Real Estate Financing
Instruments and concepts
A promissory note is the borrower's promise to pay; a mortgage or deed of trust pledges the property as security. Both are hypothecation rather than transfer of title, but a deed of trust places bare legal title with a trustee. Loan-to-value ratio equals loan amount divided by the lesser of the sales price or the appraised value, and the difference is the borrower's down payment. PITI combines principal, interest, taxes, and insurance, and lenders collect monthly impounds for the last two.
Loan types and disclosures
Conventional loans are not government insured; FHA and VA loans carry federal backing and VA loans often require no down payment for eligible veterans. Conforming loans meet the secondary-market limits; jumbo loans exceed them. Adjustable-rate mortgages are described by the index, margin, adjustment caps, and initial teaser rate. Prepayment penalties, due-on-sale (alienation) clauses, acceleration, assumption, subordination, and wraparound arrangements are recurring test items. Federal disclosures now use the Loan Estimate and the Closing Disclosure under the TILA-RESPA integrated disclosure rules, and the ability-to-repay and qualified mortgage rules shape underwriting.
Distress and foreclosure
Alabama permits nonjudicial foreclosure under a power of sale, with notice published before the sale, and a statutory right of redemption after the sale. Deeds in lieu and short sales are alternatives.
Traps and worked example
Discount points are paid to reduce the interest rate and are not the same as an origination fee. Worked example: a buyer contracts at 250,000 dollars and appraises at 245,000 dollars; an 80 percent LTV loan is based on 245,000 dollars, giving a 196,000 dollar loan and a down payment of 54,000 dollars.