Doc prep, servicer, RMLO. What am I paying to create a note I plan to hold?

Question

I got a sample note-and-deed-of-trust package from a title company and read the whole thing. There are blanks for the late charge, the grace period, the default rate, and the balloon date, and nobody told me who is supposed to fill those in or what it costs to have someone do it properly. I'd rather budget the setup honestly than discover the bill after I've already agreed to carry.

Rena Guide · Accepted Answer

Those blanks get filled by a real estate attorney or, in some states, by the closing agent working from attorney-approved forms, and how the documents have to be worded and recorded differs state by state, so this is a question for someone licensed where the property sits.

Rough costs people budget. Attorney drafting of a note plus security instrument commonly runs a few hundred dollars to around $2,000 depending on the state and how custom the terms are. Recording the security instrument is usually a modest county fee, sometimes tens of dollars, sometimes more where transfer taxes apply. A third party loan servicer typically charges a setup fee in the range of $75 to $200 and then something like $20 to $40 a month to collect payments, track the balance, and issue year end interest statements. If the buyer is going to occupy the home, federal rules on residential mortgage loan originators can require a licensed RMLO to prepare the file, and that service often runs a few hundred dollars up to about $1,000 per loan. Whether it applies to you depends on how many loans you make and on state licensing rules, so confirm it in writing with a licensed professional before you sign anything.

The cost most first time carry sellers forget is monitoring. You need to know if the buyer stops paying property taxes or lets the hazard insurance lapse, because a tax lien can climb ahead of your lien and an uninsured fire wipes out your collateral. Servicers sell tax and insurance tracking as an add on, usually a few dollars a month, and it's cheaper than finding out late.

marcus_hale41 · Answer

Add a lender's title policy to your list. Buyers pay for their own owner's policy and assume you're covered too, and you aren't. Getting yourself insured as the lienholder on the same transaction is a fraction of the standalone cost since the search is already done, and it's the only thing standing between you and a recording error on your own deed of trust.

nataliehsu · Answer

So there's an actual cottage industry here: doc prep, servicers, RMLO shops, tax and insurance tracking. Is any of that work someone does without a license, or is it all licensed roles plus the servicer?

dpatel_re · Answer

You've priced the paperwork and skipped the underwriting. A credit pull through a legitimate provider, verification of income, and a bank statement review is maybe $50 to $150 out of pocket and an hour of your time, and it's the cheapest line item in the whole file relative to what it prevents. I won't carry paper without a written application on file, mostly because a note buyer later will ask for exactly that.

raj_mehta14 · Answer

I'm still tangled on which document does what. The note is the promise to pay, the deed of trust or mortgage is what ties the promise to the house, and only the second one gets recorded? If the note is the asset, why isn't the asset the thing on record?

sonia_alvarez · Answer

@vellum yes, the note travels, the security instrument sits in the county records. And whether you're recording a mortgage or a deed of trust depends on the state, which also decides whether a default runs through a court or through a trustee sale. That difference is worth more to your downside than any doc prep fee, because judicial states can take a very long time.

nicole_adeyemi · Answer

Worth separating out if you ever carry on raw land. There's no dwelling, so the residential originator rules generally aren't in play, and a lot of land carries happen on a contract for deed instead of a note and deed of trust. Cheaper to paper, and the remedies on default are a completely different animal by state. I wouldn't assume anything from a house deal carries over.

jessreyes12 · Answer

The one I felt silly asking: who reports the interest income, and does the buyer get a form from me so they can deduct it? My assumption was the servicer handles it and I've never confirmed that. Talking to a CPA before the first payment rather than after, apparently.

Doc prep, servicer, RMLO. What am I paying to create a note I plan to hold?

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