Financing and Settlement
This chapter explains how real estate purchases are financed, the instruments and clauses used in mortgage lending, and what happens at settlement. Financing knowledge helps licensees guide buyers and understand the closing process.
Notes, Mortgages, and Key Clauses
A buyer who borrows signs a promissory note, the promise to repay, and a mortgage or deed of trust that pledges the property as security. An acceleration clause lets the lender demand the full balance upon default, a necessary step before foreclosure. A defeasance clause requires the lender to release the lien once the debt is paid. A due-on-sale clause allows the lender to call the loan if the property is sold, preventing unauthorized loan assumptions.
Types of Loans and Lending Laws
Conventional loans are not government-backed, while FHA loans are insured and VA loans are guaranteed by federal agencies to help qualified borrowers. Loans may carry fixed or adjustable interest rates. Federal laws shape lending practices: the Truth in Lending Act requires disclosure of borrowing costs, the Equal Credit Opportunity Act prohibits discrimination in credit, and RESPA governs settlement services and prohibits kickbacks. These protections promote informed and fair lending.
The Settlement Process
At settlement, or closing, ownership transfers and funds are disbursed according to a settlement statement that itemizes charges to buyer and seller. Prorations divide ongoing expenses such as property taxes between the parties as of the closing date. Buyers typically receive the Closing Disclosure outlining final loan terms and costs before closing. Escrow or trust funds held during the transaction are released as the closing is finalized.