Financing & mortgages

Financing shows up everywhere on the Florida exam, so this lesson is one you'll want to read twice.

The note and the mortgage are two different documents

This is the distinction the exam tests first, and it trips people up because they think of "the mortgage" as the whole loan. It isn't.

• The note is the borrower's promise to repay the debt. It spells out the amount, the interest rate, and the payment terms. It is the IOU.
• The mortgage is the security instrument. It pledges the property as collateral, so if the borrower stops paying, the lender has a claim against the property.

Say it this way and it sticks: the note is the promise, the mortgage is the pledge. The borrower signs both, but they do different jobs.

Florida is a lien-theory state

In a lien-theory state, the borrower keeps title to the property and the lender simply holds a lien against it. The lender does not own the home during the loan.

Florida follows lien theory. That matters because it shapes how foreclosure works here, which we'll get to at the end. For the exam, just lock in: in Florida, the borrower holds title, the lender holds a lien.

The main loan types

You need to know who stands behind each loan type. Four come up:

• Conventional — not backed by the government. The lender takes the risk directly.
• FHA — insured by the Federal Housing Administration. FHA doesn't make the loan; it insures the lender against loss.
• VA — guaranteed by the Department of Veterans Affairs for eligible veterans and service members.
• USDA — backed loans aimed at qualifying rural and suburban buyers.

Watch the verbs. FHA insures. VA guarantees. Conventional has neither. Exam questions love to swap those words and see if you notice.

PMI versus MIP

Both protect the lender when a borrower puts little money down, but they belong to different loans.

• PMI (private mortgage insurance) attaches to conventional loans, typically when the down payment is under 20%. It's private, so it can usually be removed once the borrower builds enough equity.
• MIP (mortgage insurance premium) attaches to FHA loans.

Easy memory hook: Private goes with conventional, the FHA premium is MIP. If a question pairs PMI with an FHA loan, that's the wrong answer.

The clauses you must recognize

Mortgage clauses are pure vocabulary points, and they're often the easiest questions on the test. Learn these four:

• Acceleration — on default, the lender can demand the entire remaining balance at once, not just the missed payment.
• Alienation (due-on-sale) — if the borrower transfers the property, the lender can require the loan be paid in full. "Alienation" means transfer.
• Defeasance — when the debt is fully paid, the lender releases its claim and clears the lien. Payoff defeats the mortgage.
• Prepayment — addresses whether the borrower may pay the loan off early, and whether a penalty applies.

Pair each clause with its trigger. Default triggers acceleration. Transfer triggers alienation. Payoff triggers defeasance.

Points and amortization basics

A point is a fee the lender charges at closing, and it's worth knowing the concept rather than memorizing dollar figures. Points are paid up front and relate to the cost of the loan.

Amortization means the loan is paid down over time through regular payments that cover both interest and principal. Early in an amortized loan, more of each payment goes to interest; over time, more goes to principal. By the final payment, the balance reaches zero. A fully amortized loan pays itself off by the end of the term.

Primary versus secondary mortgage market

Here's a distinction that confuses almost everyone at first, so go slow.

The primary market is where loans are originated. This is the lender who sits across from the borrower and writes the loan.

The secondary market is where existing loans are bought and sold among investors. Selling loans frees up the original lender's cash so it can make more loans. Three names anchor the secondary market:

• Fannie Mae
• Freddie Mac
• Ginnie Mae

If the question is about meeting the borrower and writing the loan, that's primary. If it's about buying and selling loans after the fact, that's secondary, and those three names live there.

Foreclosure basics

When a borrower defaults, the lender can move to foreclose and force a sale of the property to recover what it's owed. Because Florida is a lien-theory state, foreclosure here runs through the courts. The exam wants you to connect the dots: default can trigger the acceleration clause, the lender pursues foreclosure, and the property is sold to satisfy the debt.

Don't overthink it for the test. Default leads to acceleration leads to foreclosure leads to a forced sale. That chain is the takeaway.

Want to test whether these clauses and loan types are sticking? Run a set on the practice exam and see which verbs you're still mixing up.

Up next: Valuation, appraisal, and how the market actually sets a price, including the difference between value, price, and cost.