Chapter 9

Mortgages and Notes
_______________________________________
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 “                                         title”
•	Most Bank loans involve at least two documents
–	Promissory _______________
–	Document pledging the real estate as                                  :
•	Mortgage
•	Deed of Trust
Parties to Land Contract:
	Buyer is _____________________________
	Seller is______________________________
Promissory Note
•	Contract between a borrower and lender
•	Obligor sometimes referred to as Maker
•	Obligee sometimes referred to as Holder
•	Principal
•	Interest
–	Arrears vs. Advance
•	Signature

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.

Parties to a Mortgage 
Mortgagor is _____________________________
Mortgagee is _____________________________

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
Particular Provisions Reviewed
•	Defeasance clause:  “mortgage and estate created hereby shall cease and be null and void”. . . when paid
•	Acceleration clause___________________________________
•	Covenant to pay taxes_________________________________
•	Covenant against waste and removal______________________
•	Covenant of insurance_________________________________
•	Covenant of preservation and repair______________________
Mortgage Satisfaction
•	Return Note marked “PAID”
•	Mortgagee issues either a “satisfaction of mortgage” or a “release”
•	Partial payment may be partially released
•	“Subject to” (original mortgagor remains liable, buyer not liable)
•	Assumption (original mortgagor remains liable, buyer liable)
•	Substitution or Novation
Recordation
•	Promissory note [ is  -  is not (circle one)]  usually recorded
•	Mortgage should be recorded by bank/lender
–	Recorded at _____________________
–	Requirements for recording:
•	____________________
•	____________________
Debt Priorities
•	First mortgage / Senior mortgage
•	Second mortgage / Junior mortgage
•	Subordination
•	Chattel liens
•	Foreclosure / Power of Sale

Key Terms
•	Acceleration clause
•	Deficiency judgment
•	First mortgage
•	Foreclosure
•	Junior mortgage
•	Mortgage
•	Mortgagee
•	Power of sale
•	Subordination

Chapter 10

Deed of Trust
_______________________________________
Deed of Trust Parties
•	Borrower = ___________________
•	Lender = _____________________
•	Neutral Third Party = _________________
–	Bank or Savings
–	Attorney
–	Real Estate Broker
–	Title Company
–	Trust Company

Conveyance Type
•	Naked or bare title: note conveyance language, “grants and conveys . . . in trust”
•	Trustee holds “title” until paid
•	Satisfaction through “Reconveyance” 
Clauses
•	Unique to Mortgage: Defeasance
•	Unique to DOT: “In Trust” & Reconveyance
•	All other clauses and covenants (pay taxes, etc) ____________

Deed of Trust Advantages
•	Upon default, Lender can 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

Foreclosure Reviewed
Key Terms
•	Assignment of rents
•	Beneficiary
•	Deed of trust
•	Naked title
•	Reconveyance 
•	Trustee
•	Trustor

Chapter 11

Lending Practices
_______________________________________
Loans
•	Term loan –________________payments only until due.
•	Amortized loan – regular equal payments for life of loan including ______________________.
•	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.

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?_________

•	Equity – ____________________________________________.
•	Points – one percent of _________________________.
•	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.

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 Similarities
•	 Owner-occupied
•	 1-4 family dwellings
•	 Refinancing allowed
•	 Assumption allowed (with approval)
•	VA borrowers must obtain
–	“Certificate of Eligibility”
–	“Certificate of Reasonable Value”

Key Terms
•	Amortized loan
•	Balloon loan
•	Conventional loans
•	Equity
•	FHA
•	Impound account
•	Loan origination fee
•	Loan-to-value ratio
•	Maturity
•	PITI
•	Point
•	Principal
•	UFMIP
•	VA

Chapter 12

The Loan and the Consumer
_______________________________________
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.
APR Example
•	It is designed to help borrowers compare different loan options. 
•	Not every 6% loan will have same APR
APR Example (2)
•	Note effect of lowering of the Origination fee and eliminating the points
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
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.

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 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
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 
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 
Debt to Income Ratios: 
Mitigating Factors
•	Demonstrated ability of an applicant to:
–	Allocate a higher percent of gross income to housing expenses
–	Accumulate savings and maintain a good credit rating
•	Larger down payment than normal
•	Applicant’s large net worth
•	Potential for increased earnings because of education or profession
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.
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:	A+	670+
•	Quality level/Credit score:	A-	660
•	Debt ratio:				28 - 38%
•	LTV Ratio				to 95%
•	Delinquency:
–	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:	B+	640
•	Quality level/Credit score:	B-	620
•	Debt ratio:				50%
•	LTV Ratio:				75-85%
•	Delinquency:
–	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:	C+	600
•	Quality level/Credit score:	C-	580
•	Debt ratio:				55%
•	LTV Ratio:				75%
•	Delinquency:
–	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:	D+	560
•	Quality level/Credit score:	D-	540
•	Debt ratio:				60%
•	LTV Ratio:				65-70%
•	Delinquency:
–	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 
Redlining
•	Refusing to make loans in certain areas.
Key terms
•	APR
•	Credit report
•	Fair credit reporting act
•	FICO
•	Finance charge
•	Liquid asset
•	Redlining
•	Regulation Z
•	Truth-in-Lending act
•	Subprime loans (A- to F risk)