Financing
Most buyers borrow to purchase real estate, and brokers are tested on the instruments, clauses, and federal laws in more detail than salespeople because a broker's agents rely on the broker to keep the office compliant. This topic covers the documents that create and secure a loan, common loan types and clauses, and the federal lending laws.
Notes and Security Instruments
A mortgage loan involves two documents. The promissory note is the borrower's personal promise to repay and is the evidence of the debt. The security instrument (a mortgage or a deed of trust) pledges the property as collateral so the lender can foreclose on default. In a mortgage the borrower (mortgagor) gives the security to the lender (mortgagee). In a deed of trust the borrower conveys bare legal title to a neutral trustee who holds it until the loan is paid, then issues a reconveyance. In title-theory states the lender holds title until payoff; in lien-theory states the borrower keeps title and the lender holds only a lien.
Loan Types and Common Clauses
Conventional loans are not government-backed; FHA loans are insured and VA loans are guaranteed by federal agencies to reduce lender risk. Important clauses include acceleration (whole balance due upon default), alienation or due-on-sale (loan called if the property is transferred), prepayment (may charge a penalty for early payoff), subordination (allows a lien to move to lower priority), and defeasance (releases the lien on full payment). Junior financing, wraparound loans, and seller carry-backs are tools a broker should understand to structure a deal, always subject to the senior lender's due-on-sale rights.
Federal Lending Laws
The Truth in Lending Act (Regulation Z) requires disclosure of the annual percentage rate (APR) and finance charges and regulates credit advertising, including trigger terms that require full disclosure. RESPA governs closing-cost disclosures for federally related mortgage loans and prohibits kickbacks and unearned referral fees for settlement services, a compliance area a broker must police in the office. The Equal Credit Opportunity Act (ECOA) prohibits discrimination in lending based on protected characteristics. A broker who tolerates a referral-fee arrangement that violates RESPA risks liability for the entire firm.