Most buyers borrow. A loan involves two instruments: a promissory note (the promise to repay) and a mortgage or deed of trust (the security pledging the property as collateral). Virginia primarily uses deeds of trust.
Financing instruments
- Promissory note
- The borrower's written promise to repay the debt.
- Mortgage / Deed of trust
- The security instrument pledging the property; a deed of trust adds a neutral trustee.
- Hypothecation
- Pledging property as security while retaining possession.
- Equity
- The market value of a property minus the debt owed against it.
Common loan types
- Conventional — not government-backed; PMI usually required under 20% down (cancellable under the Homeowners Protection Act at 78–80% LTV).
- FHA — insured by the Federal Housing Administration; low down payment; charges an up-front and annual MIP.
- VA — guaranteed by the Dept. of Veterans Affairs for eligible veterans; no down payment, no PMI, but a one-time funding fee.
- USDA / Rural Development — zero-down loans in eligible rural areas.
- Conforming vs. jumbo — conforming loans meet Fannie/Freddie limits; jumbo loans exceed them.
- Fixed-rate vs. adjustable-rate (ARM) — ARMs adjust to an index + margin, with periodic and lifetime rate caps.
Specialty financing
- Purchase-money mortgage
- Seller financing — the seller 'takes back' a note for part of the price.
- Land contract (contract for deed / installment)
- Buyer takes possession and pays over time; seller keeps legal title (buyer holds equitable title) until paid in full.
- Wraparound mortgage
- A new loan that 'wraps' an existing one the seller keeps paying; only works if the underlying loan has no due-on-sale enforcement.
- Blanket mortgage
- One loan covering several parcels; includes a partial release clause so lots can be sold off.
- Package mortgage
- Finances real estate plus personal property (e.g., appliances).
- Reverse mortgage (HECM)
- Lets older owners convert equity to cash; repaid when the owner sells, moves, or dies.
- Home equity loan / HELOC
- A junior lien against the owner's equity; HELOC is a revolving line.
Key mortgage / note clauses
- Acceleration clause
- On default, the lender may declare the entire balance immediately due.
- Alienation (due-on-sale) clause
- Loan must be paid in full if the property is sold; blocks most loan assumptions.
- Defeasance clause
- Requires the lender to release the lien once the debt is fully paid.
- Prepayment clause / penalty
- Permits early payoff; a penalty (if allowed) charges for paying off early.
- Subordination clause
- A lender agrees its lien will take a lower priority than another.
Default & foreclosure
- Judicial vs. non-judicial foreclosure
- Judicial goes through court; non-judicial uses the deed-of-trust 'power of sale' — Virginia's usual, faster route.
- Deed in lieu of foreclosure
- Borrower voluntarily deeds the property to the lender to avoid foreclosure.
- Short sale
- Lender agrees to accept less than the loan balance from a sale.
- Equity vs. statutory redemption
- Equity redemption = pay off before the sale; statutory redemption = a post-sale window (Virginia does NOT grant statutory redemption).
- Deficiency judgment
- A judgment for the shortfall when the sale doesn't cover the debt.
The mortgage market & qualifying
- Primary vs. secondary market
- Primary = lenders originating loans to borrowers; secondary = where those loans are bought/sold and pooled.
- Fannie Mae / Freddie Mac / Ginnie Mae
- Secondary-market entities that buy/guarantee loans, providing lenders fresh capital (Ginnie Mae backs FHA/VA pools).
- Discount points
- Prepaid interest to buy down the rate; 1 point = 1% of the loan amount.
- Debt-to-income (qualifying) ratios
- Front-end (housing ÷ income) and back-end (total debt ÷ income) ratios lenders use to qualify a borrower.
- Loan-to-value (LTV)
- Loan ÷ the lesser of price or appraised value; higher LTV = more lender risk.
Lending regulators & laws (overlaps with the Financing Laws lesson)
- Dodd-Frank / CFPB — created post-2008 oversight of mortgage lending.
- SAFE Act — requires loan originators to be licensed/registered (NMLS).
- ECOA — prohibits lending discrimination; HMDA — requires lending data reporting.
- Usury laws cap interest rates; predatory practices (loan flipping, equity stripping) are prohibited.
Virginia uses deeds of trust with non-judicial 'power of sale' foreclosure and grants NO statutory right of redemption after the sale — a frequent exam contrast with judicial-foreclosure states.