Real Estate Finance and Financing
The instruments
A promissory note is the borrower's promise to repay; the mortgage or deed of trust pledges the property as security (hypothecation). In a lien-theory state the borrower retains title and the lender holds a lien. Questions frequently swap the debt instrument for the security instrument - keep them separate.
Numbers that matter
Loan-to-value equals the loan divided by the lesser of price or appraised value. PITI combines principal, interest, taxes, and insurance, and lenders escrow taxes and insurance with only a limited cushion permitted. Fixed-rate loans fully amortize; interest-only and balloon loans do not. ARMs carry an index, a margin, periodic and lifetime caps, and often a teaser rate.
Loan programs
Conventional conforming loans follow Fannie/Freddie guidelines. FHA loans require an up-front and an annual mortgage insurance premium. VA loans use entitlement and a funding fee instead of monthly PMI. USDA loans target rural areas. Conventional PMI must terminate at the borrower's request at 80% LTV and automatically at 78%.
Regulation
RESPA prohibits kickbacks and unearned fees. TRID requires a Loan Estimate within three business days of application and a Closing Disclosure at least three business days before consummation. ECOA/Reg B requires adverse-action notice, generally within 30 days. Fair housing law bars redlining.
Traps
- Prequalification is not preapproval.
- Discount points buy down the rate; origination points are the lender's fee.
- A due-on-sale clause blocks unapproved assumptions.
Rule of thumb / example
Price $400,000 with 20% down gives a $320,000 loan at 80% LTV, so PMI is generally not required. At 10% down the borrower pays PMI until the balance amortizes to 80% of original value or the borrower requests termination at that level.