Proven mnemonics — built specifically for the real estate licensing exam.
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Loan Types Overview
Conventional vs Government loans: conventional = private lender, no govt guarantee. FHA/VA/USDA = government backed.
Loan Types Overview
The fundamental distinction between conventional and government-backed loans
Conventional loans: issued by private lenders, not insured by government. Conforming: meets Fannie Mae/Freddie Mac guidelines (loan limits apply). Non-conforming/Jumbo: exceeds conforming limits. FHA: Federal Housing Administration insures — low down payment (3.5%), more flexible credit. VA: Veterans Affairs, no down payment for qualifying veterans. USDA: rural properties.
Conventional
Private lender, no government guarantee
FHA
Government insured, 3.5% down, flexible credit
VA
Veterans only, no down payment required
USDA
Rural areas, no down payment
Amortization
Amortization: each payment = interest (on remaining balance) + principal. Early payments mostly interest.
Amortization
How mortgage payments are divided between interest and principal over time
Early in the loan: most of each payment is interest, very little principal. As balance decreases: less interest owed, more goes to principal. Fully amortized loan: last payment brings balance to exactly zero. Negative amortization: payment doesn't cover interest — balance grows.
Fixed rate: payment never changes. ARM: rate adjusts periodically — initial rate lower but risk of rising.
Fixed vs Adjustable Rate
Two fundamental mortgage structures
Fixed rate: interest rate locked for entire loan term. Predictable. Higher initial rate than ARM. ARM (Adjustable Rate Mortgage): initial fixed period then adjusts based on an index (LIBOR, SOFR) plus a margin. Caps limit how much rate can change per adjustment and over life of loan.
Private Mortgage Insurance
PMI required when LTV > 80%. Protects the LENDER, not the borrower. Can be removed at 80% LTV.
Private Mortgage Insurance
Who PMI protects — and when it can be removed
PMI protects the lender if the borrower defaults. Required on conventional loans with less than 20% down. Does NOT protect the borrower. Homeowners Protection Act: lender must automatically cancel PMI when loan reaches 78% LTV. Borrower can request cancellation at 80% LTV with good payment history.
Annual Percentage Rate
APR includes interest rate PLUS fees and points — better comparison tool than interest rate alone
Annual Percentage Rate
Why APR is a more accurate cost comparison than interest rate
APR reflects the true cost of borrowing: interest rate + origination fees + points + mortgage broker fees + other costs. Two loans with same interest rate may have different APRs. Truth in Lending Act (TILA) requires lenders to disclose APR. Use APR to compare loans on equal footing.
Deed of Trust vs Mortgage
Deed of trust: borrower (trustor) gives legal title to trustee who holds it for lender (beneficiary)
Deed of Trust vs Mortgage
Two ways to secure a real estate loan — depends on the state
Mortgage: two parties — borrower and lender. Borrower keeps title but gives lender a lien. Judicial foreclosure required. Deed of trust: three parties — trustor (borrower), trustee (neutral third party), beneficiary (lender). Trustee holds title. Non-judicial foreclosure (faster). Most western states use deed of trust.
Mortgage
Two parties — judicial foreclosure
Deed of Trust
Three parties — non-judicial foreclosure (faster)
Acceleration and Alienation Clauses
Acceleration clause: entire loan balance due immediately if borrower defaults
Acceleration and Alienation Clauses
Two important mortgage clauses tested on the exam
Acceleration clause: upon default, lender can call the entire loan balance due immediately. Alienation clause (due-on-sale clause): loan must be paid in full when property is sold — prevents buyer from assuming the loan without lender approval. Most modern mortgages contain both.
TILA and RESPA
Truth in Lending (TILA): requires disclosure of APR, total finance charge, payment schedule
TILA and RESPA
Two federal laws protecting mortgage borrowers
TILA (Truth in Lending Act): requires clear disclosure of loan terms including APR and total cost. Right of rescission: 3 business days to cancel certain refinances. RESPA (Real Estate Settlement Procedures Act): prohibits kickbacks between settlement service providers, requires Loan Estimate and Closing Disclosure.
FHA insures the loan — lender is protected if borrower defaults. Minimum 3.5% down payment (with 580+ credit score). MIP: upfront MIP (1.75% of loan amount) plus annual MIP. Lower credit score requirements than conventional. Loan limits vary by county. Property must meet FHA condition standards.
VA Loan Features
VA loans: no down payment, no PMI, funding fee, must be veteran/active duty/surviving spouse
VA Loan Features
Key characteristics of VA loans for veterans
VA guarantees portion of loan — no down payment required. No PMI (replaced by one-time funding fee, which can be financed). No minimum credit score set by VA (lenders set their own). Entitlement: how much VA will guarantee. Certificate of Eligibility required. Primary residence only.
Mortgage Buydowns
Buydown: paying points upfront to get a lower interest rate for a period or for life of loan
Mortgage Buydowns
Temporary and permanent interest rate buydowns
Permanent buydown: pay discount points at closing to permanently lower the rate. Temporary buydown: seller or builder pays to reduce buyer's rate for first 1-3 years. 2-1 buydown: rate 2% lower first year, 1% lower second year, then full rate. Used in slower markets as seller concession.
🏦 Finance
PITI
Monthly Mortgage Payment Components
Every mortgage payment has exactly four parts
When lenders qualify you, they calculate your full PITI — not just principal and interest. This is what the front-end ratio measures.
The inverse relationship every finance student forgets
Interest rates and bond prices always move in opposite directions. Mortgage rates are tied to bond markets. Think of a seesaw — rates up, bonds down.
🏦 Finance
FHA = First-timers, Hardly Any down
FHA Loans
Remember FHA loan basics with one phrase
FHA loans are government-backed and require only 3.5% down. Minimum credit score 580. Requires MIP (Mortgage Insurance Premium) — cannot be removed without refinancing.
🏦 Finance
VA = Veterans Always get 0% down
VA Loans
VA loan — the best loan for those who qualify
VA loans require NO down payment and NO PMI — for eligible veterans, active duty, and surviving spouses. Government guarantees the loan. One-time VA funding fee required (unless exempt).
🏦 Finance
Discount Points: "Buy Down the Rate"
Discount Points
Points paid upfront to lower the interest rate permanently
1 point = 1% of loan amount at closing. Each point typically lowers the rate 0.125%-0.25%. Break-even: upfront cost ÷ monthly savings = months to break even.
🏦 Finance
Usury = "You Sure Pay a Lot"
Usury Laws
Usury laws cap the maximum legal interest rate
Usury = charging interest above the legal maximum set by state law. It's the LENDER breaking the law, not the borrower. Lenders who charge usurious rates face penalties.
Loan-to-Value Ratio
LTV = Loan Amount ÷ Appraised Value × 100
The lender's primary risk measurement — higher LTV means more risk
LTV above 80% typically requires PMI — lenders want equity as a cushion
LTV = (Loan Amount / Appraised Value) × 100. Example: $180,000 loan on $200,000 property = 90% LTV. Below 80% LTV: no PMI required, better interest rates. 80-95% LTV: PMI required (protects lender, paid by borrower). Above 95%: limited conventional options. FHA loans: up to 96.5% LTV (3.5% down). VA loans: up to 100% LTV (0% down). The lower the LTV, the lower the lender's risk and the borrower's rate.
Below 80%
No PMI — conventional loan sweet spot
80-95%
PMI required — adds 0.5-1.5% annually to cost
FHA
96.5% LTV allowed — 3.5% minimum down payment
Debt-to-Income Ratio
Front-end DTI: housing costs ÷ gross income. Back-end DTI: all debt ÷ gross income
Lender's measure of a borrower's ability to manage monthly payments
Conventional loans typically allow 28/36 DTI — FHA allows up to 43% back-end
Front-end (housing) ratio: (PITI ÷ gross monthly income) × 100. PITI = Principal + Interest + Taxes + Insurance. Target: ≤28% for conventional. Back-end (total debt) ratio: (all monthly debt payments ÷ gross monthly income) × 100. Includes housing + car, student loans, credit cards. Target: ≤36% conventional, ≤43% FHA. Example: $5,000 gross income, $1,200 PITI → 24% front-end. Add $500 car payment → 34% back-end. Both within conventional guidelines.
Front-end
PITI only — target 28% or less for conventional
Back-end
All debt — target 36% conventional, 43% FHA
PITI
Principal, Interest, Taxes, Insurance — full housing payment
Adjustable Rate Mortgages
ARM CAPS — Initial cap, Periodic cap, Lifetime cap protect borrower
How ARMs work and what protects borrowers from unlimited rate increases
A 5/1 ARM is fixed 5 years then adjusts annually — caps limit how much it can rise
ARM format: 5/1 ARM = fixed for 5 years, then adjusts every 1 year. Rate tied to an index (SOFR, Treasury) plus a margin. Three caps: Initial cap (how much rate can jump at first adjustment), Periodic cap (max change per adjustment period), Lifetime cap (max total change over life of loan). Example 2/2/6: first adjustment max 2%, each subsequent max 2%, never more than 6% total. ARMs start lower than fixed rates — good if planning to sell before adjustment period.
Initial cap
Max rate change at first adjustment
Periodic cap
Max change per adjustment period thereafter
Lifetime cap
Max total rate increase over life of the loan
RESPA and TRID
RESPA = Real Estate Settlement Procedures Act — prohibits kickbacks at closing
Federal laws governing mortgage disclosures and settlement costs
TRID merged GFE and HUD-1 into Loan Estimate (3 days) and Closing Disclosure (3 days before closing)
RESPA: prohibits kickbacks, referral fees, and unearned fees between settlement service providers (lenders, title companies, agents). Affiliated Business Arrangements (AfBAs) allowed only with disclosure. TRID (TILA-RESPA Integrated Disclosure): replaced old forms. Loan Estimate: given within 3 business days of application — shows estimated costs. Closing Disclosure: given at least 3 business days before closing — shows actual costs. Borrower has right to compare LE to CD. Tolerances: some costs cannot increase, others limited to 10% increase.
RESPA
No kickbacks between settlement service providers
Loan Estimate
Within 3 days of application — estimated costs
Closing Disclosure
3 business days before closing — final costs
Secondary Mortgage Market
Fannie + Freddie = conventional. Ginnie = government (FHA/VA). All buy loans from lenders.
Three agencies that buy mortgages and keep money flowing to housing
Without the secondary market, lenders would run out of money to lend — it's what makes 30-year loans possible
Fannie Mae (FNMA): buys conventional conforming loans from lenders — packages into mortgage-backed securities (MBS). Freddie Mac (FHLMC): same function as Fannie, different lender relationships. Both are GSEs (Government-Sponsored Enterprises) — private but with government backstop. Ginnie Mae (GNMA): guarantees MBS backed by FHA and VA loans — true government agency. Why it matters: lenders sell loans → get cash back → make more loans → rates stay competitive. Conforming loan limits (set by FHFA annually) determine which loans Fannie/Freddie will buy.
Fannie/Freddie
Buy conventional conforming loans — GSEs
Ginnie Mae
Guarantees FHA/VA loan pools — true government agency
Conforming limit
Max loan Fannie/Freddie buy — jumbo loans above it
Balloon Mortgages
Small payments, BIG ending — amortized over 30 but due in 5-7 years
A loan with a large lump-sum payment due at the end of the term
Balloon mortgages have lower rates but require refinancing or full payoff at maturity
Balloon mortgage: payments calculated as if it were a 30-year loan (low monthly payment) BUT the entire remaining balance (balloon payment) is due at the end of a shorter term — typically 5, 7, or 10 years. Used in: commercial real estate, bridge financing, seller financing. Risk: if borrower cannot refinance at maturity (rates rose, credit changed, property value fell), they face default. Advantage: lower rate than a fully amortizing loan of same term. Negative amortization: payment is less than interest owed — balance GROWS. Found in some ARMs with payment caps.
Balloon
Amortized over 30, due in 5-7 years — refinance risk
Negative amortization
Payment below interest — balance grows, not shrinks
Bridge loan
Short-term balloon used between two transactions
Subordination and Priority
Subordination = voluntarily stepping back in line. First recorded = first in line.
How lenders agree to change the priority of their liens
A subordination agreement lets a new first mortgage take priority over an existing lien
Lien priority: normally determined by recording date — first recorded has first priority (except property taxes). Subordination agreement: a lienholder voluntarily agrees to move to a lower priority position. Used when: refinancing (new lender wants first position — existing second lender must subordinate), construction financing (land seller subordinates so construction lender can be in first position). SNDA: Subordination, Non-Disturbance, and Attornment — commercial lease agreement where tenant subordinates to lender, lender agrees not to disturb tenant's possession if foreclosed, tenant agrees to recognize new owner.
Subordination
Lender voluntarily steps back — gives up priority position
Why needed
Refinancing — new lender must be in first position
SNDA
Commercial: Sub + Non-Disturbance + Attornment
Discount Points and Buydowns
1 point = 1% of loan. Each point buys down rate ~0.25%. Pay now, save monthly.
Prepaid interest that lowers the interest rate for the life of the loan
Calculate break-even: upfront cost ÷ monthly savings = months to recover the point cost
Discount points: prepaid interest paid at closing to permanently reduce the interest rate. 1 point = 1% of the loan amount. Rule of thumb: each point reduces rate by approximately 0.125–0.25%. Break-even analysis: cost of points ÷ monthly savings = months to break even. Example: 2 points on $300,000 = $6,000 upfront. Saves $100/month → break even in 60 months (5 years). If selling before break-even: not worth it. 2-1 buydown: rate is 2% lower in year 1, 1% lower in year 2, then goes to full rate — often seller-paid concession.
1 point
1% of loan amount — reduces rate ~0.25%
Break-even
Cost ÷ monthly savings = months to recover
2-1 buydown
Rate 2% low yr 1, 1% low yr 2, full rate yr 3+
Prepayment Penalties and Due-on-Sale
Prepayment penalty: pay early, pay a fee. Due-on-sale: sell the house, pay the loan.
Two loan clauses that restrict what borrowers can do with the mortgage
Assumable loans have no due-on-sale clause — FHA and VA loans are assumable with lender approval
Prepayment penalty: fee charged if borrower pays off loan early — compensates lender for lost interest. Common in commercial loans; rare in modern residential (banned in many QM loans). Soft penalty: applies only if refinancing. Hard penalty: applies even if selling. Due-on-sale clause (alienation clause): requires full loan payoff if property is sold or transferred — prevents buyers from assuming the loan without lender approval. Assumable loans: FHA and VA loans are assumable — buyer takes over seller's loan (with lender qualification). Assumption can be attractive when seller has a low-rate loan.
Due-on-sale
Loan must be paid off on sale — prevents assumption
Assumable
FHA and VA loans — buyer takes over seller's rate
Prepayment penalty
Fee for early payoff — rare in residential now
Hard Money and Bridge Loans
Hard money = asset-based, fast, expensive. Bridge = short-term gap between two deals.
Alternative lending sources used when conventional financing won't work or is too slow
Hard money lenders care about the property value — not your credit score or income
Hard money loans: made by private investors or companies based on asset value (LTV), not borrower creditworthiness. Fast to close (days, not months). High rates (8-15%+) and fees (2-5 points). Short terms (6-24 months). Used by: fix-and-flip investors, borrowers who can't qualify conventionally. Bridge loan: short-term loan bridging the gap between buying a new property before the old one sells. Allows buyer to make non-contingent offers. Repaid when old home sells. Construction loans: short-term, interest-only during construction — convert to permanent mortgage on completion (construction-to-permanent or "one-time close").
Hard money
Asset-based — fast close, high cost, fix-and-flip tool
Bridge loan
Gap between selling and buying — allows clean offers
Construction
Interest-only during build, converts to permanent at completion
🎓 Common Exam Questions
Q: What is the difference between conventional, FHA, and VA loans?
A: Conventional loans: not government-backed, sold on secondary market (Fannie Mae/Freddie Mac). Require higher credit scores (620+), down payment 3-20%+, PMI if down payment below 20%. Conforming loans: within loan limits set by FHFA. Jumbo: exceeds limits. FHA loans: insured by Federal Housing Administration. Lower credit requirements (580 for 3.5% down), down payment as low as 3.5%, mortgage insurance premium (MIP) required for life of loan if down payment under 10%. Property must meet FHA standards. VA loans: guaranteed by Veterans Administration for eligible veterans and active duty. Zero down payment, no PMI, competitive rates, funding fee instead. USDA loans: 100% financing for rural areas, income limits apply.
Q: How does amortization work and what is the difference between principal and interest portions?
A: Amortization: process of paying off a loan through regular equal payments that include both principal and interest. Early payments: mostly interest, small principal reduction. Later payments: mostly principal, small interest. Example: $200,000 loan at 6%, 30-year fixed — first payment is mostly interest ($1,000) with small principal reduction ($199). By year 25, most of the payment goes to principal. Total interest paid over 30 years on a $200,000 loan at 6% = approximately $231,676 — more than the original loan amount. Amortization schedule shows breakdown of each payment. Biweekly payments: 26 half-payments per year = 13 full payments annually → pay off loan 5-7 years early.
Q: What is the secondary mortgage market and why does it matter?
A: Primary market: lenders originate loans directly to borrowers. Secondary market: loans are bought and sold between financial institutions. Fannie Mae (FNMA) and Freddie Mac (FHLMC): government-sponsored enterprises that buy conventional conforming loans from lenders, pool them into mortgage-backed securities (MBS), and sell to investors. Ginnie Mae (GNMA): guarantees MBS backed by FHA and VA loans. Why it matters: allows lenders to replenish capital immediately after making loans → can make more loans → keeps money flowing to housing market → keeps rates lower. Conforming loan limits: maximum loan size that Fannie/Freddie will buy — set annually by FHFA. Loans above limits = jumbo loans, kept by portfolio lenders.
Q: How are closing costs typically allocated between buyer and seller?
A: Buyer typically pays: loan origination fee, appraisal, credit report, title search, lender's title insurance policy, recording fees for deed and mortgage, prepaid interest, homeowners insurance, property tax impounds, home inspection. Seller typically pays: real estate agent commissions (traditionally 5-6%, evolving), owner's title insurance policy, transfer taxes/documentary stamp tax, any required repairs from inspection, payoff of existing loans and liens, prorated property taxes through closing date. Negotiable: many costs can be negotiated — seller may offer credits. Cash to close = down payment + buyer's closing costs (typically 2-5% of loan amount). Seller's net proceeds = sale price minus agent commission, existing loans, closing costs, repairs.
Q: What is the cap rate and how is it used in real estate investment?
A: Capitalization Rate (Cap Rate) = Net Operating Income (NOI) ÷ Property Value (or Price). NOI = Gross Rental Income - Vacancy & Credit Loss - Operating Expenses (taxes, insurance, maintenance, management — NOT mortgage). Higher cap rate = higher return but typically higher risk (secondary markets, older properties). Lower cap rate = lower return, typically lower risk (primary markets, newer properties). To find value: Value = NOI ÷ Cap Rate. Example: property generates $50,000 NOI, market cap rate is 5% → Value = $50,000 ÷ 0.05 = $1,000,000. Cap rate is independent of financing — allows comparison of investment properties regardless of leverage used.