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 (power-of-sale) foreclosure, an important state-specific feature. Loan program details, rates, and thresholds change frequently, so verify current terms with a lender and confirm current federal rules, since figures can change.
Loan Instruments and Security
A mortgage loan is documented by two distinct instruments, and confusing them is a common exam mistake, so keep them separate. The first is the promissory note, which is the borrower's written promise to repay the debt; it states the amount borrowed, the interest rate, the payment schedule, and the term, and it is the actual evidence of the debt and the personal obligation to pay. The second is the security instrument, which pledges the property as collateral so the lender can be repaid from the property if the borrower defaults. In some states that security instrument is a mortgage with two parties, the borrower (mortgagor) and the lender (mortgagee). Texas, however, most commonly uses a deed of trust, which involves three parties: the borrower (called the trustor or grantor), the lender (called the beneficiary), and a neutral third party (the trustee) who holds legal title, or a power of sale, on the lender's behalf until the loan is paid. This three-party structure matters because it enables the fast non-judicial foreclosure process Texas is known for. Two vocabulary terms round out the topic. Hypothecation describes the arrangement in which the borrower pledges the property as security for the debt while keeping possession, use, and enjoyment of it; the borrower lives in the home even though it secures the loan. Defeasance refers to a clause providing that when the debt is fully paid, the lien is canceled and clear title is confirmed in the borrower, in Texas typically through a release of lien recorded in the county records. The debt-to-property relationship also introduces the ideas of lien priority, since a first lien is paid before a second lien in a foreclosure, and the equity the owner builds as the loan balance falls and the value rises. Understanding which document does what, and that Texas uses a deed of trust with a trustee, gives agents the vocabulary to explain how default and foreclosure actually work to their buyers, though agents should direct specific loan questions to a licensed lender.
Common Loan Programs
Buyers choose among several loan programs depending on their credit, cash, and goals, and agents should understand the trade-offs well enough to steer buyers toward getting properly qualified. Conventional loans are not insured or guaranteed by the federal government; they follow the underwriting guidelines of the secondary-market buyers Fannie Mae and Freddie Mac, and they typically offer the best terms to borrowers with strong credit and larger down payments. A defining feature of conventional lending is private mortgage insurance, or PMI: when the borrower's down payment is less than 20 percent, meaning the loan-to-value ratio is above 80 percent, the lender generally requires PMI to protect against default, and it can usually be canceled once the borrower builds sufficient equity. FHA loans are insured by the Federal Housing Administration; they allow lower down payments and more flexible credit qualifying, which helps first-time and moderate-income buyers, but they require mortgage insurance premiums and the property must meet minimum condition standards. VA loans are guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and certain surviving spouses; their signature benefits are the possibility of no down payment and no monthly mortgage insurance, though a funding fee usually applies. USDA loans support eligible rural properties with little or no down payment. Beyond who backs the loan, buyers choose a rate structure. A fixed-rate mortgage keeps the same interest rate and principal-and-interest payment for the entire term, giving predictability. An adjustable-rate mortgage (ARM) starts with a rate that later adjusts periodically based on a published index plus a fixed margin; caps limit how much the rate can change at each adjustment and over the life of the loan, which protects the borrower from unlimited increases. Loans are also either fully amortized, meaning the scheduled payments retire the balance to zero by the end of the term, or they carry a balloon payment, a large final payment due after smaller periodic payments. Because down-payment thresholds, insurance rules, and eligibility standards change over time and vary by lender, always advise buyers to confirm current program terms with a licensed mortgage lender.
Key Loan Clauses and Costs
Loan documents contain standard clauses that protect the lender and features that shape the borrower's cost, and agents should be able to explain them plainly. The acceleration clause allows the lender, upon the borrower's default, to declare the entire remaining balance immediately due rather than waiting to collect payment by payment; acceleration is a legal prerequisite to foreclosure, because the lender must first accelerate the debt before selling the property to satisfy it. The due-on-sale clause, also called an alienation clause, allows the lender to call the full balance due if the borrower sells or otherwise transfers the property without the lender's consent; this clause prevents an unqualified new owner from simply taking over the old low-rate loan and is the reason most modern loans cannot be freely assumed. A prepayment penalty, where permitted, charges the borrower for paying the loan off early, though many loan types restrict or prohibit it. On the cost side, discount points are a form of prepaid interest the borrower pays at closing to buy down the interest rate, and each point equals one percent of the loan amount; for example, one point on a $200,000 loan is $200,000 x 0.01 = $2,000. Origination fees compensate the lender for making the loan and are also often quoted in points. The monthly payment on a typical loan is captured by the acronym PITI, which stands for Principal, Interest, Taxes, and Insurance; the principal and interest repay the loan, while the taxes and insurance are frequently collected monthly and held in an escrow (impound) account so the lender can pay the property tax bill and the homeowner's insurance premium when they come due. Lenders qualify borrowers partly by comparing PITI and total debt to income using debt-to-income ratios. A simple interest example ties this together: annual interest equals principal times the annual rate, so 7 percent on a $250,000 loan is $250,000 x 0.07 = $17,500 per year, or $17,500 / 12 = about $1,458 per month in interest before principal. Because rates, points, and escrow requirements vary by lender and change constantly, agents should present these as concepts and refer buyers to a lender for current figures.
Default, Foreclosure, and Redemption
When a borrower fails to make payments or otherwise breaches the loan, the lender can pursue foreclosure to force a sale of the collateral and recover the debt. Texas is well known for its non-judicial foreclosure process, which is faster than the court-supervised process used in many other states, and this is a favorite exam topic. Non-judicial foreclosure is possible because the deed of trust contains a power-of-sale clause that authorizes the trustee to sell the property without a full court trial when the borrower defaults and the debt has been accelerated. The process is governed by statute (notably Texas Property Code Section 51.002 for the sale procedure) and by strict notice requirements: the borrower must generally receive notice of default and an opportunity to cure, followed by a notice of sale, and Texas foreclosure sales are conducted publicly on the first Tuesday of the month at the county courthouse, subject to the statutory timelines. Because the exact notice periods are set by statute and can change, verify the current requirements rather than memorizing a single number. Borrowers have certain rights to save or reclaim the property. The equitable right of redemption allows a defaulting borrower to pay the full debt plus costs to stop the sale before it takes place, curing the default and keeping the home. A statutory right of redemption, allowing an owner to buy the property back after the sale, is limited in Texas and applies mainly in specific situations such as certain tax sales and homeowners association assessment foreclosures, so do not assume a general post-sale redemption right exists for ordinary mortgage foreclosures. If the foreclosure sale does not bring enough to pay off the debt, the lender may seek a deficiency judgment for the shortfall, subject to legal limits and anti-deficiency protections that can apply to certain loans, especially on homesteads. Alternatives to foreclosure include a deed in lieu of foreclosure, where the borrower voluntarily conveys the property to the lender, and a short sale, where the lender agrees to accept sale proceeds that are less than the balance owed. A loan assumption, where a buyer takes over the seller's existing loan and terms, is possible only with lender approval given the due-on-sale clause, and whether the original borrower is released depends on the lender. Direct specific foreclosure questions to an attorney.
Federal Lending Laws and the Secondary Market
A cluster of federal laws promotes transparency, fairness, and consumer protection in mortgage lending, and the exam expects you to recognize the purpose of each by name. The Truth in Lending Act (TILA), implemented by Regulation Z, requires lenders to disclose the true cost of credit so consumers can compare loans; its central figure is the annual percentage rate (APR), which folds interest and certain finance charges into a single yearly rate, and TILA also governs how credit is advertised, requiring that if certain trigger terms appear, additional disclosures must follow. The Real Estate Settlement Procedures Act (RESPA) applies to federally related mortgage loans on residential property and focuses on the settlement (closing) process; it requires clear disclosure of settlement costs, limits escrow account cushions, and strictly prohibits kickbacks, referral fees, and unearned fees among settlement service providers, which is why an agent may not accept an undisclosed payment for steering a client to a particular title company or lender. The disclosures required by TILA and RESPA for most closed-end consumer mortgages are now combined under the TILA-RESPA Integrated Disclosure rule, known as TRID, which produced the Loan Estimate the borrower receives shortly after applying and the Closing Disclosure the borrower must receive at least three business days before closing, giving time to review the final terms. The Equal Credit Opportunity Act (ECOA) prohibits discrimination in any part of a credit transaction based on protected characteristics such as race, color, religion, national origin, sex, marital status, age, or because income comes from public assistance. These consumer laws work alongside the secondary mortgage market, which is what keeps money available to lend. In the primary market, lenders originate loans directly to borrowers; in the secondary market, entities such as Fannie Mae, Freddie Mac, and Ginnie Mae buy those loans from originators, often pooling them into mortgage-backed securities. By purchasing existing loans, the secondary market returns cash to lenders so they can make new loans, providing liquidity and standardizing underwriting through the guidelines borrowers must meet. Because these federal rules and their dollar thresholds and timelines are periodically revised, treat specific figures as subject to change and confirm current requirements before relying on them.
Last updated: September 2026
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