Real Estate Financing

Financing questions make up a meaningful chunk of the national exam, and they reward understanding the mechanics — not just memorizing acronyms.

Note vs. mortgage/deed of trust

These two documents do different jobs, and the exam loves testing the difference:

Loan-to-value and down payment

Loan-to-value (LTV) is the loan amount as a percentage of the property's value. An 80% LTV loan on a $300,000 home means a $240,000 loan and a $60,000 down payment. Lower LTV generally means less lender risk — which is why LTVs above roughly 80% typically trigger private mortgage insurance (PMI) on a conventional loan, protecting the lender (not the borrower) if the loan defaults.

Common loan types

Conventional

Not government-insured or guaranteed; typically needs a stronger credit profile.

FHA

Government-insured, allowing a lower down payment and more flexible credit standards.

VA

Government-guaranteed for eligible veterans and service members, often with no down payment required.

Adjustable-rate (ARM)

Interest rate can change over the loan term, usually after an initial fixed period.

Primary vs. secondary mortgage market

The primary mortgage market is where a borrower actually gets a loan — banks, credit unions, and mortgage companies originating loans directly to homebuyers. The secondary mortgage market is where those already-originated loans get bought and sold among investors, which is what lets an originating lender free up capital to make new loans instead of holding every mortgage for its full 30-year term. Fannie Mae and Freddie Mac are the best-known participants here — they buy conforming loans from originators, package many of them together, and sell mortgage-backed securities to investors. A borrower generally never deals with the secondary market directly, but its existence is exactly what keeps the primary market liquid enough to keep lending.

What happens on default: foreclosure

If a borrower defaults, the lender can pursue foreclosure — forcing a sale of the property to satisfy the debt. Two general paths exist, and which one applies depends on state law and the specific security instrument used:

Judicial foreclosure

Foreclosure through the court system, generally required in mortgage-theory states or whenever the security instrument doesn't include a power-of-sale clause.

Non-judicial foreclosure

A faster, out-of-court process available when a deed of trust includes a power-of-sale clause, letting the trustee sell the property without a judge's involvement.

Deed in lieu of foreclosure

The borrower voluntarily deeds the property back to the lender to avoid the foreclosure process entirely — generally less damaging to the borrower's credit than a completed foreclosure, though it isn't without consequence.

A borrower also generally has an equitable right of redemption — the right to pay off the full debt and stop foreclosure any time before the sale actually happens. Some states separately provide a statutory right of redemption, allowing the borrower (or certain other parties) to reclaim the property for a defined period even after the foreclosure sale is complete — a meaningfully different and less commonly available right than the equitable one.

The federal disclosure laws

Two federal statutes govern how borrowers are informed during the loan process:

• TILA (Truth in Lending Act) requires lenders to clearly disclose loan terms and the annual percentage rate (APR), so borrowers can compare offers on an apples-to-apples basis.
• RESPA (Real Estate Settlement Procedures Act) governs disclosure of settlement costs and — importantly — prohibits kickbacks and undisclosed referral fees between settlement service providers.

Discount points

A discount point costs 1% of the loan amount and generally buys a lower interest rate. On a $250,000 loan, one point costs $2,500. Whether points make sense depends on how long the borrower plans to keep the loan — the monthly savings need enough time to recoup the upfront cost.