Tag Archive for: Mortgage Loans

FINANCING – Platform Loan Officer working with Buyers for mortgage loans

🏠 Real Estate Financing: Everything You Need to Know for the PSI Exam

By Capital Real Estate School | PSI Exam Prep Series

If you’re getting ready for the PSI real estate salesperson licensing exam, one topic you absolutely cannot skip is financing. The financing section covers roughly 10–12% of your national exam questions, so a solid understanding here can make a real difference in your final score.

Don’t worry, we’re going to explain everything clearly. Whether you’re new to mortgages or just need a refresher before exam day, this guide walks through every major subtopic from the PSI outline, with tips to help you remember what matters most.

Let’s get started.

📄 The Key Players and Documents

When someone buys a home using borrowed money, there are always two core legal documents involved: a promissory note and a security instrument (either a mortgage or a deed of trust).

The Promissory Note

The promissory note is the borrower’s written promise to repay the loan. Think of it like an IOU; it spells out the loan amount, the interest rate, and the repayment terms. It’s the debt itself, but it doesn’t put a lien on the property.

The Mortgage vs. the Deed of Trust

Here’s where things get a little technical, but it’s worth knowing this material cold for the exam.

• A mortgage is a two-party agreement between the borrower (mortgagor) and the lender (mortgagee). The borrower retains title, and the lender holds a lien on the property.
• A deed of trust involves three parties: the trustor (borrower), the trustee (a neutral third party), and the beneficiary (the lender). The trustee holds legal title to the property until the loan is paid off.

💡 PSI Exam Tip: Know the parties in a deed of trust — trustor, trustee, and beneficiary. The exam tests whether you can correctly identify each role. The trustor is the borrower; the beneficiary is the lender.

⚖️ Lien Theory vs. Title Theory

States use one of two legal theories to govern who “holds” the property during a loan.

• In lien theory states, the mortgage is used, and foreclosure goes through the courts; this process is called judicial foreclosure and takes longer.
• In title theory states, the deed of trust is used, and the trustee can sell the property without going to court; this procedure is called nonjudicial foreclosure or “foreclosure by power of sale.”

💡 PSI Exam Tip: If a question mentions a “power of sale” clause or “nonjudicial foreclosure,” think deed of trust. If it says “court action required,” think mortgage / judicial foreclosure.

📝 Key Mortgage Clauses You Must Know

The PSI exam loves testing mortgage clauses. Here are the big five:

• Acceleration Clause: If you miss payments, the lender can demand the entire loan balance immediately. Think “accelerate”; the whole debt speeds up.
• Alienation Clause (Due-on-Sale) — If you sell the property, the full loan balance becomes due. This prevents the buyer from assuming your mortgage without lender approval.
• Defeasance Clause: Once you pay off the loan, the lender must release the lien. The mortgage is “defeated.”
• Prepayment Clause: Spells out whether you can pay off the loan early and whether there’s a penalty for doing so.
• Subordination Clause: Allows a later (junior) mortgage to take priority over an older one; often used in construction financing.

💡 PSI Exam Tip: The alienation clause and the acceleration clause are the most commonly tested. Know the difference: alienation triggers on the sale of property; acceleration triggers on default.

💰 Types of Mortgage Loans

Conventional, FHA, and VA Loans

These three are the bread and butter of residential lending, and the PSI exam will test you on the differences.

• The Federal Housing Administration, a division of HUD, insures FHA loans. If you default, the government reimburses the lender.
• VA loans are guaranteed (not insured) by the Department of Veterans Affairs and are available only to eligible military members and veterans.
• Conventional loans are not backed by any government agency. They follow Fannie Mae/Freddie Mac guidelines to be “conforming.”

💡 PSI Exam Tip: The exam may say that FHA loans are “insured” and VA loans are “guaranteed”—those terms are not interchangeable. Get them right!

📊 Fixed-Rate vs. Adjustable-Rate Mortgages (ARMs)

• A fixed-rate mortgage keeps the same interest rate for the entire loan term. Your monthly payment never changes — very predictable.
• An adjustable-rate mortgage (ARM) starts with a fixed rate for an initial period, then adjusts periodically based on a market index (like the SOFR or Treasury index).

ARMs have two important caps:

• Rate cap — Limits how much the interest rate can change per adjustment period and over the life of the loan.
• Payment cap — Limits how much your monthly payment can change, regardless of rate changes. (This can cause negative amortization if the cap is too low!)

🏗️ Specialized Loan Types

These loan types show up regularly on the PSI exam, so don’t skip them:

• Balloon Loan: Low or interest-only payments for a set period, then a large lump-sum “balloon” payment at the end.
• Interest-Only Loan: You pay only interest for a period; no principal is paid down during that time.
• Package Mortgage: Covers both real property and personal property (like appliances) in the same loan.
• Blanket Mortgage: One loan that covers multiple parcels of land. Often used by developers. Includes a “release clause” to free individual lots as they’re sold.
• Open-End Mortgage: The borrower can borrow up to a set limit over time (think: like a credit card secured by real estate).
• Construction Loan: A short-term loan used to finance the building of a property. Typically, the loan is converted to a permanent mortgage when construction is complete.
• Home Equity Loan / HELOC: Let’s existing homeowners borrow against the equity they’ve built up.

💡 PSI Exam Tip: A common exam question asks: “What type of mortgage covers both real AND personal property?” Answer: Package mortgage.

🤝 Seller Financing

Sometimes the seller becomes the lender. Two key instruments:

• Purchase Money Mortgage (PMM) — The seller takes back a mortgage from the buyer instead of receiving full cash at closing. The buyer makes payments directly to the seller.
• Land Contract / Contract for Deed — The buyer makes payments to the seller over time, but the seller retains legal title until the loan is paid in full. The buyer gets “equitable title” (the right to use and enjoy the property) but not legal title. This is common when a buyer can’t qualify for a traditional mortgage.

💡 PSI Exam Tip: In a land contract, who holds legal title? The seller. The buyer only gets equitable title. This is heavily tested!

🏛️ The Secondary Mortgage Market: Fannie, Freddie & Ginnie

Most people hear “mortgage” and think of their local bank, but what happens after the bank approves your loan? Often, the loan is sold to the secondary market.

Primary vs. Secondary Market

• Primary market: Where loans are originated (made). The primary market is your bank, credit union, or mortgage company.
• Secondary market: Where existing loans are bought and sold between investors. This process frees up cash for lenders to make more loans.

The Big Three Government-Sponsored Entities

Fannie Mae and Freddie Mac buy mortgages from lenders, bundle them into mortgage-backed securities (MBS), and sell them to investors. This keeps money flowing back to lenders so they can make new loans. Ginnie Mae guarantees the MBS backed by government loans (FHA, VA) but does not buy loans directly.

💡 PSI Exam Tip: Ginnie Mae = government loans (FHA/VA). Fannie Mae and Freddie Mac = conventional conforming loans. This is a very common distinction in exams.

🧮 Qualifying the Buyer

Lenders look at several factors to decide if someone can afford a loan:

• Debt-to-Income Ratio (DTI): Your total monthly debt payments divided by your gross monthly income. Most conventional loans want a DTI below 36–43%. FHA may allow up to 50% in some cases.
• Credit Score: Conventional loans typically require 620+; FHA allows as low as 500 with a 10% down payment.
• Income Verification: Pay stubs, W-2s, tax returns
• Assets: Down payment funds, reserves for emergencies

🛡️ Consumer Protections: TILA, RESPA, and TRID

This is one of the most important sections for the exam and real life!

Truth in Lending Act (TILA)

TILA requires lenders to clearly disclose the true cost of a loan, including the Annual Percentage Rate (APR). The APR includes both the interest rate and certain fees, giving borrowers a more complete cost picture.

Trigger terms in advertising: If an ad mentions specific loan details (like down payment, monthly payment, or number of payments), it triggers the requirement to disclose all key loan terms.

RESPA (Real Estate Settlement Procedures Act)

RESPA protects buyers by requiring disclosure of all settlement costs and prohibiting kickbacks between real estate professionals, lenders, and title companies.

TRID (TILA-RESPA Integrated Disclosure)

In 2015, the Consumer Financial Protection Bureau (CFPB) combined TILA and RESPA disclosures into a unified system called TRID, which uses two key documents:

1. Loan Estimate (LE): Must be given to the borrower within 3 business days of application
2. Closing Disclosure (CD): Must be given at least 3 business days before closing

💡 PSI Exam Tip: Remember the “3-day rule” for both documents. Loan Estimate = 3 days after application; Closing Disclosure = 3 days before closing. These numbers show up on the exam!

⚠️ Predatory Lending, Usury & High-Cost Loan Protections

Predatory lending refers to unfair, deceptive, or abusive loan practices that trap borrowers in loans they can’t afford. Common examples include:

• Loan flipping (repeatedly refinancing to generate fees)
• Balloon payments hidden in fine print
• Excessive fees and prepayment penalties
• Targeting elderly or low-income borrowers

Usury is the practice of charging illegally high interest rates; most states set maximum legal rates.

HOEPA (Home Ownership and Equity Protection Act) provides extra protections for “high-cost” mortgages by requiring additional disclosures and restricting certain loan terms.

💡 PSI Exam Tip: The exam may ask about usury — just know it means charging above the legal interest rate limit. It’s illegal.

🎯 Quick PSI Financing Recap

Before test day, make sure you can answer these key questions without hesitation:

• What are the three parties in a deed of trust?
• What is the difference between lien theory and title theory states?
• What triggers the acceleration clause vs. the alienation clause?
• Who is Fannie Mae, Freddie Mac, and Ginnie Mae, and what do they each do?
• What are the two TRID documents, and when must each be delivered?
• What is the difference between a package mortgage and a blanket mortgage?
• What is the difference between FHA-insured and VA-guaranteed loans?
• What does APR include that a basic interest rate does not?

📚 Additional Study Resources

Here are eight external resources to deepen your understanding of key PSI financing topics:

1. Promissory Notes Explained – Chase Bank
2. Deed of Trust vs. Mortgage – Bankrate
3. FHA vs. Conventional Loans – Bankrate
4. About Fannie Mae & Freddie Mac – FHFA
5. TRID Guide – Rocket Mortgage
6. PSI Real Estate Exam Prep: Types of Loans – YouTube
7. FHA vs. Conventional: Pros & Cons – Capital Bank
8. TILA-RESPA Integrated Disclosure Glossary – Barnes Walker

Good luck on your PSI exam! Financing is one of those sections where having a strong grasp of vocabulary is very helpful. Review the tables above, memorize the TRID timelines, and keep the three government agencies straight; you’ve got this! 🎓