Real Estate Exam Financing & Mortgage Guide 2026
Financing is one of the heaviest sections on the real estate exam — approximately 14% of your score (17-20 questions). It covers everything from loan types and mortgage terms to federal lending regulations and the secondary mortgage market.
The good news? Financing questions follow predictable patterns. Master the loan types, key terminology, and federal laws in this guide, and you'll be well-prepared.
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Mortgage Terminology (Start Here)
Getting the terminology right is critical — the exam deliberately uses confusing terms:
The #1 Trap: Mortgagor vs. Mortgagee
| Term | Who | Memory Trick |
|---|---|---|
| Mortgagor | The BORROWER | The "or" gives the mortgage (signs it over) |
| Mortgagee | The LENDER | The "ee" receives the mortgage |
This is counterintuitive, which is exactly why the exam tests it. The borrower (mortgagor) gives a mortgage to the lender (mortgagee). The lender (mortgagee) gives money to the borrower (mortgagor).
Key Mortgage Terms
| Term | Definition |
|---|---|
| Promissory Note | The borrower's promise to repay the debt — the evidence of the debt |
| Mortgage/Deed of Trust | The security instrument — pledges the property as collateral |
| Lien | A claim against the property — the mortgage creates a voluntary lien |
| Equity | Property value minus the debt owed |
| LTV (Loan-to-Value) | Loan amount ÷ Property value — measures lender risk |
| DTI (Debt-to-Income) | Monthly debt payments ÷ Monthly gross income |
| PMI | Private Mortgage Insurance — required when LTV exceeds 80% on conventional loans |
| Amortization | Gradual repayment of a loan through regular installments |
| Prepayment Penalty | Fee charged for paying off a loan early (less common today) |
Mortgage vs. Deed of Trust
This is a critical distinction the exam tests multiple times:
| Feature | Mortgage | Deed of Trust |
|---|---|---|
| Parties | 2: Mortgagor (borrower), Mortgagee (lender) | 3: Trustor (borrower), Beneficiary (lender), Trustee (third party) |
| Who holds title | Borrower keeps title (lien theory) | Trustee holds legal title (title theory) |
| Foreclosure | Judicial (court process — slower) | Non-judicial (trustee sale — faster) |
| Deficiency judgment | Available in most states | Varies by state |
Lien Theory vs. Title Theory
| Theory | Who Holds Title | Foreclosure | States |
|---|---|---|---|
| Lien Theory | Borrower keeps both legal AND equitable title; lender has a lien | Judicial foreclosure (court required) | Most states |
| Title Theory | Lender holds legal title; borrower holds equitable title | Non-judicial foreclosure possible | Some states (e.g., GA, MA) |
| Intermediary Theory | Borrower holds title until default, then title passes to lender | Hybrid approach | A few states |
The 4 Main Loan Types
1. Conventional Loans
| Feature | Details |
|---|---|
| Government backed? | No — no government insurance or guarantee |
| Down payment | Typically 3-20% |
| PMI | Required if LTV exceeds 80% (less than 20% down) |
| PMI cancellation | Automatically removed at 78% LTV; can request at 80% LTV |
| Conforming limits | Must meet Fannie Mae/Freddie Mac guidelines |
| Best for | Borrowers with good credit and 20%+ down payment |
2. FHA Loans (Federal Housing Administration)
| Feature | Details |
|---|---|
| Government backed? | Yes — insured by FHA (part of HUD) |
| Down payment | 3.5% minimum (with 580+ credit score) |
| Mortgage insurance | Upfront MIP + annual MIP (required for life of loan if LTV > 90%) |
| Assumable? | Yes — with lender approval |
| Property requirements | Must meet FHA property standards (safety, structural integrity) |
| Best for | First-time buyers, lower credit scores, smaller down payments |
3. VA Loans (Department of Veterans Affairs)
| Feature | Details |
|---|---|
| Government backed? | Yes — guaranteed by VA |
| Down payment | $0 required (100% financing) |
| PMI/MIP | None — but a one-time funding fee is charged |
| Who qualifies | Veterans, active-duty military, certain surviving spouses |
| Assumable? | Yes — even by non-veterans (with lender approval) |
| Prepayment penalty | None |
| Best for | Eligible veterans and military members |
4. USDA Loans (U.S. Department of Agriculture)
| Feature | Details |
|---|---|
| Government backed? | Yes — guaranteed by USDA |
| Down payment | $0 required |
| Income limit | Yes — cannot exceed 115% of area median income |
| Location requirement | Property must be in USDA-eligible rural area |
| Guarantee fee | Upfront + annual fee (similar to MIP) |
| Best for | Low-to-moderate income buyers in rural areas |
Quick Comparison Table (Exam Favorite)
| Feature | Conventional | FHA | VA | USDA |
|---|---|---|---|---|
| Down payment | 3-20% | 3.5% | $0 | $0 |
| Mortgage insurance | PMI if >80% LTV | MIP (required) | None (funding fee) | Guarantee fee |
| Government backed | No | Yes | Yes | Yes |
| Assumable | Generally no | Yes | Yes | Yes |
| Occupancy | Primary, secondary, investment | Primary only | Primary only | Primary only |
Mortgage Clauses You Must Know
| Clause | What It Does |
|---|---|
| Acceleration Clause | Allows lender to demand full loan repayment if borrower defaults |
| Alienation (Due-on-Sale) Clause | Loan becomes due if property is sold or transferred — prevents assumption |
| Defeasance Clause | Requires lender to release the lien when the loan is paid in full |
| Subordination Clause | Allows a later mortgage to take priority over an earlier one |
| Prepayment Clause | Terms for early repayment (penalty or no penalty) |
| Escalation Clause | Allows lender to raise interest rate under certain conditions (ARMs) |
Federal Lending Laws
RESPA (Real Estate Settlement Procedures Act)
What it regulates: Settlement (closing) procedures for residential mortgage loans
Key provisions:
- Loan Estimate must be provided within 3 business days of loan application
- Closing Disclosure must be delivered at least 3 business days before closing
- Prohibits kickbacks — no referral fees between settlement service providers
- Limits escrow — lenders cannot require excessive escrow deposits
- Applies to "federally related mortgage loans" (virtually all residential mortgages)
Truth in Lending Act (TILA) / Regulation Z
What it regulates: How lenders advertise and disclose loan terms
Key provisions:
- Must disclose APR (Annual Percentage Rate) — the true cost of borrowing
- 3-day right of rescission on refinances and home equity loans (NOT purchase loans)
- Trigger terms in advertising: If an ad mentions specific terms (e.g., "3.5% down," "$1,500/month"), it must disclose ALL terms (APR, down payment, loan term, etc.)
- Regulates advertising — what lenders can and cannot say
Equal Credit Opportunity Act (ECOA)
What it prohibits: Discrimination in lending based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.
Key points:
- Cannot ask about plans to have children
- Cannot require spouse's signature unless both are on the loan
- Must provide reasons for denial within 30 days
Primary vs. Secondary Mortgage Market
Primary Market
Where borrowers get loans directly from lenders:
- Banks and credit unions
- Mortgage companies
- Savings associations
Secondary Market
Where loans are sold to investors, providing liquidity:
| Entity | Full Name | What They Do |
|---|---|---|
| Fannie Mae | Federal National Mortgage Association (FNMA) | Buys conventional and FHA loans. GSE (government-sponsored enterprise). |
| Freddie Mac | Federal Home Loan Mortgage Corporation (FHLMC) | Buys conventional loans. GSE. Targets smaller banks. |
| Ginnie Mae | Government National Mortgage Association (GNMA) | Guarantees MBS pools of FHA/VA loans. Full government agency. |
Why the secondary market matters: When a bank sells your mortgage to Fannie Mae, the bank gets cash back to make more loans. This cycle keeps mortgage rates low and credit available. Without the secondary market, banks would run out of money to lend.
Types of Mortgage Payments
| Type | How It Works |
|---|---|
| Fixed-Rate | Same payment amount for the entire loan term (15 or 30 years) |
| Adjustable-Rate (ARM) | Rate adjusts periodically based on an index plus a margin |
| Balloon | Lower payments during the term, with a large final "balloon" payment |
| Interest-Only | Pay only interest for a period, then begin principal + interest payments |
| Graduated Payment | Starts with lower payments that increase over time (may have negative amortization) |
| Reverse Mortgage | Lender pays the homeowner — available to borrowers 62+ (HECM) |
ARM Terminology
- Index: The benchmark rate the ARM is tied to (e.g., SOFR, Treasury)
- Margin: The lender's markup above the index (e.g., 2.75%)
- Cap: Limits on how much the rate can increase (per adjustment and lifetime)
- Floor: The minimum rate the ARM can adjust down to
Key Financing Formulas
| Formula | How to Calculate |
|---|---|
| LTV | Loan Amount ÷ Property Value |
| Equity | Property Value - Loan Balance |
| Monthly Payment (simple) | Loan Amount × Monthly Rate |
| Points | 1 point = 1% of loan amount (each point lowers rate ~0.25%) |
| DTI (Front-end) | Housing Costs ÷ Gross Monthly Income |
| DTI (Back-end) | Total Monthly Debt ÷ Gross Monthly Income |
Example: A buyer purchases a $400,000 home with 10% down.
- Down payment: $400,000 × 10% = $40,000
- Loan amount: $400,000 - $40,000 = $360,000
- LTV: $360,000 ÷ $400,000 = 90% (PMI required on conventional)
- 2 discount points: $360,000 × 2% = $7,200
Foreclosure Process
| Type | Process | Speed |
|---|---|---|
| Judicial | Court-supervised — lender files lawsuit, property sold at sheriff's sale | Slow (6-18 months) |
| Non-judicial | Trustee sale — no court required (deed of trust states) | Faster (2-6 months) |
| Strict | Court awards property directly to lender (no sale) — rare today | Varies |
Key terms:
- Lis Pendens: Public notice that a foreclosure lawsuit has been filed
- Right of Redemption: Borrower's right to reclaim property by paying full amount owed
- Equitable redemption: Before the foreclosure sale
- Statutory redemption: After the sale (available in some states)
- Deficiency Judgment: If the foreclosure sale doesn't cover the debt, the lender can sue the borrower for the difference
Common Exam Mistakes on Financing
- Mixing up mortgagor and mortgagee. Mortgagor = borrower. Mortgagee = lender. Always.
- Thinking the right of rescission applies to purchase loans. It does NOT — only refinances and home equity loans on a primary residence.
- Confusing Fannie Mae, Freddie Mac, and Ginnie Mae. Only Ginnie Mae is a full government agency. Only Ginnie Mae guarantees FHA/VA loan pools.
- Forgetting that RESPA prohibits kickbacks. Agents cannot receive referral fees from lenders, title companies, or other settlement providers.
- Mixing up FHA insurance terms. FHA uses MIP (Mortgage Insurance Premium), not PMI (Private Mortgage Insurance). PMI is for conventional loans only.
Start Practicing Financing Questions Now
Financing is one of the highest-weighted sections on your exam. The formulas, loan types, and federal laws are predictable — master them and you'll earn easy points.
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Related Real Estate Exam Guides
- Contracts & Agency Guide — Fiduciary duties, OLDCAR, and contract law
- Property Valuation & Appraisal Guide — The 3 appraisal approaches and Cap Rate
- Fair Housing Laws Guide — Protected classes, violations, and exemptions
- Real Estate Exam Math Guide — All the formulas you need to know