Creating a new note through mortgage loan origination is a great way to jump into note investing. You can make a note to keep for yourself or sell to an investor.
These are for notes which you may hold in your portfolio for cash flow or notes you can sell to someone in the open market.
While it has loan origination has perks, there are drawbacks. The main drawback is that there is no discount built into the origination process. For example, if you decide to originate a new note in a $50,000 loan, then you are going to be lending $50,000 to the borrower so they can buy a house.
Discount Points
Since this is the case, the loan originator will charge the borrower discount points, in which one (1) point represents 1% of the loan amount. Discount points refer to the amount of money the borrower pays to obtain the loan.
Discount points generally range between 0.5% to 5%. This can also be referred to as closing costs. When you originate a loan of $100,000, and charge a 5% loan discount, then they have to pay you $5,000 in closing costs, in the form of discount points to get the loan, then you really only have $45,000 invested in the loan.
Dodd-Frank Act
It is important for you to remember to follow the protocol of the law when originating a new note. You should hire a licensed loan originator to handle the paperwork and qualify the borrower.
Loan originators usually charge 1% of the loan, which can be passed onto the borrower. Using a loan originator will ensure that your loan is in compliant with the Dodd-Frank Act.
This law prevents the excessive risk-taking that led to the 2008 recession. The law also provides protections for American families, creating new consumer watchdog to prevent mortgage companies and pay-day lenders from exploiting consumers.
According to the Dodd-Frank Act, mortgage originators are defined as “any person who for direct or indirect compensation or gain or in the expectation of direct or indirect compensation or gain takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.”
Loan Originators
Loan originators are held to a higher standard than the person who buys the note from the loan originator. The loan originator must verify that the borrower can afford the property. This is known as the ability to repay – a qualified mortgage (QM). Factors such as credit and job history have to be examined.
When originating a loan, it may also be helpful for you to use a company called Call the Underwriter (CTU). They will underwrite the loan for you rather than use a loan originator, who charges more. CTU will conduct the same QM test.
This will ensure that you have a Dodd-Frank compliant loan, which you can later sell in the marketplace if you so choose. Being compliant with the Dodd-Frank Act will also help you out with the foreclosure process if you need to use this exit strategy.
In conclusion – Mortgage loan originations are an important part of the real estate market and can be impacted by various factors, such as interest rates, housing inventory, and economic conditions.
