Financing
Financing Types the Real Estate Exam Tests
Down payment minimums, insurance premiums, funding fees, income and loan limits, and eligibility rules are set by the administering agency or the secondary market entity and are revised periodically. Learn the structure and the purpose here; take current figures from the agency's own publications.
The financing section looks like a long list of loan names to memorize. It is not. Nearly every item turns on one of three questions: who stands behind the loan, how the balance behaves over time, and how many properties the lien touches.
Sort each product against those three questions and the list collapses into a handful of patterns. The definitions below are written that way, followed by the clauses and program details that items are actually built on.
Three Questions That Sort Every Product
Start with backing. A conventional loan carries no government insurance or guarantee, so the lender's protection comes from the borrower's equity and, below a threshold, from private mortgage insurance. A government-backed loan shifts part of that risk to a federal agency, which is why its underwriting can be looser than the borrower's own balance sheet would otherwise support. Insured and guaranteed are not the same mechanism, and items test the difference.
Then ask how the balance behaves. A fully amortizing loan retires itself by the end of its term through level payments whose interest and principal split drifts month by month. A partially amortizing loan pays down for a while and then demands the remainder at once. An interest-only loan does not reduce principal at all during its initial period. A negatively amortizing loan can grow. Any question about what is owed at a future date is really a question about which of these four you are looking at.
Finally ask what the lien covers. Most loans attach to one property. A blanket loan attaches to several at once. A package loan sweeps in personal property alongside the real estate, and a construction loan advances in stages against work completed rather than in a single disbursement. When an item describes an unusual collateral arrangement, that is the axis being tested.
Major Loan Types
Read each of these as an answer to the three questions above rather than as a name to recognize.
Conventional Loan
A mortgage carrying no federal insurance or guarantee, where the lender relies on the borrower's credit and the equity in the property. A conventional loan that satisfies the purchase criteria of the major secondary market entities is described as conforming and can be sold into that market; one that does not, whether because of size or because of underwriting, is non-conforming and is priced accordingly. Where the borrower's equity is below the customary threshold, the lender requires private mortgage insurance, which is paid by the borrower and protects only the lender.
FHA Loan
A loan made by an approved private lender and insured by the Federal Housing Administration, which reimburses the lender if the borrower defaults. Insurance, not lending: the agency itself does not make the loan. The program is aimed at borrowers with modest savings or thinner credit files, and it accepts a smaller down payment than conventional underwriting normally would. In exchange the borrower pays a mortgage insurance premium, typically both an upfront charge and an ongoing one, and how long the ongoing charge lasts depends on the down payment and on the program rules in force when the loan was written. The property must meet the agency's minimum condition standards, and there are maximum loan amounts that vary by area.
VA Loan
A loan made by a private lender and partially guaranteed by the Department of Veterans Affairs, so the agency absorbs a portion of the lender's loss rather than insuring the whole balance. Eligibility runs to qualifying service members, veterans and certain surviving spouses, and is evidenced by a certificate of eligibility. Its defining features are the absence of a required down payment for an eligible borrower within the guaranty and the absence of any monthly mortgage insurance charge. A one-time funding fee applies instead, with statutory exemptions for certain borrowers, and the appraisal produces a certificate of reasonable value that caps the amount financed.
USDA Loan
A loan guaranteed under a Department of Agriculture rural development program, intended to support owner-occupied housing outside metropolitan areas. Two conditions define it and both are tested: the property has to sit within a designated eligible area, and the household income has to fall under a published limit for that area. Qualified borrowers can finance the purchase without a down payment. Guarantee and annual fees apply, and the eligibility maps and income tables are maintained by the agency.
ARM (adjustable-rate mortgage)
A loan whose note rate is recalculated at set intervals, usually after an initial period at a fixed rate. At each adjustment the rate is reset to the value of a published index plus a margin: the index moves with the market and neither party controls it, while the margin is the lender's fixed spread and does not change for the life of the loan. Caps constrain the movement, a periodic cap limiting any single adjustment and a lifetime cap limiting the total rise above the start rate. The rate risk sits with the borrower, which is the reason the opening rate is lower than a comparable fixed-rate quote.
Purchase Money Mortgage
A mortgage the buyer gives as part of the consideration for the purchase itself. In its most commonly tested form the seller takes back paper: title passes to the buyer by deed at closing, and the seller holds a lien securing the unpaid balance, either behind an institutional first loan or as the entire financing. Sellers use it to move a property, to spread a gain, or to reach a buyer institutional underwriting has declined. Distinguish it from a land contract, where the seller retains legal title until the contract is performed and the buyer holds only equitable title in the meantime.
Hard Money Loan
Short-term financing from a private investor or fund, underwritten primarily against the value of the collateral rather than the borrower's income and credit. Speed and flexibility are the product; the price is a materially higher rate, points at origination, and a term measured in months. Typical uses are acquisition and rehabilitation of a property that will be resold or refinanced quickly, and situations where conventional underwriting cannot move fast enough. Repayment usually depends on an exit, so these loans commonly end in a lump sum rather than amortizing away.
Blanket Mortgage
One loan secured by a lien over two or more separate parcels, used by developers holding subdivision lots and by investors financing several properties together. Its essential feature on the exam is the partial release clause, which lets an individual parcel be conveyed free of the blanket lien once a specified payment is made, so lots can be sold off one at a time without retiring the entire debt. Without such a clause the borrower could not deliver clear title to any single parcel.
Clauses and Features That Cut Across Loan Types
These attach to many of the products above, and items frequently pair a clause with the wrong instrument.
Acceleration. Lets the lender declare the whole unpaid balance due on a defined default, which is what allows foreclosure of the entire debt rather than a suit for missed installments.
Due-on-sale, also called alienation. Lets the lender call the balance when the property is transferred, and is the reason an assumption generally needs the lender's consent.
Prepayment penalty. A charge for retiring the debt early, restricted or prohibited for certain loan types and in certain jurisdictions. Do not assume it is available.
Subordination. An agreement by an existing lienholder to take a lower priority than a later loan, most often seen where a seller financing a lot agrees to sit behind a construction lender.
Partial release. Frees one parcel from a lien covering several, and is what makes a blanket loan workable.
Balloon payment. The lump sum owed at maturity on a loan that has not fully amortized, common where payments were calculated on a longer schedule than the actual term.
Escalation and escrow. A rate escalation provision changes the rate on stated events, while an escrow or impound account collects taxes and insurance with the payment. Neither changes the principal balance.
Assumption versus taking subject to. On an assumption with release the buyer becomes personally liable and the seller is discharged; taking title subject to the loan leaves the original borrower personally obligated while the buyer merely owns encumbered property.
Insured, Guaranteed, and Neither
The government programs are easiest to keep straight by naming the mechanism. The Federal Housing Administration insures the lender against loss and charges the borrower a premium for that insurance. The Department of Veterans Affairs guarantees a portion of the loan, so the agency stands behind part of the balance and charges a funding fee rather than a recurring premium. The Department of Agriculture likewise guarantees within its rural program. In all three cases the money comes from a private lender, which is the single most common misconception in this material.
Private mortgage insurance is the conventional analogue, and it is worth separating from the government programs precisely because it looks similar. It is bought from a private insurer, it protects the lender, the borrower pays it, and it exists only while the borrower's equity is below the customary threshold. Federal law sets out when it terminates automatically and when a borrower may request cancellation; treat those triggers as rules to look up rather than numbers to assume.
Two more participants show up in items about where the money comes from. The primary market is where loans are originated. The secondary market is where closed loans are purchased and pooled, returning capital to originators so they can lend again, and its purchase standards are the reason conforming underwriting criteria exist. Ginnie Mae is the entity associated with securities backed by government-program loans, while Fannie Mae and Freddie Mac deal in conventional conforming paper.
Finally, note what finances land and construction. A construction loan disburses in draws against inspected progress and is typically short-term and interest-bearing on the amount advanced, with a permanent loan taking it out at completion. A combined facility that converts from one to the other without a second closing is a construction-to-permanent arrangement. A land or lot loan is separately underwritten because raw ground produces no income and is harder to resell after default.
Financing Questions Worth Getting Right
Which is the debt and which is the security?
The promissory note is the debt: it contains the promise to repay and the terms. The mortgage or deed of trust is the security instrument: it pledges the property and gives the lender a remedy if the note is not paid. A note can exist without a mortgage. A mortgage securing nothing has no purpose, which is why the security follows the note when the debt is sold.
What is a balloon loan, and why would anyone take one?
Payments are calculated on a longer amortization schedule than the loan's actual term, so the loan has not retired itself when it matures and the remaining balance falls due in a single payment. The attraction is a lower payment during the term. The risk is the maturity date, since repaying it normally depends on a sale or a refinance that may not be available on the terms the borrower assumed.
What is a bridge loan used for?
It carries a borrower across the gap between two transactions, most often letting an owner buy before selling so the offer on the new property does not have to be contingent on the old one closing. It is short-term, it is often secured by the departing residence, and it is priced above permanent financing. It is sometimes called a swing or gap loan.
What separates a wraparound from a straight second mortgage?
In a wraparound, the seller extends new financing in an amount that includes the existing first loan, which stays in place, and the buyer pays the seller while the seller continues paying the underlying lender. A conventional second is a separate junior lien for its own amount, paid to its own lender. A wraparound only works if the first loan permits it, so the due-on-sale clause is where these items usually end up.
Which financing type is best for a first-time buyer?
There is no single answer, and an option that asserts one is a distractor. The fit depends on eligibility, savings, credit, the property's location and condition, and how long the borrower expects to hold. What the exam wants is that you can match a described borrower to the program whose eligibility rules and structure fit the facts given.
How much of the exam is financing?
Enough that it is never safely skipped, but the weighting is set by your jurisdiction and its exam vendor. The current candidate handbook publishes a content outline with the share assigned to each area. Use that outline as your syllabus, and take your own weak-area split from a cold full-length attempt rather than from an assumption about which topics are heaviest.