FUNDAMENTALS

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OVERVIEW OF DISCOUNT MORTGAGE FUNDAMENTALS:

Most people are not aware of the fact that in today’s market there are a substantial number of Real Estate transactions that have seller financing.  More and more in today’s market, with the changing interest rates and with lending done by private investors it is wise for home sellers to think about holding paper when they want to sell their homes fast.  In most cases, sellers and individuals holding paper would like to receive cash for their note, and they could probably accomplish this with NATIONAL NOTE BUYERS.  Even those individuals who wanted to carry back the paper on a long term basis will have events that occur in their lives which will make it necessary for them to sell all or part of their notes.

If you are holding/or want to create notes there are a few terms you should be aware of. 

They are as follows:

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UNDERSTANDING A MORTGAGE NOTE

This section is added to help understand how and why a deal a deal is put together and what make it work or not work.  This includes knowing how real estate is financed, how and why privately held mortgages also known as “paper” and trust deeds come into existence.

Let me introduce the players who are part of our hypothetical deal.  First meet Jane,  Jane has a piece of real estate she wants to sell.  Next is Art.  He wants to buy Jane’s real estate.

Jane’s real estate is a single-family home, which she is selling for $130,000.  Art has agreed to purchase it at that price.  He has $50,000 cash to use as a down payment.  He needs to finance an additional $80,000 in order to buy the house.

Jane owns the house outright, free and clear. There are no liens or back taxes against the property.  This means  Jane will have $130,000 cash out of the deal, less here closing costs.

I’m assuming, to make this transaction simple, that Jane owns  the house free and clear.  You don’t have to have a transaction free of  other debt.  In most cases you won’t be dealing with free-and-clear property, but to make the numbers simple, lets make it free and clear.

Art needs to borrow $80,000 to make this deal work.  Where does he go for the money?

More often than not, Art will go to a bank for his loan to purchase Jane’s house.  And why not? That’s what banks are for; that’s what everyone else does.

Art sits down with the banker, describes the property, and explains how much down payment he has.  The banker does a little figuring and tells Art his payment on a fixed-rate loan of $80,000 will be $775.00 a month for the next thirty years, assuming the property appraises okay and he qualifies for the loan.

Before the bank agrees to lend Art the money, it checks him out and approves or disapproves his loan.  This normally take anywhere from four to eight weeks.  The bank goes through Art’s financial life with a fine-toothed comb. It wants to be very sure Art has the means to actually repay the money.  The bank will ask for a net-worth, two years of tax returns, a credit report, verification of employment, etc.  The process takes a long time.  The bank does not want to lend money to just anyone, especially someone who has bad credit or little net worth.  The bank also wants to make sure Art has enough money, somewhere, for the down payment.

That’s why banks are very careful, take a lot of time, and, as you know if you’ve ever bought a piece of property, are always asking for one more piece of documentation about something or other as the loan gets close to funding.

The bank also checks out the property itself.  They have an appraisal on the property to learn whether the true value of the property supports the loan Art is requesting.  They also do a title report on the property.  The title report tells them what other liens, if any, are against the property, what positions those liens hold (whether first, second, or third mortgages, for example) and whether property taxes have been paid.  If there are taxes or outstanding liens when Art buys the property, then at closing those taxes and liens must be paid off. so that the bank has first position.  The title report also reveals whether Jane holds a clear title, whether there are any covenants, conditions, and restrictions on the deed, and whether there are any easements on the property, among other information vital to determining the value of the property that will secure the bank’s loan.

The bank will be very happy with Art’s $50,000 down payment provided the appraiser confirms the accuracy of the selling price. But it also wants to be sure Art has an income/debt ratio that will allow him to make the payments.

Finally the bank calls Art and tells him his loan has been approved and the banker goes over the details with Art one more time.  A date is then set for closing.  At the closing, in mortgages states, Jane, Art and their attorneys, and a representative of the bank sit around a large table to review the documents and sign the papers that transfer ownership of title to the property from Jane to Art.  Jane

When the closing is completed, Jane has $130,000 cash to use as she pleases.  Art owns the house and has signed a mortgage and promissory note.  This is a legal promise to pay back the money.  In this document all the terms are stated, such as interest rate, monthly payment, amount borrowed, as well as the parties’ names and addresses, and of course the address and legal description of the property.  Bill signs this document at closing and the bank puts it in a safe place.  The promissory note is like a check worth $80,000 plus interest, payable at $775. a month for thirty years.

The note is combined with another legal document called the mortgage or trust deed, which is recorded—placed on public record—at the county recorder’s office. It spells out, in detail, what Art has agreed to.  It also includes the legal description of the real estate Art has purchased—the collateral the bank uses to secure the loan—listing the lot and block number of the property.  It details what will happen if Art doesn’t make his payments.

The mortgage document is a contract between Art and the bank.  It’s fairly standard all across the United States and Canada.  In a number of states, mostly in the West, this contract is called a trust deed.

A trust deed serves the same purpose as a mortgage.  It, too, has a promissory note associated with it, but instead of two parties (Art and the bank) there are three parties, Art, the bank, and a  neutral third party, the trustee.  The trustee is an independent person or company who hold the legal documents in trust for Art and the bank.

When the closing is completed, Jane has her $130,000 cash, Art has the property, and the bank has the mortgage or trust deed and the promissory note.

 

 

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