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Financing — Key Facts

Financing questions separate the instruments (note versus mortgage versus deed of trust), the players (mortgagor versus mortgagee), and the loan programs (FHA, VA, USDA, conventional). Federal lending law shows up too — RESPA's kickback ban and TILA's disclosure rules. The exam rewards candidates who keep the -or/-ee vocabulary straight and know when PMI applies and what a discount point actually costs. Drill those distinctions here until they're automatic.

Instruments

Loan Types

Default & Federal Law

Key vocabulary: Financing glossary (42 terms)

Practice Financing

Every Freehold question shows why the right answer is right — and cites its source.

In a real estate loan transaction, the promissory note serves as:

  1. The borrower's personal promise and evidence of the debt
  2. The document that pledges the property as collateral
  3. The instrument that transfers title to the lender
  4. The insurance policy protecting the lender from default
Show answer & explanation

The borrower's personal promise and evidence of the debt — The promissory note is the borrower's written promise to repay the debt on stated terms, making it the evidence of the debt itself. The mortgage or deed of trust separately pledges the property as security.

Source: U.C.C. § 3-104 (Negotiable Instrument; "note" defined)

In a mortgage, the mortgagor is:

  1. The lender
  2. The borrower
  3. The trustee under a deed of trust
  4. The title company
Show answer & explanation

The borrower — The borrower gives the mortgage pledging the property as security, so the borrower is the mortgagor. The lender receives the mortgage and is the mortgagee — the '-or' gives, the '-ee' receives.

Source: PSI National Real Estate Exam Content Outline §4 Financing

Private mortgage insurance (PMI) is generally required on a conventional loan when:

  1. The borrower is a first-time homebuyer
  2. The loan is insured by the FHA
  3. The loan-to-value ratio exceeds 80 percent
  4. The property is a condominium
Show answer & explanation

The loan-to-value ratio exceeds 80 percent — Conventional lenders require PMI when the down payment is under 20 percent, meaning the loan-to-value ratio exceeds 80 percent. PMI protects the lender against loss if the borrower defaults.

Source: PSI National Real Estate Exam Content Outline §4 Financing

A fully amortized fixed-rate loan is characterized by:

  1. Interest-only payments with a balloon payment at maturity
  2. Payments that adjust annually with an index
  3. Increasing payments that start below the interest owed
  4. Equal periodic payments that retire the entire debt by the end of the term
Show answer & explanation

Equal periodic payments that retire the entire debt by the end of the term — A fully amortized loan is repaid through equal periodic payments covering both interest and principal, so the balance reaches zero at the end of the term with no balloon payment due.

Source: PSI National Real Estate Exam Content Outline §4 Financing

One discount point equals:

  1. One percent of the loan amount
  2. One percent of the purchase price
  3. One-eighth percent of the interest rate
  4. One percent of the down payment
Show answer & explanation

One percent of the loan amount — A discount point is prepaid interest equal to one percent of the loan amount, not the purchase price. Borrowers pay points at closing to buy down the interest rate on the loan.

Source: PSI National Real Estate Exam Content Outline §4 Financing

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