Real Estate Financing, Mortgages, and Loan Instruments
The instruments and the theory
Financing involves two documents: the note (the promise to pay) and the security instrument - a mortgage (two parties: mortgagor and mortgagee) or a deed of trust (three parties: trustor, trustee, beneficiary). In a lien-theory state such as Mississippi, the borrower keeps title and the lender holds a lien; a mortgage is foreclosed judicially, while a deed of trust is typically foreclosed non-judicially under its power of sale after statutory notice and publication. Know the standard clauses: acceleration, prepayment, due-on-sale, defeasance, escrow/impounds, subordination, and release.
Numbers a candidate must be able to compute
Loan-to-value = loan ÷ value or price (the lesser). Combined LTV adds a second lien. PMI is generally required above 80% LTV and must be terminated at 78% of original value on the amortization schedule (borrower-requested cancellation at 80%). PITI = principal + interest + taxes + insurance. On a fixed-rate loan, early payments are mostly interest. Discount points are prepaid interest that buydown the rate; an origination fee pays the lender for making the loan.
Regulatory overlay
RESPA prohibits Section 8 kickbacks and unearned fees. TRID requires the Loan Estimate within three business days of application and the Closing Disclosure at least three business days before consummation. ECOA/Reg B requires an adverse action notice; the SAFE Act licenses loan originators; ATR/QM rules require ability-to-repay verification. Loan products: conventional, FHA (MIP), VA (funding fee, entitlement, no monthly PMI), USDA, ARM (index + margin, caps), balloon, interest-only, construction, bridge, blanket, and package loans.
Traps: PMI ≠ FHA MIP; VA ≠ FHA; LTV uses the lesser of price or appraised value. Rule of thumb: sketch the parties to the instrument - if you can't name the trustee, it's a mortgage.