Real Estate Financing
How a mortgage actually works, the loan types you'll see on the exam, and the disclosure laws that govern them.
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:
The promissory note is the borrower's personal promise to repay the debt — it's the IOU. The mortgage (or deed of trust, depending on the state) is what pledges the property as collateral for that promise, giving the lender a lien against the real estate if the borrower doesn't pay.
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.
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.
RESPA doesn't ban a brokerage from referring clients to an affiliated title company it partly owns — that's allowed under the affiliated-business-arrangement safe harbor, as long as the affiliation and any fee are properly disclosed. What RESPA actually prohibits is an undisclosed kickback for the referral itself.
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.
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