Where this fits on the exam
| Official syllabus topic | Basic Real Estate Financing Concepts |
|---|---|
| Official PSI area | Financing |
| Published area weight | 10% of the national portion |
| Exam portion | National salesperson portion |
| Source edition | PSI Georgia Candidate Information Bulletin dated July 1, 2026 |
The Rule
PSI publishes the weight for the complete content area, not a fixed question count for this lesson. Learn the rule well enough to apply it when PSI changes names, numbers, or parties in a new scenario.
The lesson
Principal and interest
Principal is the amount borrowed or unpaid balance. Interest is the charge for using funds. The note states the rate, payment method, and maturity.
Equity and LTV
Owner equity is market value minus liens. LTV compares the loan to the lender's accepted value base and helps measure collateral risk.
Payments and reserves
PITI refers to principal, interest, taxes, and insurance. A lender may collect escrow installments for taxes and insurance in addition to principal and interest.
Mortgage markets
Primary-market lenders originate loans to borrowers. Secondary-market participants buy and sell existing mortgage loans or interests in them, supporting liquidity.
Repayment structures
Fully amortized payments retire the principal by maturity. Partial amortization leaves a balloon balance. Interest-only payments do not reduce principal during that period; negative amortization means unpaid interest is added to principal. A low initial payment does not establish a low total cost.
Fixed rates and ARMs
A fixed rate stays unchanged under the note. An ARM adjusts using its stated index plus margin, subject to initial, periodic, and lifetime caps. A cap limits the change but does not promise a fixed payment forever.
Conventional and government programs
A conventional loan is not federally insured or guaranteed; private mortgage insurance may apply. FHA insures qualifying lender loans. VA guarantees part of eligible lender loans. USDA offers both direct and guaranteed rural housing programs. Program eligibility, charges, and underwriting differ, so a low down payment is not automatic approval.
Home equity borrowing
A home equity loan normally advances a lump sum. A HELOC permits draws, repayments, and further borrowing during the draw period within its terms and credit limit. Both put the home at risk; available credit is not the same as equity.
Reverse mortgages
A reverse mortgage can turn equity into funds without ordinary monthly principal-and-interest payments. The borrower still has property-tax, insurance, maintenance, and occupancy obligations. Sale, permanent move, death, or default can trigger repayment under the applicable program and documents.
Construction, rehabilitation, and bridge loans
Construction funding commonly follows progress draws for a new build. Rehabilitation financing addresses repairs or improvements to an existing property; an FHA 203(k) can combine acquisition or refinancing with rehabilitation. Bridge financing covers a temporary timing gap, such as buying before selling, with repayment and overlapping-debt risk.
Points and mortgage insurance
One point is one percent of the loan amount. Discount points are prepaid borrowing costs; origination fees compensate loan production. PMI generally protects the conventional lender, not the owner's equity or ability to make payments. Use the loan amount, not the sales price, when calculating points.
Decision rule
Georgia-specific distinction
Worked example
Scenario. A home is valued at $400,000 and secures a $320,000 loan.
Reason it through. LTV is $320,000 divided by $400,000. Equity before other liens is value minus debt.
Answer. LTV is 80%, and the owner's equity is $80,000.
Common exam traps
- Dividing value by loan for LTV
- Calling equity cash in a bank account
- Treating PITI as principal and interest only
- Assuming leverage removes risk
Original practice questions with detailed explanations
These questions were written for instruction and mapped to the current outline. They are not copied from PSI or any live examination. Choose an answer before opening the explanation.
Question 1A home appraises at $250,000 and sells for $240,000. The lender bases LTV on the lower of price or appraised value. The buyer borrows $216,000. What is the LTV?
- A. 10%
- B. 86.4%
- C. 90%
- D. 111.1%
Show answer and explanation →
Answer: C. 90%
LTV is the loan divided by the value base, and here the base is the lower $240,000 price: $216,000 divided by $240,000 is 90%. Using the $250,000 appraisal gives 86.4%, which ignores the lower-of rule stated in the question.
- A. Incorrect. 10% is the down-payment share: $24,000 divided by $240,000. LTV measures the borrowed share.
- B. Incorrect. 86.4% divides $216,000 by the $250,000 appraisal, ignoring the lower-price rule in the question.
- C. Correct. The lender uses $240,000, so $216,000 divided by $240,000 equals 90%.
- D. Incorrect. 111.1% reverses the ratio by dividing the price by the loan.
Question 2A home is worth $350,000. The owner owes $210,000 on the first security deed and $40,000 on a home equity line of credit. What is the owner's equity?
- A. $100,000
- B. $140,000
- C. $250,000
- D. $310,000
Show answer and explanation →
Answer: A. $100,000
Equity is market value minus all liens: $350,000 minus $250,000 in total debt leaves $100,000. The $140,000 answer forgets the home equity line, which is the trap when a property carries more than one lien.
- A. Correct. The two debts total $250,000, leaving $350,000 minus $250,000, or $100,000 in equity.
- B. Incorrect. $140,000 subtracts only the first loan and leaves out the $40,000 HELOC.
- C. Incorrect. $250,000 is the combined debt, not the owner's remaining interest.
- D. Incorrect. $310,000 subtracts only the HELOC and ignores the $210,000 first loan.
Question 3A lender makes a loan to a Georgia homebuyer and then sells the loan to Fannie Mae. Where did the sale to Fannie Mae take place?
- A. Primary mortgage market
- B. Secondary mortgage market
- C. Federal Reserve discount window
- D. Capital reserve market
Show answer and explanation →
Answer: B. Secondary mortgage market
The primary market is where loans are made to borrowers, and the secondary market is where existing loans are bought and sold. The primary market is the wrong answer because the loan started there, but the sale of an existing loan is secondary-market activity.
- A. Incorrect. Making the original loan to the buyer was primary-market activity; reselling it is a separate transaction.
- B. Correct. Fannie Mae is buying an existing mortgage loan, which is secondary-market activity.
- C. Incorrect. The discount window concerns Federal Reserve lending to eligible institutions, not this mortgage resale.
- D. Incorrect. Capital reserves support an institution's financial strength; they do not name the market for reselling mortgages.
Question 4A loan requires principal-and-interest payments calculated over 30 years, but the remaining balance is due after five years. Which description fits?
- A. Fully amortized over its five-year term
- B. Partially amortized with a balloon
- C. Interest-only with no principal payments
- D. A reverse mortgage
Show answer and explanation →
Answer: B. Partially amortized with a balloon
The payment schedule reduces principal but does not retire it by the five-year maturity. The remaining balance is a balloon.
- A. Incorrect. A fully amortized loan would be paid off by the contractual maturity.
- B. Correct. The 30-year payment schedule and five-year maturity leave an unpaid balance due at once.
- C. Incorrect. The stated payments include principal, so this is not interest-only.
- D. Incorrect. The borrower makes ordinary principal-and-interest payments rather than receiving reverse-mortgage advances.
Question 5A borrower makes exactly the required interest-only payments on a $240,000 loan for one year, with no fees added and no extra principal paid. What is the principal balance afterward?
- A. $0
- B. Less than $240,000
- C. $240,000
- D. More than $240,000
Show answer and explanation →
Answer: C. $240,000
Paying all accruing interest leaves principal unchanged. Negative amortization would require unpaid interest or other amounts to be added.
- A. Incorrect. Interest-only payments do not retire the borrowed principal.
- B. Incorrect. No principal payment is included, so the balance does not decline.
- C. Correct. The borrower pays interest in full but leaves the $240,000 principal outstanding.
- D. Incorrect. The facts exclude added fees and unpaid interest, so there is no stated increase.
Question 6At an ARM adjustment, the index is 4% and the margin is 2.5%. The current rate is 5%, and this adjustment cannot raise it by more than one percentage point. What rate applies, assuming no other limit?
- A. 4%
- B. 5%
- C. 6%
- D. 6.5%
Show answer and explanation →
Answer: C. 6%
Index plus margin is 6.5%, but the one-point adjustment cap limits this increase from 5% to 6%.
- A. Incorrect. The index alone omits the loan's margin.
- B. Incorrect. The loan permits an increase and is not fixed at its old rate.
- C. Correct. The otherwise calculated 6.5% is limited to 6% by the stated cap.
- D. Incorrect. This is the uncapped index-plus-margin result, before applying the one-point limit.
Question 7A lender offers a conventional mortgage with private mortgage insurance. Which statement is accurate?
- A. FHA insures it because insurance is required
- B. VA guarantees it because a lender makes it
- C. It is outside federal insurance or guarantee programs despite PMI
- D. USDA makes every insured home loan directly
Show answer and explanation →
Answer: C. It is outside federal insurance or guarantee programs despite PMI
Private mortgage insurance does not turn a conventional mortgage into a government program. FHA insurance, VA guarantees, and USDA direct or guaranteed programs are distinct.
- A. Incorrect. PMI is private insurance, not FHA's mortgage insurance.
- B. Incorrect. A private lender can make many loan types; that fact alone does not create a VA guarantee.
- C. Correct. The loan remains conventional even though private insurance protects the lender.
- D. Incorrect. USDA offers distinct direct and guaranteed rural programs, not all insured home loans.
Question 8A homeowner with a reverse mortgage says, 'No monthly principal-and-interest bill means I can stop paying property taxes.' What is the best response?
- A. Correct, because the lender now owns the home
- B. Correct, unless the loan rate adjusts
- C. No, property-charge and occupancy obligations still apply
- D. No, all reverse mortgages require monthly principal payments
Show answer and explanation →
Answer: C. No, property-charge and occupancy obligations still apply
The absence of ordinary monthly debt payments does not waive property taxes, insurance, maintenance, or occupancy requirements. Failure to meet them can cause default.
- A. Incorrect. A reverse mortgage does not automatically transfer ownership to the lender.
- B. Incorrect. Tax obligations do not depend on whether the mortgage has a fixed or adjustable rate.
- C. Correct. The homeowner must still meet the reverse mortgage's continuing property obligations.
- D. Incorrect. The issue is continuing property charges, not a universal monthly principal-payment requirement.
Question 9An owner wants to borrow $15,000 now, repay it, and draw funds again next year within an approved limit secured by the home. Which product best matches?
- A. A HELOC
- B. A one-time lump-sum home equity loan
- C. A fully paid purchase-money note
- D. An unsecured credit card
Show answer and explanation →
Answer: A. A HELOC
A HELOC provides a secured revolving borrowing arrangement during its permitted draw period. The owner must follow the credit limit and repayment terms.
- A. Correct. Permitted draws and redraws within a home-secured limit describe a HELOC.
- B. Incorrect. A closed-end lump-sum loan does not ordinarily replenish a revolving draw limit.
- C. Incorrect. A paid note supplies no continuing right to borrow again.
- D. Incorrect. The request expressly calls for the home as collateral, unlike an unsecured card.
Question 10A buyer needs temporary financing to close on a new home before selling the current home. Which loan purpose fits most closely?
- A. Construction financing for a new foundation
- B. Bridge financing for the timing gap
- C. Rehabilitation financing for repairs
- D. A USDA direct loan solely because it is temporary
Show answer and explanation →
Answer: B. Bridge financing for the timing gap
A bridge loan addresses an interim funding gap. The buyer must assess how the loan will be repaid if the expected sale is delayed.
- A. Incorrect. No new building project is described.
- B. Correct. The financing bridges the interval between buying and receiving proceeds from the other sale.
- C. Incorrect. No repair or improvement project is stated.
- D. Incorrect. Temporary need does not by itself establish USDA eligibility or a direct-loan purpose.
Question 11A buyer wants one FHA-insured mortgage to buy an existing house and finance qualifying repairs. Which program most directly matches?
- A. An ordinary unsecured repair credit card
- B. A VA guarantee available to every buyer
- C. FHA 203(k) rehabilitation financing
- D. A construction-only loan for vacant land
Show answer and explanation →
Answer: C. FHA 203(k) rehabilitation financing
FHA's 203(k) program can insure a mortgage combining acquisition or refinancing with rehabilitation of an eligible existing home.
- A. Incorrect. An unsecured card is not the requested insured acquisition-and-rehabilitation mortgage.
- B. Incorrect. VA eligibility is separate, and a guarantee is not FHA insurance.
- C. Correct. The program is designed to combine qualifying rehabilitation with acquisition or refinancing.
- D. Incorrect. A new-build construction purpose differs from repairing this existing home.
Question 12A private lender makes a VA-backed loan to an eligible veteran. What is VA's role in that program?
- A. Advancing all loan funds directly in every case
- B. Guaranteeing part of the lender's loan
- C. Providing conventional PMI
- D. Certifying the buyer needs no underwriting
Show answer and explanation →
Answer: B. Guaranteeing part of the lender's loan
For a VA-backed private-lender loan, VA guarantees part of the debt. Eligibility does not replace lender qualification.
- A. Incorrect. This program uses a private lender, rather than a VA direct-loan advance.
- B. Correct. VA's guarantee supports the private lender against covered loss.
- C. Incorrect. PMI is private insurance associated with qualifying conventional loans.
- D. Incorrect. A certificate of eligibility and guarantee do not waive lender underwriting.
Question 13A borrower says USDA loans are available only through private banks. Which statement corrects that claim?
- A. USDA offers both direct and guaranteed rural housing programs
- B. Every USDA loan is an FHA-insured loan
- C. USDA lends only for urban commercial buildings
- D. Every rural parcel automatically qualifies
Show answer and explanation →
Answer: A. USDA offers both direct and guaranteed rural housing programs
USDA Rural Development has direct-loan and approved-lender guarantee programs. Borrower, property, location, and program requirements still apply.
- A. Correct. The two program paths show why private-bank-only is too broad.
- B. Incorrect. FHA insurance and USDA rural-housing programs are separate.
- C. Incorrect. These single-family programs concern eligible rural housing, not only urban commercial property.
- D. Incorrect. A rural location alone does not satisfy all eligibility requirements.
Question 14A new-home builder's lender releases funds in stages after foundation, framing, and later work is verified. Which financing purpose is shown?
- A. Construction financing through progress draws
- B. A reverse mortgage with no building work
- C. A HELOC solely because any loan has a limit
- D. A bridge loan solely because construction takes time
Show answer and explanation →
Answer: A. Construction financing through progress draws
Progress-based advances fund the new construction as work is completed. Permanent financing may follow under the loan arrangement.
- A. Correct. The advances are tied to the stages of the new build.
- B. Incorrect. Reverse-mortgage advances concern equity access, not this construction-draw arrangement.
- C. Incorrect. A credit limit alone does not turn staged building finance into a homeowner's HELOC.
- D. Incorrect. A temporary term alone does not change the stated new-build purpose into an unrelated bridge gap.
Question 15A loan accrues $1,000 interest this month. Its permitted minimum payment is $800, and the unpaid $200 is added to principal. What has occurred?
- A. Full amortization
- B. Interest-only repayment without a balance change
- C. Negative amortization
- D. A $200 principal reduction
Show answer and explanation →
Answer: C. Negative amortization
The payment does not cover accrued interest, and the shortfall increases principal. This differs from paying all interest while leaving principal unchanged.
- A. Incorrect. Full amortization requires scheduled principal reduction, rather than added unpaid interest.
- B. Incorrect. Interest-only repayment would cover the full $1,000 interest; this payment falls short.
- C. Correct. Adding the $200 unpaid interest causes the balance to grow.
- D. Incorrect. The $200 is added to the debt, not paid toward reducing it.
Question 16A fixed-rate loan is fully amortized over its 30-year term. The borrower makes every scheduled payment on time, with no unpaid charges, modifications, or extra advances. What is the principal balance immediately after the last scheduled payment?
- A. Zero
- B. The original principal amount
- C. A balloon equal to the final year's interest
- D. The home's market value minus the loan
Show answer and explanation →
Answer: A. Zero
A fully amortizing schedule pays off principal by maturity when the stated payments are made. A partially amortized loan would leave a balloon, while interest-only payments would not retire principal during the interest-only period.
- A. Correct. The scheduled payments retire all principal by the end of this fully amortizing term.
- B. Incorrect. This would describe principal not being repaid, contrary to the stated schedule.
- C. Incorrect. A balloon is a remaining principal balance; it is not created by full amortization.
- D. Incorrect. Equity is a property-value calculation, not the balance of the note after repayment.
Ready to move on?
You are ready for the next lesson when all of these are true.
- Explain Basic Real Estate Financing Concepts in one clear answer without notes.
- Separate Principal and interest from Equity and LTV using a fresh example.
- Apply the decision rule to a new fact pattern and name the fact that controls the result.
- State the Georgia-specific point or explain why the national rule applies unchanged.
- Answer every practice question and explain the rule each rejected option misapplies.
- Revisit this topic later in mixed practice without category labels.
Recommended next lesson
Continue with Mortgage Underwriting and Loan Qualification. LTV and equity feed straight into loan approval, and the next lesson shows how underwriters weigh credit, income, debt-to-income ratio, assets and collateral, and why a preapproval stays conditional until closing.
Return to the Financing hub to see every official branch and the complete lesson sequence for this content area.