Financing
Most buyers borrow to purchase real estate. This topic covers the instruments that create and secure a loan, common loan types and clauses, and the federal laws that govern lending disclosures and fairness.
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 title to a neutral trustee who holds it until the loan is paid, then issues a reconveyance releasing the 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. A fixed-rate loan keeps the same interest rate, while an adjustable-rate mortgage (ARM) changes with an index. 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), and subordination (allows a lien to move to lower priority).
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. RESPA (the Real Estate Settlement Procedures Act) governs closing-cost disclosures and prohibits kickbacks and referral fees for settlement services. The Equal Credit Opportunity Act (ECOA) prohibits discrimination in lending based on protected characteristics. Together these laws promote informed, fair borrowing.