Financing and settlement

Pearson VUE area VII has 7 questions and PSI gives financing 10%. The questions mix instruments and loan types with the federal lending laws that regulate disclosures and closing.

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80 questions in 2 hours 30 minutes, 56 to pass. 7 of the 80 questions come from financing and settlement, and every answer is explained.

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Free sample · Question 1 of 3Financing and settlement

A loan whose size exceeds the limit for purchase by Fannie Mae or Freddie Mac is called a

What to know about financing and settlement

  1. The promissory note is the promise to repay; the mortgage or deed of trust pledges the property as security (hypothecation: pledging without giving up possession). In a mortgage the borrower is the mortgagor and the lender the mortgagee; in a deed of trust the borrower (trustor) conveys title to a trustee for the lender (beneficiary), which allows non-judicial foreclosure in many states.
  2. Conventional loans are not government backed; loans above 80% LTV usually need private mortgage insurance. FHA insures lenders against default on loans with low down payments and charges a mortgage insurance premium. VA guarantees loans for eligible veterans with no down payment required. USDA loans serve rural areas.
  3. Conforming loans meet Fannie Mae and Freddie Mac standards and limits; jumbo loans exceed them. The secondary market (Fannie Mae, Freddie Mac, Ginnie Mae) buys loans from primary lenders, which replenishes funds to lend.
  4. Loan structures: fully amortized (level payments pay interest then principal), adjustable-rate (index plus margin, with periodic and lifetime caps), balloon (a large final payment), interest-only, graduated payment and reverse mortgages for owners 62 and older.
  5. Clauses: acceleration (the whole balance becomes due on default), due-on-sale or alienation (the loan must be repaid on transfer, so it cannot be assumed without lender consent), prepayment, defeasance (the lien is released when paid) and subordination (a lien agrees to a lower priority). Assuming a loan makes the buyer liable; taking "subject to" leaves the seller liable.
  6. Discount points are prepaid interest: one point is 1% of the loan amount and buys a lower rate. Origination fees pay the lender for making the loan. LTV = loan ÷ value (or price, whichever is less).
  7. Foreclosure: judicial through a court sale, non-judicial under a power of sale in a deed of trust. A deficiency judgment pursues the shortfall; a deed in lieu avoids foreclosure; a short sale needs lender approval of a sale below the balance. Equitable redemption occurs before the sale; some states allow statutory redemption after it.
  8. TILA and Regulation Z require disclosure of the APR and finance charge, regulate advertising trigger terms (a stated down payment, payment amount or rate requires full disclosure) and give a 3-business-day right of rescission on refinances and home equity loans secured by a principal residence (not on purchase loans).
  9. TRID combines TILA and RESPA disclosures: the Loan Estimate within 3 business days of application and the Closing Disclosure at least 3 business days before consummation. RESPA applies to federally related loans on one-to-four family homes: it bans kickbacks and unearned fees (Section 8), requires affiliated business disclosures and limits escrow cushions. ECOA bars credit discrimination on race, color, religion, national origin, sex, marital status, age or public assistance income.
  10. At closing, the settlement agent prorates taxes, rents and dues, collects the lender’s funds, pays off existing liens, records the deed and mortgage and disburses proceeds. Title insurance (owner’s and lender’s policies) is issued at or after closing.
Line drawing of a bank building with columns, a house, a stack of coins, a percent sign and a sealed document

Pearson VUE outline area VII: 7 of the 80 scored national questions in our mock come from this topic. The notes state principles that hold in every state; state-specific rules are in the California, Texas and Florida guides.

Drill financing and settlement, then sit the full exam

Take the full real estate practice exam

80 questions in 2 hours 30 minutes, 56 to pass. 7 of the 80 questions come from financing and settlement, and every answer is explained.

Or try the free financing and settlement drill

Common questions

What is the difference between a mortgage and a deed of trust?

Both secure a promissory note with the property. A mortgage is a two-party lien between borrower and lender, usually foreclosed through the courts. A deed of trust is three-party: the borrower conveys title to a trustee who holds it for the lender and can sell the property without a court under a power of sale.

When must the Closing Disclosure be delivered?

At least three business days before consummation of the loan, under TRID. The Loan Estimate must go out within three business days after the lender receives the application.

Take the full real estate practice exam

80 questions in 2 hours 30 minutes, 56 to pass. 7 of the 80 questions come from financing and settlement, and every answer is explained.

Or try the free financing and settlement drill

More real estate exam topics

Free financing and settlement drill · National mock exam · California exam · Texas exam · Florida exam

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