Mortgages on the Florida real estate exam: types, clauses and the math

Two exam topics are about mortgages: Residential mortgages (9%) and Types of mortgages and sources of financing (4%). Thirteen questions, and among the easiest to win, because nearly all of it is definition and a little arithmetic. The law here is mostly federal; Florida contributes the form of the mortgage and the foreclosure. An orientation, not legal or financial advice. Leer en español.

Note and mortgage: two documents, two jobs

The promissory note is the promise to pay: amount, rate, term. It is the debt.
The mortgage is the security: a lien on the property backing the note (F.S. 697.02). The borrower is the mortgagor; the lender, the mortgagee.
Florida is a lien theory state: the borrower keeps title; the lender holds only a lien. In title theory states the lender holds title until the debt is paid.

The clauses the exam asks about

Acceleration: on default, the lender may demand the whole balance at once. Without it, the lender would have to sue payment by payment.
Due-on-sale (alienation clause): if the property is transferred, the balance comes due. It is what stops a buyer “assuming” a conventional loan without permission; the federal Garn-St Germain Act makes it enforceable.
Prepayment penalty: compensates the lender for interest it stops collecting. Regulation Z limits it on residential loans; F.S. 697.06 requires prepayment to be allowed unless expressly agreed otherwise.
Defeasance: once the debt is paid, the lien is extinguished and the satisfaction is recorded.
Release clause: in a blanket mortgage over several lots, releases each lot as it is sold.

Foreclosure in Florida

Florida is a judicial foreclosure state (F.S. 702.01): the lender sues, a judge orders the sale.
Equity of redemption: the borrower may pay everything owed and keep the property up to the sale. Florida extends it until the certificate of sale is filed (F.S. 45.0315).
Deficiency judgment (F.S. 702.06): if the sale does not cover the debt, the court may order the borrower to pay the difference.
Alternatives: a short sale (the lender accepts less) and a deed in lieu of foreclosure.

Loan types by who stands behind them

Conventional: no government backing. If it meets Fannie Mae and Freddie Mac's purchase standards (including the loan limit, which changes yearly and by county) it is conforming; above the limit it is jumbo.
FHA: insured by the Federal Housing Administration (part of HUD). Down payment from 3.5%, a mortgage insurance premium (MIP). The lender is a bank; the FHA only insures.
VA: guaranteed by Veterans Affairs for eligible veterans, active-duty service members and some surviving spouses. May be no down payment. Insured (FHA) versus guaranteed (VA) is a classic question.
PMI (private mortgage insurance): on conventional loans when the loan-to-value exceeds 80%, that is, with less than 20% down. The Homeowners Protection Act (1998) requires it to be cancelled automatically when the balance reaches 78% of the original value.

Loan types by how they are paid

Amortized: equal payments covering interest and principal; the balance is zero at the end. Early on, nearly all of each payment is interest.
Balloon: small payments and one large payment at the end. Florida requires a conspicuous legend on the mortgage (F.S. 697.05).
Adjustable rate (ARM): rate = index + margin. The caps limit how much it rises per adjustment and over the life of the loan (Reg Z, 12 CFR 1026.30).
Package: includes personal property (appliances). Blanket: several parcels under one mortgage. Wraparound: a new mortgage that wraps the existing one. Purchase-money: the seller finances. Reverse (HECM): for owners 62 and over, the lender pays the owner.

Where the money comes from: primary and secondary markets

Primary market: where loans are originated. Banks, credit unions, mortgage bankers (lend their own funds or a warehouse line of credit, then sell the loan) and mortgage brokers (arrange only; they do not lend).
Secondary market: where originated loans are bought and sold. Fannie Mae and Freddie Mac buy conforming loans; Ginnie Mae buys nothing, it guarantees securities backed by FHA and VA loans.
The Federal Reserve influences rates through the federal funds rate and monetary policy; it does not set mortgage rates directly.

The federal law that does show up

TILA / Regulation Z: disclosure of the cost of credit, the APR, and the advertising rules (advertise a “trigger term” such as the down payment or the monthly payment and you must disclose the rest).
RESPA and TRID: the Loan Estimate within 3 business days of application and the Closing Disclosure at least 3 business days before closing. RESPA prohibits kickbacks for referrals.
ECOA: no discrimination in credit. Fair Housing applies to financing too.

The exam's math, with one example each

Loan-to-value (LTV) = loan ÷ value (or price, whichever is lower). Price $250,000, down payment $35,000: loan $215,000; LTV = 215,000 ÷ 250,000 = 86%. Over 80%, so PMI applies.
Points: one point is 1% of the loan amount, not the price. Two discount points on $215,000 = $4,300. Discount points buy the rate down; the origination fee pays for the lender's work.
PITI = principal, interest, taxes and insurance (plus HOA dues and PMI if they apply). It is the housing payment compared with income.
Ratios: the front-end (housing) ratio is typically capped at 28% of gross monthly income; the back-end (all debts) at 36%. Income $8,500: maximum PITI = 8,500 × 0.28 = $2,380.
One month's interest = balance × annual rate ÷ 12. Balance $200,000 at 6%: 200,000 × 0.06 ÷ 12 = $1,000 of interest in the first payment.

How the exam asks it

Insured or guaranteed? Buys or guarantees? FHA insures, VA guarantees; Fannie and Freddie buy, Ginnie guarantees. Four verbs, four questions.
Which clause does this? A situation (the house was sold, payments stopped, the loan was paid early) and the name of the clause.
The arithmetic. LTV, points and ratios. Always note what the percentage is of: points on the loan, LTV on the value, the ratio on income.

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