Financing and Mortgages
This domain tests how real estate loans are structured, secured, disclosed, and enforced. Expect lien theory, loan-to-value, escrow, amortization, and default remedies.
Loan structure and security
The promissory note is the borrower's promise to pay; the mortgage or deed of trust is the security instrument. Most states are lien-theory states, where the lender has a lien, not title. A deed of trust uses a trustee and nonjudicial foreclosure in many states. Loan-to-value (LTV) equals loan amount divided by value or purchase price, whichever is lower. PMI is commonly required above 80% LTV on conventional loans; FHA loans use mortgage insurance premiums.
Payments and disclosures
PITI is principal, interest, taxes, and insurance. Escrow collects taxes and insurance. Points are prepaid interest: one point equals 1% of the loan amount. The APR includes certain finance charges and is usually higher than the note rate. Amortization spreads payments over time; early payments are mostly interest. Adjustable-rate loans shift interest-rate risk to the borrower. A due-on-sale clause lets the lender demand payment on transfer.
Worked example
Purchase price is $400,000 with 20% down. Down payment = $80,000; loan = $320,000; LTV = 80%. At 6% annual interest, first-month interest = $320,000 × 0.06 ÷ 12 = $1,600. If the borrower pays two points, cost = $320,000 × 0.02 = $6,400. The points are paid at closing, not added to the monthly interest rate unless financed.
Traps
Do not compute points on the purchase price when the loan amount is different. Preapproval is not the same as prequalification. A second mortgage generally has lower priority unless subordinated. Judicial foreclosure involves court; nonjudicial follows power-of-sale notice rules. A short sale requires lender approval and does not automatically erase a deficiency unless negotiated.