Mortgages, Loan Types, and Lending Markets

Separate the promise from the security

A promissory note states a borrower's repayment obligation. A mortgage or deed of trustDeed of trust A security instrument commonly involving a trustor, trustee, and beneficiary. See Chapter 15. Glossary gives a security interest in real property. A note is not itself a deedDeed An instrument used to convey an interest in real estate. See Chapter 7. Glossary conveying ownership to a buyer.

In mortgage vocabulary, the mortgagorMortgagor The party giving a mortgage, ordinarily the borrower. See Chapter 15. Glossary gives the mortgage and the mortgageeMortgagee The party receiving a mortgage, ordinarily the lender. See Chapter 15. Glossary receives it. In a deed-of-trust arrangement, the borrower is commonly the trustorTrustor In conventional deed-of-trust terminology, the borrower granting the security interest. See Chapter 15. Glossary, the lender the beneficiaryBeneficiary In deed-of-trust terminology, commonly the lender; in trusts generally, a person entitled to benefits. See Chapter 4, Chapter 15. Glossary, and the trusteeTrustee A party holding property, powers, or duties under a trust or deed-of-trust arrangement. See Chapter 4, Chapter 15. Glossary holds the interest or powers specified by the instrument and law. Lien-theory, title-theory, and intermediate-theory treatment varies by state. S07 S05

HypothecationHypothecation Pledging property as collateral without surrendering possession merely by the pledge. See Chapter 15. Glossary means pledging property as security without giving up possession merely by making the pledge. EquityEquity The owner's economic interest after relevant debt or claims are considered. See Chapter 15. Glossary is the owner's interest after relevant debt or claims are considered; a simplified problem often uses value minus secured debt.

Payment structures

A fully amortizing loan is paid off through scheduled payments over its term if paid as agreed. Each payment generally contains interest and principalPrincipal In agency, the represented client; in finance, the loan balance apart from interest. See Chapter 8, Chapter 15. Glossary. With a fixed-rate level-payment loan, the interest portion decreases and the principal portion increases over time.

A partially amortizing loan leaves a balance due at maturity, often a balloon paymentBalloon payment A substantial remaining balance due at loan maturity. See Chapter 15. Glossary. A straight or interest-only loan makes periodic interest payments without scheduled principal reduction during the interest-only period. Negative amortizationNegative amortization Growth in principal when unpaid interest is added to the loan balance. See Chapter 15. Glossary occurs when unpaid interest is added to principal, so the balance grows.

An adjustable-rate mortgageAdjustable-rate mortgage A loan whose interest rate can change under an index, margin, and other contractual terms. See Chapter 15. Glossary uses an indexIndex A reference measure used with a margin or formula to adjust a rate or payment. See Chapter 15, Chapter 18. Glossary and marginMargin The contractual addition to an ARM index in a fully indexed rate. See Chapter 15. Glossary, subject to its terms and caps. The fully indexed rate is generally index plus margin, but introductory rates, adjustment timing, caps, floors, and rounding may alter the actual rate charged. Payment caps and rate caps are not the same. S01 S07

Important clauses

An accelerationAcceleration Making the remaining debt due after a contractual triggering event, subject to law. See Chapter 15. Glossary clause permits the lender to declare the remaining obligation due after a specified default. A due-on-saleDue-on-sale A loan provision concerning repayment upon specified transfers, subject to legal restrictions and exceptions. See Chapter 15. Glossary, or alienationAlienation Transfer of a property interest, voluntarily or involuntarily. See Chapter 7. Glossary, clause concerns a transfer that can trigger repayment, subject to applicable protections and exceptions. A defeasanceDefeasance A provision concerning release of security after satisfaction of the obligation. See Chapter 15. Glossary provision concerns release of the security interest after satisfaction.

A subordinationSubordination Agreement changing the relative priority of interests. See Chapter 5, Chapter 15. Glossary agreement changes lienLien A security claim or charge against property for an obligation. See Chapter 5. Glossary priority. A partial release clause can permit release of part of the collateral after specified performance, useful in some blanket financing. A prepayment provision governs early repayment and any lawful charge. Not every loan permits a prepayment penalty.

A loan assumptionAssumption Taking responsibility for an existing loan under the governing arrangement. See Chapter 15. Glossary involves taking responsibility for an existing loan under applicable requirements. Taking property subject to an existing loan generally does not itself make the buyer personally liable on the seller's note, but the property remains exposed to the lien and a due-on-sale issue may arise. Neither arrangement automatically releases the original borrower. S07

Conventional and government-related programs

A conventional loanConventional loan A loan not federally insured or guaranteed through programs such as FHA or VA. See Chapter 15. Glossary is not insured or guaranteed by the federal government through programs such as FHAFHA Federal Housing Administration in lending; distinguish this abbreviation from Fair Housing Act in civil-rights contexts. See Chapter 13, Chapter 15. Glossary or VA. Conventional loans can be conforming or nonconforming under applicable secondary-market criteria. Private mortgage insurance protects the lender against specified loss; it is not homeowner hazard insurance.

For covered conventional loans, federal PMIPMI Private mortgage insurance protecting a lender against specified losses on covered loans. See Chapter 15. Glossary cancellation rules generally permit borrower-requested cancellation at 80% of original value under required conditions and automatic termination when the scheduled balance reaches 78%, if the borrower is current. These rules have qualifications and are not the FHA mortgage-insurance system. S33

FHA loans are made by participating private lenders and insured by the Federal Housing Administration. FHA is not ordinarily the direct lender. Some eligible borrowers can make a down payment as low as 3.5%, but eligibility, mortgage insurance, property standards, and geographic loan limits apply. S51

VA purchase loans provide a federal guaranty for eligible borrowers. Eligibility, entitlement, lender underwriting, and property valuation matter. No down payment may be available under applicable conditions, and VA loans do not require monthly private mortgage insurance. A funding fee can apply unless the borrower is exempt. Eligibility alone is not loan approval. S34

USDA's guaranteed single-family program supports eligible housing in qualifying rural areas for eligible households through approved lenders. USDA also has separate direct-loan programs. Do not treat every rural parcel or every household as automatically eligible. S35

Reverse mortgages and specialty loans

A reverse mortgage lets qualifying borrowers obtain advances secured by home equityEquity The owner's economic interest after relevant debt or claims are considered. See Chapter 15. Glossary. The balance ordinarily grows as advances, interest, and applicable charges accrue. HECM loans generally require eligible borrowers to be at least sixty-two, with counseling and other conditions. Borrowers remain responsible for taxes, insurance, maintenance, and applicable occupancy obligations. “No monthly principal-and-interest payment” does not mean “no obligations” or “no foreclosureForeclosure Enforcement of a security interest through authorized sale or legal process. See Chapter 7. Glossary risk.” S36

A construction loan commonly advances funds through draws as work progresses. Bridge financing addresses a temporary financing need. A blanket loanBlanket loan A loan secured by more than one parcel. See Chapter 15. Glossary covers more than one parcel; a package loanPackage loan Financing secured by real property and specified personal property. See Chapter 15. Glossary includes real property and specified personal propertyPersonal property Movable or other property not classified as real property under the applicable rules. See Chapter 2. Glossary; a purchase-money loan finances acquisition and may be seller-provided or otherwise defined by state law. A wraparound loanWraparound loan Financing incorporating an existing debt within a new arrangement, requiring careful legal and payment analysis. See Chapter 15. Glossary incorporates an existing loan into a new financing arrangement and requires close attention to consent, payment handling, and legal constraints. S01 S07

Underwriting and markets

Underwriting evaluates the borrower, collateral, and transaction. Common measures are loan-to-value ratio, income stability, assets, credit history, and debt-to-income ratios. A prequalification is often an initial estimate; preapproval may involve more verification, but neither universally guarantees final funding.

The primary mortgage market originates loans to borrowers. The secondary mortgage market involves sale or securitization of existing loans. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are associated with the conventional secondary market; Ginnie Mae (Government National Mortgage Association) guarantees qualifying mortgage-backed securities, rather than making ordinary home-purchase loans directly to consumers. Program rules and institutional status can change, so use current official materials for details. S01 S54 S57