowers 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 Publishing2002

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 lenders charge to raise the return on the loan usually stated as a percentage of the loan amount.

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Government Sponsored Loan Programs vs. Conventional Loans

Government Sponsored:

FHA: Federal Housing Administration VA: Veterans Administration RHSA: Rural Housing Services Administration
Conventional Private

Non-Governmental Loans:

VA and FHA in Comparison

FHA Insures loans UFMIP VA Guarantees loans Funding fee Veterans only Rate negotiable Points No down payment 100% L-T-V

Anyone qualified Rate negotiable Points 3-5% down 97-95% L-T-V

(up front mortgage Insurance premium)

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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

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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.

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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 Publishing2002

Regulation Z
Right to Rescission
Borrowers 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.

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Regulation Z
Triggering Items and Disclosures Mention these
Down payment Any payment Number of payments Period of payments Amount of any finance charge, or statement: no charge for credit

Triggers disclosure
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

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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

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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 borrowers 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 Publishing2002

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