Proven mnemonics — built specifically for the real estate licensing exam.
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.