Finance is a math-heavy section that covers how real estate purchases are funded, the types of mortgages, and the federal regulations that govern lending.
A mortgage has two parts: the note (the borrower's promise to repay) and the mortgage instrument (the lien on the property securing the loan). In NY, foreclosure is a judicial process, meaning the lender must go through the courts.
Fixed-rate mortgages have a constant interest rate. Adjustable-rate mortgages (ARMs) have rates that change periodically based on an index. FHA loans are government-insured with low down payments. VA loans are for veterans with no down payment required. Conventional loans are not government-backed.
One discount point equals 1% of the loan amount and reduces the interest rate by approximately 0.25%. Points are prepaid interest and are tax-deductible in the year paid. The exam frequently asks you to calculate the cost of points.
The Real Estate Settlement Procedures Act (RESPA) prohibits kickbacks and requires disclosure of closing costs. The TILA-RESPA Integrated Disclosure rule (TRID) requires lenders to provide a Loan Estimate within 3 business days of application and a Closing Disclosure at least 3 business days before closing.
1. A buyer purchases a $400,000 home with a $320,000 mortgage. What is the loan-to-value (LTV) ratio?
LTV = Loan Amount ÷ Property Value = $320,000 ÷ $400,000 = 0.80 = 80%. At 80% LTV, the borrower is at the conventional PMI threshold — PMI is not required at exactly 80%.
2. Which loan type requires NO down payment and NO private mortgage insurance for eligible borrowers?
VA loans (guaranteed by the Dept. of Veterans Affairs) require no down payment and no PMI for eligible veterans and service members. USDA also has no down payment but applies only to rural properties with income limits.
3. The Truth in Lending Act (TILA) requires lenders to prominently disclose the:
TILA (Regulation Z) requires disclosure of the APR, which includes the interest rate plus all fees. The APR is always higher than the stated interest rate and allows apples-to-apples loan comparisons.
Acceleration Clause
A mortgage provision that allows the lender to demand full repayment of the remaining loan balance if the borrower defaults.
Amortization
The process of paying off a loan through regular, scheduled payments that cover both principal and interest.
Balloon Mortgage
A mortgage with periodic payments that do not fully amortize, leaving a large lump-sum payment due at the end of the loan term.
Due-on-Sale Clause
A mortgage provision that requires the borrower to repay the full loan balance when the property is sold or transferred.
Equity
The difference between a property's current market value and the total amount owed on all mortgages and liens against it.
Foreclosure
The legal process by which a lender seizes and sells a property to recover unpaid mortgage debt after the borrower defaults.
Hypothecation
The act of pledging property as collateral for a loan without giving up possession of it.
Kickback
An illegal payment or referral fee given in exchange for directing business, prohibited under RESPA in mortgage transactions.
Study Real Estate Finance in depth
Unlock the full study module with explanations, flashcards, and Carl, your AI tutor who can answer any question about this topic.
Start studying free →No credit card required
click for a haiku!