UNDERSTANDING A MORTGAGE NOTE

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. There are many steps to take when applying for a mortgage. From the application and preapproval process, to acceptance, funding, and finally the closing of the loan, it is a long and intense process. The more organized and prepared you are for this process, the easier it will be.

Choose a trusted loan consultant or mortgage broker to help you through the loan process. Do not hesitate to comparison shop. This will be one of the major purchases of your life, and you will want to be sure you are getting the best possible deal. Explore all your options as each type of lender offers various loan products. Gather information from banks, mortgage brokers, credit unions and government loan programs.

Order a copy of your credit report or have your loan consultant get it for you. Review the report and make sure there are no errors. If you find any, have your loan consultant help you fix them. Also check with your loan consultant to see whether there are steps you can take to improve your score.

 

Fill out a loan application. The loan application will require your personal information as well as information about your income, debts and assets.

Gather your supporting documents. The loan consultant will tell you what documents your lender requires, but generally he will ask for a credit report, bank statements, pay stubs and references from your landlord and employers.

Review your good faith estimate, an itemized list of the costs you will encounter through the lending process. The law requires your lender to give you a good faith estimate within three days of your submitting the loan application. This way there are no hidden fees, and you and the lender can be sure you have sufficient funds to close the loan. You may incur fees for loan origination, appraisal, credit report, processing and underwriting.

Submit your purchase agreement to lock in the interest rate on the loan. Some lenders will allow you to lock the interest rate before you have the purchase contract, for a limited time and for a fee. The lender will also require an appraisal on the property, and some will require a termite inspection. The time period after your offer to purchase a home has been accepted is called the escrow period. It is during this time that the bank will fully approve you as a borrower.

Let me introduce the players who are part of our hypothetical deal.  First meet Mary,  Mary has a piece of real estate she wants to sell.  Next is Bob.  He wants to buy Mary’s real estate. Mary’s real estate is a single-family home, which she is selling for $130,000.  Bob 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. Mary owns the house outright, free and clear. There are no liens or back taxes against the property.  This means  Mary will have $130,000 cash out of the deal, less here closing costs. I’m assuming, to make this transaction simple, that Mary 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. Bob needs to borrow $80,000 to make this deal work.  Where does he go for the money? More often than not, Bob will go to a bank for his loan to purchase Mary’s house.  And why not? That’s what banks are for; that’s what everyone else does. Bob sits down with the banker, describes the property, and explains how much down payment he has.  The banker does a little figuring and tells Bob 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 Bob 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 Bob’s financial life with a fine-toothed comb. It wants to be very sure Bob 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 Bob 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 Bob 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 Bob 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 Mary 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 Bob’s $50,000 down payment provided the appraiser confirms the accuracy of the selling price. But it also wants to be sure Bobhas an income/debt ratio that will allow him to make the payments. Finally the bank calls Bob and tells him his loan has been approved and the banker goes over the details with Bob one more time.  A date is then set for closing.  At the closing, in mortgages states, Mary, Bob 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 Bob.  Mary When the closing is completed, Jane has $130,000 cash to use as she pleases.  Bob 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 Bob has agreed to.  It also includes the legal description of the real estate Bob 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 Bob doesn’t make his payments. The mortgage document is a contract betweenBob 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, Bob, 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 Bob and the bank. When the closing is completed, Mary has her $130,000 cash,Bob has the property, and the bank has the mortgage or trust deed and the promissory note. There are many steps to take when applying for a mortgage. From the application and preapproval process, to acceptance, funding, and finally the closing of the loan, it is a long and intense process. The more organized and prepared you are for this process, the easier it will be.

Choose a trusted loan consultant or mortgage broker to help you through the loan process. Do not hesitate to comparison shop. This will be one of the major purchases of your life, and you will want to be sure you are getting the best possible deal. Explore all your options as each type of lender offers various loan products. Gather information from banks, mortgage brokers, credit unions and government loan programs.

Order a copy of your credit report or have your loan consultant get it for you. Review the report and make sure there are no errors. If you find any, have your loan consultant help you fix them. Also check with your loan consultant to see whether there are steps you can take to improve your score.

 

There are many steps to take when applying for a mortgage. From the application and preapproval process, to acceptance, funding, and finally the closing of the loan, it is a long and intense process. The more organized and prepared you are for this process, the easier it will be.

Choose a trusted loan consultant or mortgage broker to help you through the loan process. Do not hesitate to comparison shop. This will be one of the major purchases of your life, and you will want to be sure you are getting the best possible deal. Explore all your options as each type of lender offers various loan products. Gather information from banks, mortgage brokers, credit unions and government loan programs.

Order a copy of your credit report or have your loan consultant get it for you. Review the report and make sure there are no errors. If you find any, have your loan consultant help you fix them. Also check with your loan consultant to see whether there are steps you can take to improve your score.

Fill out a loan application. The loan application (1003)  will require your personal information as well as information about your income, debts and assets.

Gather your supporting documents. The loan consultant will tell you what documents your lender requires, but generally he will ask for a credit report, bank statements, pay stubs and references from your landlord and employers.

Review your good faith estimate, an itemized list of the costs you will encounter through the lending process. The law requires your lender to give you a good faith estimate within three days of your submitting the loan application. This way there are no hidden fees, and you and the lender can be sure you have sufficient funds to close the loan. You may incur fees for loan origination, appraisal, credit report, processing and underwriting.

Submit your purchase agreement to lock in the interest rate on the loan. Some lenders will allow you to lock the interest rate before you have the purchase contract, for a limited time and for a fee. The lender will also require an appraisal on the property, and some will require a termite inspection. The time period after your offer to purchase a home has been accepted is called the escrow period. It is during this time that the bank will fully approve you as a borrower.

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  Mary’s,  Mary has a piece of real estate she wants to sell.  Next is Bob.  He wants to buy Mary’s real estate.

Mary’s real estate is a single-family home, which she is selling for $130,000.  Bob 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.  You can also convert your note to  INSTANT CASH, by selling a note that you own.

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

I’m assuming, to make this transaction simple, that Mary 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.

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

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

Bob sits down with the banker, describes the property, and explains how much down payment he has.  The banker does a little figuring and tells Bob 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 Bob 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 Bob’s financial life with a fine-toothed comb. It wants to be very sure Bob 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 Bob 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 Bob 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 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 Bob ‘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 Bob and tells him his loan has been approved and the banker goes over the details with Bob one more time.  A date is then set for closing.  At the closing, in mortgages states, Mary, Bob 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 Mary to Bob. 

When the closing is completed, Mary has $130,000 cash to use as she pleases.  Bob 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.  Bob 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 Bob has agreed to.  It also includes the legal description of the real estateBobhas 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 Bob  doesn’t make his payments.

The mortgage document is a contract between Bob 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 (Bob and the bank) there are three parties, Bob, 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 Bob and the bank.  

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