This is the document that is the evidence of debt. This is the device that a lender can show that a debt is owed. It shows the requirements of payment on the part of the owner/mortgagor; "promising to pay." It shows the debt amount, the interest rate charged, the repayment schedule, and the payment amount that is due every month.
Allows Holder to Foreclose - This is the document that allows the lender to:
Can be Sold - The lender holding the note can sell it to another lender. This is why a homeowner starts with one lender and ends up working with another lender. When this is done, the promissory note is said be sold at a discounted to the new lender. If the original lender/holder of the promissory note wishes to sell it, the note is "discounted" (sold at less than face value) because the current lender is selling prior to the Note's ending date. A $250,000 30 year note that is only payable for the next 22 years is not worth $250,000 today. This is why the note is sold at a discount to the new lender. This is called "discounting" a note.
Used as Collateral - If the lender desires to take out a loan from another lender, the current lender can use the promissory Note as collateral. The lender/holder would pledge the Note as collateral for its loan.
The majority of security devices utilized by lenders is the mortgage. If a homebuyer has excellent credit and a good history of payments, it behooves a lender to utilize a mortgage because there are fewer costs associated with its use. The mortgage does not require a lender to establish a third-party between the homebuyer and itself. The lender is free to work with the homebuyer on a direct basis during the entire loan period.
Title - In most States like Washington which is a title theory state, the borrower does not actually keep title to the property during the loan term. The seller gives the buyer/borrower a deed to the property but when the borrower signs the mortgage for the loan the borrower gives the title back to the mortgage holder. The lender then holds title to the property, as security only, until all loan payments have been made. During that time the borrower has the right to possession of the property, and the lender delivers the deed back to the borrower only after the loan obligation has been satisfied.
Most States have advantageous mortgage laws that benefit the homeowner. The foreclosure procedures are established by each State where the property is located. Most States require a vast amount of notification by the lender regarding a loan in default, and the impending foreclosure. Each State has mortgage requirements that provide the homeowner with a series of timelines to correct deficiencies on the loan.
A redemption period is the legal right of any mortgage borrower in foreclosure to pay off the total debt, including the principal balance, plus certain additional costs and interest, in order to reclaim the property after defaulting on the mortgage. In all states, the borrower can redeem the home before the foreclosure sale, but certain states also provide for a redemption period following the foreclosure sale.
Redemption Before the Sale
In Washington State, reinstatement of the loan can be made up to 11 days before the auction which includes all late payments, fees, and lawyer cost associated.
Redemption After the Sale
Washington is a nonjudicial state and utilizes power of sale via deed of trust; therefore redemption for the seller is not possible, in some States the redemption period can be up to two years!
Some lenders prefer to use a security device known as a trust deed. The process is a complicated procedure in that the lender hires a third-party, known as the trustee, to deal with the common problems of working with borrowers. The trustee works with each borrower and handles all the administration and monies for each lien. The lender is set up as the beneficiary of the trustee and simply collects payments from the trustee.
Title - The title to the property and home is held by the trustee. The buyer/homeowner has what is known as equitable title. This means the homeowner is totally responsible for the property as far as upkeep and payment of taxes. Once the debt is completely paid, the trustee will issue a reconveyance deed to the homeowner which grants complete title ownership to the homeowner.
Since the title is held by a trustee, the foreclosure procedures can move much faster when a homeowner defaults. In fact, some States allow the foreclosure procedures to move 50% faster than a mortgage. The foreclosure procedures from a trust deed takes up to 190 days once the homeowner is behind on payments.
Again, the trustee would handle all of the foreclosure proceeds on behave of the beneficiary/lender. This would include default notifications, foreclosure procedures, and disbursement of funds once foreclosure and the sale of the property is completed.
In Washington State:
Mortgage holder must contact homeowner (or satisfy the requirements for attempting to contact the homeowner) at least 30 days before issuing a notice of default for owner-occupied residential properties to try to reach a resolution other than foreclosure. If the homeowner responds to the contact, the notice of default may not be issued for an additional 60 days. A notice of default must be served on homeowner 30 days before notice of sale is served. The notice of default must be served by both first-class mail and by registered or certified mail, return receipt requested, and by either posting the notice on the premises in a prominent place or by personal service on homeowner. Foreclosing party must serve notice of sale in the same manner as the notice of default at least 90 days before sale date. No sale may occur within 190 days after the first default.
Which of the following clauses is always found in a promissory note?
A) the acceleration clause
B) a prepayment clause
C) a late payment clause
D) all of the above
When would it be the advantage of lenders to waive a prepayment penalty provision in a note?
A) in a tight money market
B) when the Federal Reserve lowers its discount requirements
C) in a deflationary period
D) when money is readily available for real estate loans
A valid promissory note provides legally acceptable evidence of:
A) a debt
C) an alienation
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The study of system of rules which a particular country or community recognizes as regulating the actions of its members and which it may enforce by the imposition of penalties.