Real Estate Finance and Mortgages
Most real estate purchases depend on financing, so licensees must understand how mortgages work and the laws that govern lending. This chapter covers the roles of borrower and lender, key loan clauses, common loan programs, and federal consumer protection laws. Understanding finance helps you guide buyers to suitable options and recognize the terms in a transaction.
The Note, the Mortgage, and Key Parties
A real estate loan involves two main documents: the promissory note, which is the borrower's promise to repay, and the mortgage, which pledges the property as security. The borrower who gives the mortgage is the mortgagor, and the lender is the mortgagee. Equity is the owner's interest, equal to value minus the debts against the property. These fundamentals underlie every financed transaction.
Loan Repayment and Structure
Loans differ in how they are repaid. A fully amortized loan pays off completely through regular payments of principal and interest, with interest heaviest early on. Balloon loans require a large final payment, and adjustable-rate mortgages change based on an index plus a margin. These structures affect payment amounts and the borrower's risk over time.
Mortgage Clauses
Mortgages contain clauses that define the lender's and borrower's rights. An acceleration clause lets the lender demand full repayment upon default, a necessary step before foreclosure. A due-on-sale clause requires payoff when the property is transferred. A defeasance clause requires the lender to release the lien once the debt is paid. These clauses shape what happens on default or sale.
Loan Programs and the Secondary Market
Buyers may use conventional loans or government-backed programs. FHA insures loans made by approved lenders to allow lower down payments, while VA loans are guaranteed for eligible veterans. Conventional loans with less than 20 percent down usually require private mortgage insurance. The secondary market, including Fannie Mae and Freddie Mac, buys loans from lenders to provide liquidity for new lending.
Consumer Protection in Lending
Federal laws protect borrowers throughout the lending process. The Truth in Lending Act requires disclosure of credit terms, including the annual percentage rate. The Real Estate Settlement Procedures Act requires settlement cost disclosures and prohibits kickbacks. Discount points are prepaid interest used to lower the rate. These protections help consumers compare offers and understand their costs.
Last updated: July 2026