Financing, Mortgages, and Settlement/Closing
What this domain tests
This domain covers security instruments, loan terms, lien priority, disclosure rules, and closing mechanics. Expect questions on points, APR, escrow, and foreclosure.
Security instruments
A mortgage has two parties: mortgagor and mortgagee. A deed of trust has three: trustor, trustee, and beneficiary, and commonly allows nonjudicial foreclosure. The promissory note is the debt; the mortgage or deed of trust is the lien. Lien priority generally follows recording date, though purchase-money mortgages may have priority. Subordination agreements change priority.
Loan terms and disclosures
Loans may be conventional, FHA, or VA; fixed or adjustable; amortized over time. Discount points are prepaid interest. The APR includes finance charges. Under the Homeowners Protection Act, a borrower may request PMI cancellation at 80% loan-to-value, and automatic termination generally occurs at 78%. Escrow or impound accounts hold taxes and insurance. RESPA Section 8 prohibits kickbacks and unearned fees. TRID requires a Loan Estimate within three business days after application and a Closing Disclosure at least three business days before consummation.
Settlement and foreclosure
Closing transfers title and disburses funds. Documents include deeds, affidavits, title insurance, and prorations. Judicial foreclosure uses a court; nonjudicial foreclosure uses a power of sale. Deficiency judgments and redemption rights vary by state.
Worked example
A $400,000 loan with two discount points costs $8,000 ($400,000 x 0.02) and lowers the rate. It is prepaid interest, not a down payment. A separate 1% origination fee is $4,000. The APR reflects both.
Traps
Do not treat points as down payment. Do not assume all foreclosures are judicial. Do not ignore the three-day Closing Disclosure rule. Do not confuse the note with the lien.