As previously stated, a promissory note does need to be tied to either a mortgage or a deed of trust. In Illinois, the note used to obtain money to purchase real property is usually secured by a mortgage.
The mortgage document or deed of trust clearly establishes:
Deed of Trust
In some situations, lenders may prefer to use a three-party instrument known as a deed of trust, or trust deed, rather than a mortgage.
The conveyance establishes the actions that the trustee may take if the borrower (the trustor) defaults under any of the deed of trust terms.
Provisions for Default
The mortgage or deed of trust typically includes an acceleration clause to assist the lender in foreclosure. If a borrower defaults, the lender has the right to “accelerate the maturity of the debt.” This means the lender may declare the entire debt due and payable immediately.
Without an acceleration clause, the lender would have to sue the borrower every time a payment was overdue.
Other clauses in a mortgage or deed of trust:
Discount Points and Investor Yield
As a general guideline, each discount point paid to the lender will increase the lender’s yield (return) by approximately 1/8 of 1 percent (.00125). In using the guideline, for each discount point charged by a lender, add 1/8 to the stated (contract) mortgage interest rate to estimate the lender’s real return (and cost to the borrower) from the loan.
To determine the actual cost to the borrower, in dollars, added by discount points, each discount point is equal to 1% of the mortgage balance (1 point = 1%). The mortgage balance (loan amount) is multiplied by this discount percent to find the dollar amount of the discount being charged.
If the market rate of interest is 101/4% and the Lender’s rate of interest is 91/2%. The following steps should be used to approximate the discount points required to equal the market rate of interest and determine the amount of discount charged on a $60,000 mortgage.
Calculate the difference in the two rates.
Calculate the Dollar Amount of the Discount Points,
Assignment of the Mortgage
Without changing the provisions of a contract, a note may be sold to a third party, such as an investor or another mortgage company. The original mortgagee endorses the note to the third party and executes an assignment of mortgage. The assignee becomes the new owner of the debt and security instrument. When the debt is paid in full (or satisfied), the assignee is required to execute the satisfaction (or release) of the security instrument.
Release of the Mortgage Lien
When all mortgage loan payments have been made and the note has been paid in full, the borrower will want the public record to show that the debt has been satisfied and that the lender is divested of all rights conveyed under the mortgage. By the provisions of the defeasance clause in most mortgage documents, the lender is required to execute a satisfaction of mortgage (also known as a release of mortgage or mortgage discharge) when the note has been fully paid. This document returns to the borrower all interest in the real estate originally conveyed to the lender. Entering this release in the public record shows that the mortgage lien has been removed from the property.
If a mortgage has been assigned by a recorded assignment, the release must be executed by the assignee or mortgagee to the grantor. The trustee executes and delivers a release deed, sometimes called a deed of reconveyance, to the trustor. The release deed conveys the same rights and powers that the trustee was given under the deed of trust. The release deed should be acknowledged and recorded in the public records of the county in which the property is located.
Any mortgagee, or his assigns or agents, who fails to deliver a release to the mortgagor or the grantor of a deed of trust within one month after full payment and satisfaction will be liable to pay the mortgagor or grantor a $200 penalty. The release also must state the following on its face in bold letters: FOR THE PROTECTION OF THE OWNER, THIS RELEASE SHALL BE FILED WITH THE RECORDER OR THE REGISTRAR OF TITLES IN WHOSE OFFICE THE MORTGAGE OR DEED OF TRUST WAS FILED. It is then the mortgagee’s responsibility to record the release.
Tax and Insurance Reserves
Many lenders require that borrowers provide a reserve fund to meet future real estate taxes and property insurance premiums. This fund is called an impound account or an escrow account. When the mortgage or deed of trust loan is made, the borrower starts the reserve by depositing funds to cover the amount of unpaid real estate taxes. If a new mortgage insurance policy has just been purchased, the mortgage insurance premium reserve will be started with the deposit of one-twelfth of the insurance premium liability. The borrower’s monthly loan payments will include PITI: principal, interest, tax, and insurance. Other costs such as flood insurance, or homeowners’ association dues (condos) may also be included.
Illinois law — Lender Escrow Accounts
Illinois prescribes additional guidelines that must be followed by lenders who require escrow accounts for mortgage loans on single-family, owner-occupied residential properties. The Illinois Mortgage Tax Escrow Account Act at 765 I LCS 915/ provides that except during the first year of the loan, a lender may not require an escrow accumulation of more than 150 percent of the previous year’s real estate taxes. Lenders must give borrowers written notice of the act’s provisions at closing.
The Illinois Mortgage Escrow Account Act at 765 ILCS 910/ states that when the principal loan balance has been reduced to 65 percent of its original amount, the borrower may terminate his escrow account. The latter does not apply to loans insured, guaranteed, supplemented, or assisted by the state of Illinois or agencies of the federal government such as FHA and VA.
Borrowers have the right to pledge an interest-bearing deposit in an amount sufficient to cover the entire amount of anticipated future tax bills and insurance premiums instead of establishing an escrow account.
Flood insurance
The National Flood Insurance Reform Act of 1994 imposes certain mandatory obligations on lenders and loan servicers to set aside (escrow) funds for flood insurance on new loans. The act also applies to any loan still outstanding on September 23, 1994. This means that if a lender or servicer discovers that a secured property is in a flood hazard area, it must notify the borrower. The borrower then has 45 days to purchase flood insurance. If the borrower fails to procure flood insurance, the lender must purchase the insurance on the borrower’s behalf. The cost of the insurance may be charged to the borrower.
Assignment of Rents
If the property involved includes rental units, the borrower may provide for rents to be assigned to the lender in the event of the borrower’s default. The assignment may be included in the mortgage or deed of trust, or it may be a separate document. In either case, the assignment should clearly indicate that the borrower intends to assign the rents, not merely pledge them as security for the loan. In title-theory states, lenders are automatically entitled to any rents if the borrower defaults.
Assuming a Seller’s Mortgage
When a person purchases real estate that is subject to an outstanding mortgage that does not have a “Due on Sale Clause”, the buyer may take the property in one of two ways.
When the property is sold subject to the mortgage, the buyer is not personally obligated to pay the debt in full (seller is ultimately responsible for the payment of the mortgage).
In contrast, a buyer who purchases the property and assumes the seller’s debt becomes personally obligated for the payment of the entire debt.
The existence of a lien does not prevent the transfer of property; however, when a secured loan is assumed, the mortgagee or beneficiary must approve the assumption and any release of liability of the original mortgagor or trustor. Because a loan may not be assumed without lender approval, the lending institution would require the assumer to qualify financially, and many lending institutions charge a transfer fee to cover the costs of changing the records. This charge can be paid by either the buyer or the seller.
Alienation clause
The lender may want to prevent a future purchaser of the property from being able to assume the loan, particularly if the original interest rate is low. For this reason, some lenders include an alienation clause, also known as a due-on-sale clause in the note. An alienation clause provides that when the property is sold, the lender may either declare the entire debt due immediately, or allow the mortgage to be assumed.
Recording a Mortgage or Deed of Trust
The mortgage document must be recorded in the recorder’s office of the county in which the real estate is located. Recording gives constructive notice to the world of the borrower’s obligations. Recording also establishes the lien’s priority.
Priority of a Mortgage
Priority of mortgages and other liens normally is determined by the order in which they were recorded. A mortgage or deed of trust on land that has no prior mortgage lien is a first mortgage or deed of trust. If the owner later executes another loan for additional funds, the new loan becomes a second mortgage or deed of trust (or a junior lien) when it is recorded. The second lien is subject to the first lien; the first has prior claim to the value of the land pledged as security. Because second loans represent greater risk to the lender, they are usually issued at higher interest rates.
Subordination Agreement
The priority of mortgage or deed of trust liens may be changed by a subordination agreement, in which the first lender subordinates its lien to that of the second lender. To be valid, such an agreement must be signed by both lenders.
