Real Estate Finance, Mortgages, and Lending Practices
Instruments and theory
A promissory note is the borrower's personal obligation; the mortgage or deed of trust pledges the property as security. In lien-theory states the borrower retains title; in a title-theory state the lender holds legal title until the debt is paid. Iowa practice uses mortgages with the lender's interest protected by recording, and foreclosure generally proceeds through the courts.
Underwriting and loan types
Key ratios: loan-to-value (LTV), debt-to-income (DTI), and total housing expense. Conventional, FHA (insured, lower down payment), VA (veteran guarantee), USDA, and portfolio loans differ in down payment, insurance, and underwriting. Private mortgage insurance is commonly required above 80% LTV. Fixed vs adjustable rates: an ARM has an initial rate, adjustment caps, and a margin over an index. Points are prepaid interest (one point = 1% of the loan). Escrow/impound accounts collect taxes and insurance monthly.
Regulation and default
Federal disclosure rules (RESPA, TILA/TRID) govern the Loan Estimate and Closing Disclosure timing. Clauses to know: acceleration (declaring the whole balance due), due-on-sale, prepayment penalty, defeasance, and subordination. Junior liens are wiped out only in the order the foreclosure dictates; foreclosure extinguishes the borrower's redemption rights after the statutory period.
Traps
- Computing LTV on purchase price when the exam asks for the loan-to-appraised-value ratio.
- Confusing points with origination fees or discount fees.
- Assuming a second mortgage survives a first-lien foreclosure.
Worked example: Purchase price $300,000, 80% LTV → loan $240,000. One discount point on that loan costs $2,400 and buys down the rate.