Financing
Most real estate purchases involve borrowed money, so licensees must understand loan instruments, types of loans, and the laws that govern lending. This chapter covers notes and security instruments, common loan programs, and key federal disclosure laws. In Colorado, loans are commonly secured by a deed of trust rather than a traditional mortgage.
Notes and Security Instruments
A promissory note is the borrower's promise to repay the debt, while the security instrument pledges the property as collateral. Colorado typically uses a deed of trust, which involves a trustee, rather than a two-party mortgage. If the borrower defaults, the security instrument allows foreclosure to recover the debt. Understanding the difference between the note and the security instrument is fundamental to financing.
Types of Loans
A fully amortized fixed-rate loan has level payments that pay off the balance by maturity. Adjustable-rate loans change with an index, and balloon loans leave a large lump sum due at the end. Government-backed programs like FHA and VA loans have their own qualification and insurance features. Conventional loans not backed by the government often require private mortgage insurance when the down payment is small.
Federal Lending Laws
The Truth in Lending Act requires disclosure of the cost of credit, including the annual percentage rate. RESPA governs settlement cost disclosures and prohibits kickbacks for referrals. The Equal Credit Opportunity Act prohibits discrimination in lending based on protected characteristics. These laws promote transparency and fairness so borrowers can compare loans and understand their obligations.