Comprehensive Study Guide
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Overview
This study guide covers the essential financing and mortgage concepts tested on the Florida Real Estate Exam. You will need to understand the legal framework governing mortgages in Florida, the major loan types available to borrowers, the qualification process, and the federal regulations that protect consumers. Mastering these concepts is critical, as financing questions regularly appear throughout the exam.
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Mortgage Fundamentals
The Two-Document System
Every Florida mortgage loan requires two separate documents that work together:
| Document | Role | Who Signs |
|---|---|---|
| Promissory Note | Personal promise to repay the debt | Borrower |
| Mortgage (Security Instrument) | Pledges property as collateral | Borrower |
> The note creates the debt; the mortgage secures it. Both are required.
Key Parties
• Mortgagor — The borrower who pledges the property as collateral
• Mortgagee — The lender who receives the pledge (holds the lien)
> Memory Trick: The mortgagOR is the bORrOwer. The mortgagEE receives the pledge.
Florida's Legal Theory: Lien Theory
Florida follows lien theory, which means:
• The borrower retains title to the property during the loan term
• The lender holds a lien (not title) as security for the debt
• This differs from title theory states, where the lender holds actual title
Critical Mortgage Clauses
| Clause | What It Does | Triggered By |
|---|---|---|
| Acceleration Clause | Entire remaining loan balance becomes due immediately | Borrower default |
| Alienation Clause (Due-on-Sale) | Full loan balance due when property is sold or transferred | Sale or transfer of property |
Assumption vs. Subject-To
| Method | Buyer Liability | Original Borrower Liability |
|---|---|---|
| Assumption | Buyer takes personal liability | Released (usually) |
| Subject-To | Buyer takes over payments only | Remains personally liable |
Deficiency Judgment
• A deficiency judgment is a court order requiring the borrower to pay the remaining debt after foreclosure
• Applies when foreclosure sale proceeds are less than the outstanding loan balance
• The borrower remains personally liable for the deficiency amount
Key Terms — Mortgage Fundamentals
• Promissory Note — Written promise to repay a debt
• Lien Theory — Florida's legal theory; borrower keeps title, lender holds lien
• Acceleration Clause — Demands full loan balance upon default
• Alienation Clause — Requires payoff upon sale or transfer
• Deficiency Judgment — Court order to pay remaining debt after foreclosure
• Assumption — Buyer takes personal liability for existing loan
• Subject-To — Buyer takes payments; original borrower stays liable
⚠️ Watch Out For
• Do not confuse mortgagor (borrower) and mortgagee (lender) — exam questions frequently swap these
• Florida is a lien theory state — the borrower always holds title during the loan
• In a subject-to transaction, the original borrower is still on the hook if the new buyer stops paying
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Loan Types
Conventional vs. Government-Backed Loans
| Feature | Conventional | Government-Backed (FHA/VA/USDA) |
|---|---|---|
| Insurance/Guarantee | None from federal agency | Insured or guaranteed by federal agency |
| Down Payment | Typically higher | Often lower or zero |
| PMI Required | Yes, if LTV > 80% | Replaced by MIP or funding fee |
FHA Loans
• Insured by the Federal Housing Administration
• Who pays insurance? The borrower pays:
- UFMIP — Upfront Mortgage Insurance Premium (at closing)
- MIP — Annual Monthly Insurance Premiums
• Credit score 580+ → Maximum LTV of 96.5% → Minimum down payment of 3.5%
• FHA insurance protects the lender, not the borrower
VA Loans
• Guaranteed by the U.S. Department of Veterans Affairs
• Available to eligible veterans, active-duty service members, and surviving spouses
• Key benefits:
- No down payment required
- No private mortgage insurance (PMI) required
- Competitive interest rates
Adjustable-Rate Mortgage (ARM)
• Interest rate changes periodically based on a financial index
• Common index: SOFR (Secured Overnight Financing Rate) + a margin
• Monthly payment fluctuates as the rate adjusts
• Typically starts with a lower initial rate than fixed-rate loans
Balloon Mortgage
• Lower fixed payments for a set period (e.g., 5 or 7 years)
• Entire remaining principal due in one large "balloon" payment at the end
• Risk: Borrower may be unable to pay or refinance when the balloon comes due
Specialty Mortgage Types
| Loan Type | Key Feature |
|---|---|
| Package Mortgage | Uses both real and personal property as collateral (e.g., appliances, furniture) |
| Purchase Money Mortgage (PMM) | Seller acts as lender; seller accepts mortgage from buyer instead of cash |
| HELOC | Revolving line of credit secured by home equity; draw as needed |
| Traditional Second Mortgage | Lump sum disbursed at closing with fixed payments |
Key Terms — Loan Types
• Conventional Loan — No federal insurance or guarantee
• FHA Loan — Federally insured; low down payment; borrower pays MIP
• VA Loan — Federally guaranteed; no down payment; no PMI
• ARM — Variable rate tied to an index plus a margin
• Balloon Mortgage — Large lump-sum payment due at end of term
• Package Mortgage — Real + personal property as collateral
• PMM — Seller financing
• HELOC — Revolving credit line secured by equity
⚠️ Watch Out For
• FHA insurance protects the lender, not the borrower — borrowers pay for it but don't benefit directly
• VA loans do NOT require PMI — this is a major exam distinction
• A package mortgage includes personal property (furniture, appliances), not just real property
• A HELOC is revolving credit (like a credit card), not a fixed lump-sum loan
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Loan Process & Qualification
Key Ratios
#### Loan-to-Value (LTV) Ratio
$$\text{LTV} = \frac{\text{Loan Amount}}{\text{Property Value (lower of appraised or purchase price)}} \times 100$$
• Lower LTV = Less risk for the lender = Better loan terms
• LTV above 80% on a conventional loan typically triggers PMI
#### Debt-to-Income (DTI) Ratio
| Ratio Type | What It Includes |
|---|---|
| Front-End Ratio | Housing expenses only (PITI: Principal, Interest, Taxes, Insurance) |
| Back-End Ratio | All monthly debts including housing, car loans, credit cards, student loans |
$$\text{DTI} = \frac{\text{Monthly Debt Obligations}}{\text{Gross Monthly Income}} \times 100$$
Private Mortgage Insurance (PMI)
• Required on conventional loans when down payment is less than 20% (LTV > 80%)
• Protects the lender (not the borrower) in case of default
• Can typically be cancelled once LTV reaches 80%
• FHA loans use MIP instead; VA loans have no PMI
Discount Points
• Prepaid interest paid at closing to buy down the interest rate
• 1 point = 1% of the loan amount
• Each point typically reduces the rate by 0.25%
• Example: On a $200,000 loan, 1 point = $2,000 paid to reduce the rate
Escrow / Impound Account
• Maintained by the lender
• Collects a portion of monthly payments to pay:
- Property taxes
- Homeowners insurance
• Ensures these critical obligations are paid on time
Amortization
• The process of gradually paying off a loan through regular scheduled payments
• Each payment covers both interest and principal
• Balance reaches zero at end of loan term
#### How Amortization Changes Over Time
```
Early Payments: [████████████ INTEREST] [■ PRINCIPAL]
Mid-Term Payments: [████████ INTEREST] [████ PRINCIPAL]
Late Payments: [■■ INTEREST] [████████████ PRINCIPAL]
```
• Early in loan: Mostly interest, little principal
• Later in loan: Mostly principal, little interest
• The total payment stays the same on a fixed-rate loan; only the allocation changes
Key Terms — Loan Process & Qualification
• LTV — Loan amount ÷ property value × 100
• DTI — Monthly debts ÷ gross monthly income × 100
• Front-End Ratio — Housing expenses only
• Back-End Ratio — All monthly debts
• PMI — Private mortgage insurance; required when LTV > 80% on conventional loans
• Discount Points — Prepaid interest to reduce rate; 1 point = 1% of loan
• Escrow Account — Lender-held funds for taxes and insurance
• Amortization — Gradual loan payoff through scheduled payments
⚠️ Watch Out For
• LTV is based on the lower of appraised value or purchase price — not always the sales price
• PMI protects the lender, not the borrower — even though the borrower pays for it
• Discount points are paid at closing (upfront), not monthly
• On an amortizing loan, the payment amount doesn't change — only the interest/principal split changes
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Federal Regulations & Disclosures
RESPA — Real Estate Settlement Procedures Act
• Purpose: Ensures transparency of loan costs and settlement charges
• Required Disclosures:
- Loan Estimate — Must be provided within 3 business days of loan application
- Closing Disclosure — Must be provided at least 3 business days before closing
TILA — Truth in Lending Act (Regulation Z)
• Purpose: Enables borrowers to compare loan costs accurately
• Required Disclosures:
- Annual Percentage Rate (APR)
- Finance Charges
- Total Amount Financed
- Total of All Payments
#### Annual Percentage Rate (APR)
• The true annual cost of a loan as a percentage
• Includes: interest rate + points, fees, mortgage insurance, and other loan costs
• APR is always higher than the stated interest rate because it incorporates additional costs
• Used to compare loans on an apples-to-apples basis
#### Right of Rescission
• Gives borrowers 3 business days to cancel a loan
• Applies to:
- Refinance loans
- Home equity loans
- Secured by the borrower's primary residence
• Does NOT apply to: Purchase money mortgages (buying a home)
Equal Credit Opportunity Act (ECOA)
• Prohibits discrimination in lending based on:
- Race, color, religion, national origin
- Sex, marital status, age
- Receipt of public assistance income
• Applies to all creditors, not just mortgage lenders
Redlining
• Redlining = Illegally refusing to make loans (or offering unfavorable terms) in geographic areas based on racial or ethnic composition
• Prohibited by: The Community Reinvestment Act (CRA) and the Fair Housing Act
The Secondary Mortgage Market
#### Conforming Loans
• Loans that meet Fannie Mae and Freddie Mac underwriting guidelines and loan limits
• Eligible for purchase on the secondary mortgage market
• Loan limits set annually by the Federal Housing Finance Agency (FHFA)
| Entity | Role |
|---|---|
| Fannie Mae | Government-Sponsored Enterprise; buys conventional loans |
| Freddie Mac | Government-Sponsored Enterprise; buys conventional loans |
| FHFA | Sets conforming loan limits annually |
TRID — TILA-RESPA Integrated Disclosure Rule
Combines TILA and RESPA disclosures into two forms:
| Form | When Provided | Replaces |
|---|---|---|
| Loan Estimate | Within 3 business days of application | Good Faith Estimate + Initial TIL |
| Closing Disclosure | At least 3 business days before closing | HUD-1 + Final TIL |
Key Terms — Federal Regulations
• RESPA — Requires Loan Estimate and Closing Disclosure
• TILA (Regulation Z) — Requires APR and finance charge disclosures
• APR — True cost of loan including all fees; always higher than stated rate
• Right of Rescission — 3 days to cancel refinance/HELOC; not for purchase loans
• ECOA — Prohibits discriminatory lending
• Redlining — Illegal geographic lending discrimination
• Conforming Loan — Meets Fannie Mae/Freddie Mac guidelines
• FHFA — Sets conforming loan limits
• Fannie Mae / Freddie Mac — Secondary market purchasers of loans
⚠️ Watch Out For
• The Loan Estimate is due within 3 business days of application, not at closing
• The Closing Disclosure is due 3 business days before closing, not at closing day
• The right of rescission does NOT apply to purchase money mortgages — only refinances and home equity loans
• APR is always higher than the stated interest rate — never equal or lower
• Redlining is about geography (neighborhood demographics), not individual borrower characteristics
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Quick Review Checklist
Use this checklist to confirm you are ready for exam day:
Mortgage Fundamentals
• [ ] I can name and distinguish the two documents in a Florida mortgage (note + mortgage)
• [ ] I know the difference between mortgagor (borrower) and mortgagee (lender)
• [ ] I can explain lien theory and why it matters in Florida
• [ ] I understand what triggers an acceleration clause vs. an alienation clause
• [ ] I can distinguish between a mortgage assumption and buying subject-to
• [ ] I can define a deficiency judgment
Loan Types
• [ ] I know what makes a loan conventional vs. government-backed
• [ ] I understand FHA MIP (who pays it, why, and the 3.5% down payment rule)
• [ ] I know the key benefits of a VA loan (no down payment, no PMI)
• [ ] I can explain how an ARM works (index + margin)
• [ ] I can describe the risk of a balloon mortgage
• [ ] I can distinguish a package mortgage, PMM, and HELOC
Loan Process & Qualification
• [ ] I can calculate LTV and know when PMI is required
• [ ] I understand front-end vs. back-end DTI ratios
• [ ] I know that 1 discount point = 1% of loan = ~0.25% rate reduction
• [ ] I can explain how amortization changes the interest/principal split over time
• [ ] I know the purpose of an escrow/impound account
Federal Regulations
• [ ] I know the RESPA disclosure timeline (Loan Estimate: 3 days after app; Closing Disclosure: 3 days before closing)
• [ ] I understand what TILA/Regulation Z requires (APR disclosure)
• [ ] I know that APR > stated interest rate and why
• [ ] I understand the right of rescission (3 days; applies to refinances/HELOCs, NOT purchase mortgages)