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Real Estate Finance and Lending

Financing makes most real estate purchases possible, and agents must understand how loans work to serve buyers well. This chapter covers loan instruments, common loan programs, key clauses, and the federal laws that protect borrowers. Texas typically uses a deed of trust with non-judicial foreclosure, which is an important state-specific feature. Loan program details and rates change frequently, so verify current terms.

Loan Instruments and Security

A mortgage loan involves two main documents: a promise to repay and an instrument that pledges the property as collateral. Texas commonly uses a deed of trust with a trustee. Knowing the parties and documents clarifies how default and foreclosure work.

Promissory note
The borrower's written promise to repay the debt under stated terms; it is the evidence of the debt.
Deed of trust
Pledges the property as security; the borrower (trustor) conveys title to a trustee for the lender (beneficiary).
Hypothecation
The borrower pledges property as collateral while keeping possession and use of it.
Defeasance
A clause that cancels the lien and returns clear title once the debt is fully paid.

Common Loan Programs

Buyers choose among several loan types depending on their qualifications and goals. Government-backed programs offer flexibility for certain borrowers, while conventional loans follow secondary-market guidelines. Each program has trade-offs in down payment, insurance, and eligibility.

Conventional loans
Not government-insured; typically require private mortgage insurance (PMI) when the down payment is under 20% (LTV above 80%).
FHA loans
Insured by the Federal Housing Administration, allowing lower down payments and more flexible qualifying.
VA loans
Guaranteed by the Department of Veterans Affairs for eligible veterans, often with no down payment.
Adjustable-rate mortgages
The rate adjusts periodically based on an index plus a margin, usually with caps limiting changes.

Key Loan Clauses and Costs

Loan documents contain clauses that protect the lender and features that affect cost. Understanding these helps agents explain payments and consequences to buyers. Points and PITI are frequent exam and real-world topics.

Acceleration clause
Lets the lender demand the full balance upon default, a prerequisite to foreclosure.
Due-on-sale (alienation)
Allows the lender to call the loan due when the property is sold or transferred.
Discount points
Prepaid interest paid to lower the rate, with one point equal to 1% of the loan amount.
PITI
Principal, interest, taxes, and insurance, the components of a typical escrowed monthly payment.

Default, Foreclosure, and Redemption

When a borrower fails to pay, the lender can pursue foreclosure to recover the debt. Texas often uses a fast non-judicial process under the deed of trust. Borrowers may have limited rights to reclaim the property.

Non-judicial foreclosure
A power-of-sale clause lets the trustee conduct a sale without a court trial, subject to statutory notice requirements.
Equitable right of redemption
Lets a defaulting borrower pay the full debt plus costs to stop the sale before it occurs.
Deficiency
If the sale proceeds do not cover the debt, the lender may seek a deficiency, subject to legal limits.
Assumption
A buyer takes over the seller's existing loan and terms, subject to lender approval; seller release depends on the lender.

Federal Lending Laws and the Secondary Market

Federal laws promote transparency and fairness in lending, and the secondary market keeps mortgage money flowing. Agents should recognize the purpose of each law and how the market functions. These protect consumers and support lending capacity.

Truth in Lending Act (TILA)
Requires disclosure of the APR and finance charges so consumers can compare the cost of credit.
RESPA
Regulates settlement cost disclosures on federally related loans and prohibits kickbacks and unearned referral fees.
Equal Credit Opportunity Act
Prohibits discrimination in lending based on protected characteristics.
Secondary market
Entities like Fannie Mae and Freddie Mac buy loans from lenders, providing liquidity to fund new loans.
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Last updated: July 2026

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