Financing
Most real estate purchases are financed, so agents must understand how loans work. This chapter covers mortgage instruments and their key clauses, common loan types, and the federal laws that govern lending.
Mortgage Instruments and Clauses
A borrower signs a promissory note (the promise to repay) and a security instrument (a mortgage or a deed of trust) that pledges the property as collateral. Important clauses include the acceleration clause (the full balance becomes due on default), the alienation or due-on-sale clause (payment due if the property is sold), and the defeasance clause (the lien is released when the debt is paid). In a deed of trust, a trustee can conduct a nonjudicial foreclosure.
Types of Loans
Conventional loans are not government-backed and often require private mortgage insurance if the down payment is under 20%. FHA loans are insured by the government and allow lower down payments, while VA loans help eligible veterans buy with little or no down payment. Loans may carry a fixed rate or be adjustable-rate mortgages (ARMs) whose rate changes with an index over time.
Federal Financing Regulations
Several federal laws protect borrowers. The Truth in Lending Act (TILA) requires disclosure of the annual percentage rate and finance charges. The Real Estate Settlement Procedures Act (RESPA) governs closing cost disclosures and prohibits kickbacks. The Equal Credit Opportunity Act (ECOA) prohibits discrimination in lending based on protected characteristics.