Financing

Financing is area 4 of 7 on both exams, about 13 of the 150 salesperson questions and 18 of the 200 broker questions. It spans notes and deeds of trust, foreclosure and anti-deficiency law, loan clauses and types, lending math, government programs, the secondary market, and disclosure law. It earns its 9 percent because nearly every deal is financed, and its rules, exact deadlines, caps, and percentages, repay study.

§ 4.1The note, the deed of trust, and the parties

The promissory note is the borrower's written promise to pay and the evidence of the debt. The deed of trust is the security instrument that hypothecates the property, pledging it without giving up possession so the debt can be collected from it on default. Its three parties are the trustor who borrows, the beneficiary who lends, and a neutral trustee holding bare legal title with a power of sale. The words look alike, but the trustor borrows, the trustee forecloses. A mortgage has two parties, mortgagor and mortgagee, and takes judicial foreclosure with statutory redemption, which is why the nonjudicial and final deed of trust dominates California practice. Payoff alone does not clear title.

Only the holder of the beneficial interest, the trustee, or the designated agent of one of them may record a notice of default (Civil Code § 2924). Not a listing broker or an escrow company.

§ 4.2The trustee's sale timeline

On covered owner-occupied residential loans, the servicer must contact the borrower to explore alternatives, or complete due diligence, and may not record a notice of default until 30 days later (Civil Code § 2923.5). The recorded notice of default then starts the clock, identifying the deed of trust and trustor, describing the breach, declaring the election to sell, and where curable including reinstatement language.

At least 3 months must pass before notice of sale, which must be published in a newspaper of general circulation, posted on the property where possible, posted in a public place, and recorded, each at least 20 days before the sale (Civil Code § 2924f(b)). The earliest sale is 3 months and 20 days after the notice of default, a practical minimum of about 4 months.

Until 5 business days before the sale, the trustor or a junior lienholder may reinstate by paying the missed installments plus allowable costs, not the accelerated balance (Civil Code § 2924c). After that, only paying the entire debt before the auction, the equitable right of redemption, stops the sale. The auction is public, 9 a.m. to 5 p.m. on a business day in the property's county (Civil Code § 2924g). Proceeds pay sale costs, the foreclosing lien, then juniors in order, with any surplus to the trustor. Juniors are wiped, seniors survive, and the buyer takes subject to them.

§ 4.3Deficiency rules and judicial foreclosure

Judicial foreclosure carries redemption, 3 months if the sale proceeds covered the debt and 1 year if they did not (Code of Civil Procedure § 729.030).

Four deficiency rules follow. The one form of action rule of § 726(a) makes the lender proceed against the security first. Section 580b bars any deficiency on purchase money debt, a seller carryback or a lender loan paying the price of an owner-occupied one to four unit dwelling, with refinances protected except for cash-out principal. Section 580d turns on the remedy chosen.

It applies whatever the loan purpose, though guarantors and sureties are outside both bars. Where a deficiency survives, § 580a caps it at the lesser of debt minus fair market value or debt minus sale price, with 3 months to sue. On a $500,000 debt, $450,000 fair value, and $400,000 auction price, the maximum is $50,000, not $100,000. And once a written short sale consent on a one to four unit home is honored, § 580e bars pursuing the seller for the balance and voids waivers, though fraud and waste claims survive.

§ 4.4Loan clauses and borrower protections

An acceleration clause lets the lender call the entire balance due on a stated event, most commonly default. A due-on-sale clause accelerates on transfer, which the federal Garn-St Germain Act makes enforceable notwithstanding state law, except, on residential property under five units, for listed transfers: a junior lien, death of a joint tenant, transfer to a spouse or children, a divorce settlement, a living trust in which the borrower remains a beneficiary, or a lease of three years or less without a purchase option, so a lease-option is not exempt. A subordination clause steps a senior lien below a later recorded one, typical in seller carryback land deals ahead of a construction loan. Subordination is not subrogation, the substitution of one party for another.

On one to four unit residential property, a borrower may prepay 20 percent of the original principal in any 12-month period free, the penalty on any excess is capped at 6 months' advance interest, and none may be charged after 5 years (Civil Code § 2954.9). A balloon loan over one year on an owner-occupied one to four unit dwelling requires notice 90 to 150 days before the balloon is due, and foreclosure waits for it (Civil Code §§ 2924i, 2966). Impound accounts on such homes earn the borrower at least 2 percent simple interest per year (Civil Code § 2954.8).

§ 4.5Loan types and structures

A fully amortized loan retires all principal through level payments, and early payments are mostly interest. On $300,000 at 6 percent for 30 years, the first $1,798.65 payment carries $1,500 of interest and $298.65 of principal. A straight note pays interest only, all principal due at maturity by design, and a partially amortized note leaves a balloon. An adjustable rate mortgage prices at a published index plus a fixed margin. The index moves, the margin never does, and initial, subsequent, and lifetime caps limit the movement.

• Wraparound (AITD) wraps a larger loan around an existing one. It is a junior lien securing only the difference, and wrapping against a due-on-sale clause invites acceleration.
• Hard money, now often called private money, lends cash against equity rather than funding a purchase, so no purchase money protection.
• Swing or bridge loan is temporary financing of one year or less covering the down payment before the old home sells.
• Package loan secures real property plus personal property such as appliances.
• Blanket loan covers multiple parcels, with a partial release clause freeing lots as portions of the debt are paid.
• Open-end loan lets the borrower reborrow up to a stated amount on the same instrument.

§ 4.6Points, interest, and loan-to-value math

One point is 1 percent of the loan amount, never the price, so 2 points on a $400,000 loan cost $8,000. Each discount point lifts the lender's yield roughly 1/8 of 1 percent. Simple interest is principal times rate times time, run in both directions, so a borrower paying $1,437.50 monthly interest at 5.75 percent owes $300,000. Loan-to-value applies to the lesser of price or appraisal, so with a $500,000 price, a $490,000 appraisal, and an 80 percent cap, the loan is $392,000 and the buyer needs $108,000 in cash. A low appraisal raises the cash, not the loan. Broker exams add debt service coverage, net operating income over annual debt service, and cash-on-cash return, cash flow after debt service over the cash actually invested.

§ 4.7Government programs and the secondary market

Under the basic FHA program, Section 203(b), an approved lender funds the loan and the federal government insures it. The borrower finances about 96.5 percent of a one to four unit property, a minimum investment near 3.5 percent, plus up-front and annual insurance premiums, the up-front one financeable. VA instead guarantees part of a private lender's loan, with no down payment when price does not exceed appraised value, no monthly mortgage insurance, and a one-time funding fee. CalVet neither insures nor guarantees. The state buys the chosen property and resells it on a land contract, keeping legal title until paid while the veteran holds equitable title.

FHA insurance is MIP. PMI is the private product on conventional loans, those without government backing, typically required above 80 percent loan-to-value. Under the federal Homeowners Protection Act the borrower may request cancellation at 80 percent of original value, the servicer must cancel automatically at a scheduled 78 percent with the borrower current, and at the amortization midpoint regardless.

The secondary market trades existing loans, it originates nothing. Fannie Mae, chartered in 1938, and Freddie Mac, chartered in 1970, are shareholder-owned companies under congressional charters that buy loans and package them into mortgage-backed securities. Ginnie Mae is a wholly owned government corporation guaranteeing timely payment on securities backed by FHA and VA pools, with the full faith and credit of the United States.

§ 4.8Federal disclosure and fair lending law

Four trigger terms force full disclosure, a down payment amount or percentage, the number of payments or repayment period, any payment amount, and any finance charge amount. A triggered ad must add the down payment, full repayment terms including any balloon, and the APR, flagging any variable rate. The APR alone triggers nothing.

TRID timing is 3 days out and 3 days in. The Loan Estimate goes out within 3 business days after application, and the Closing Disclosure must be received at least 3 business days before consummation. Only three changes restart the clock, an APR inaccurate beyond tolerance, a changed loan product, or an added prepayment penalty. Rescission runs to midnight of the third business day on non-purchase liens on the principal dwelling, refinances with a new lender and equity loans. Purchase loans on the dwelling being acquired carry no rescission right, and missing notices stretch the period to 3 years.

RESPA Section 8 bars kickbacks and unearned fees on loans secured by one to four unit homes. Payment for services actually performed is fine, per-referral fees are not, and disclosure cures nothing. ECOA bars credit discrimination on race, color, religion, national origin, sex, marital status, age, public assistance income, or exercise of consumer credit rights, and discouraging an applicant is itself a violation. California's Holden Act of 1977 is the state's anti-redlining law for housing lending.

§ 4.9California loan brokerage law

A broker negotiating a loan secured by real property must deliver the mortgage loan disclosure statement within 3 business days of the completed written application (Business and Professions Code §§ 10240, 10241). It shows the borrower's estimated net proceeds after every deduction, carries a balloon warning in 10 point bold type, and is the broker's own form, not the federal Loan Estimate.

Article 7 caps compensation only on small loans, firsts under $30,000 and juniors under $20,000.

Covered loans under 3 years must repay in substantially equal installments, no installment more than twice the smallest, so no balloon before the 36th month. On an owner-occupied dwelling the rule reaches terms of 6 years or less, so none before the 73rd month, with construction firsts and seller carrybacks excepted. Seller financing of a one to four unit dwelling through an arranger of credit requires written disclosure of the terms to both buyer and seller (Civil Code § 2956).

Usury caps consumer loans at 10 percent per year and other loans at the higher of 10 percent or 5 points over the San Francisco Federal Reserve discount rate. A loan made or arranged by a licensed broker and secured by real property is exempt, and arranging alone qualifies. Originating loans on one to four unit homes requires the mortgage loan originator endorsement, with 20 hours of pre-licensure education, a national test passed at 75 percent, and 8 hours of continuing education a year. Broker thresholds: 10 or more loans totaling over $1,000,000 in 12 months, or $250,000 or more collected for note owners or obligors, means written notice to the department within 30 days, and servicing collections are trust funds due in the trust account within 3 business days.