- Official section
- National IV.A: Financing Concepts and Terminology
- Broker weight
- 10% of the national broker portion
- Expected scored items
- Financing accounts for about 10 of 100 items
Financing topic guide
Loan math, underwriting, and promissory notes
Financing questions get easier when every number and document has one job. LTV measures collateral leverage, DTI measures payment burden, the note states the debt, and the mortgage secures it with the property.
Last updated: August 1, 2026
What does this exam area cover?
Short answer: Use the note for the borrower's promise and debt terms, and the mortgage or security instrument for the real-estate collateral. Calculate LTV as loan divided by value, down payment as price minus loan, DTI as monthly debt divided by gross monthly income, and simple interest as principal times rate times time. Underwriting verifies repayment ability and collateral eligibility.
The national outline effective June 24, 2026 tests financing concepts and terminology. This guide uses CFPB regulations and consumer forms to connect exam vocabulary to current mortgage practice. Product eligibility, underwriting thresholds, and program rules vary, so a broker should never promise loan approval or quote one ratio as universal.
What is on the official outline?
- Topic
- Borrower, lender, and loan roles
- What to know
- Borrower, debtor, mortgagor, lender, creditor, mortgagee, loan originator, broker, processor, underwriter, appraiser, title company, settlement agent, servicer, investor, guarantor, co-borrower, and trustee
- Best exam move
- Track who owes money, who advances it, who evaluates the file, who services payments, and who holds the security interest.
- Topic
- Principal and interest
- What to know
- Original principal, unpaid principal balance, interest rate, accrued interest, annual rate, monthly rate, daily rate, simple interest, compound concept, prepaid interest, per diem, payment allocation, late charge, default interest, and payoff
- Best exam move
- Identify the principal, convert the percentage to a decimal, match the time unit, and calculate only what the question requests.
- Topic
- Promissory note
- What to know
- Promise to pay, maker, note holder, principal, interest, payment date, payment place, term, maturity, late charge, default, notice, acceleration reference, prepayment, transfer, endorsement, negotiable instrument concept, and personal obligation
- Best exam move
- Choose the note when the question asks for evidence of debt or the borrower's repayment promise.
- Topic
- Mortgage and security instrument
- What to know
- Collateral, real estate lien, mortgage, security instrument, mortgagor, mortgagee, covenants, taxes, insurance, occupancy, preservation, hazardous substances, default, acceleration, foreclosure, release, satisfaction, and recording
- Best exam move
- Choose the mortgage when the question asks how the real estate secures the note or how foreclosure rights arise.
- Topic
- Loan-to-value math
- What to know
- LTV, CLTV, first lien, second lien, loan amount, purchase price, appraised value, lower value, down payment, equity, maximum loan, decimal conversion, percentage, mortgage insurance, collateral risk, and lender limit
- Best exam move
- Write LTV = loan / value and solve for the unknown before inserting dollar amounts.
- Topic
- Down payment and financing gap
- What to know
- Purchase price, earnest money, down payment, loan amount, seller credit, lender credit, gift funds, grant, closing costs, reserves, cash to close, financed fee, subordinate financing, source of funds, and seasoning
- Best exam move
- Do not confuse the down payment with earnest money, closing costs, or the final cash-to-close figure.
- Topic
- Debt-to-income and residual income
- What to know
- Gross monthly income, verified income, housing expense, proposed payment, principal, interest, taxes, insurance, association dues, mortgage insurance, installment debt, revolving debt, student loan, alimony, child support, simultaneous loan, total monthly obligation, DTI, and residual income
- Best exam move
- Use qualifying gross income in the denominator and the obligations specified in the question in the numerator.
- Topic
- Ability-to-repay underwriting
- What to know
- Reasonable good-faith determination, current income, expected income, assets, employment status, proposed payment, simultaneous loan, mortgage-related obligation, current debt, alimony, child support, DTI, residual income, credit history, third-party record, and verification
- Best exam move
- An application begins the process; verified evidence and program standards support the credit decision.
- Topic
- Collateral underwriting
- What to know
- Appraisal, market value, property type, condition, habitability, safety, title, lien priority, survey, insurance, flood, condominium review, planned unit development, occupancy, intended use, repairs, and lender requirement
- Best exam move
- Borrower approval and property approval are separate. A strong borrower does not cure ineligible collateral.
- Topic
- Amortization and payment patterns
- What to know
- Fully amortizing, partially amortizing, interest-only, balloon, negative amortization, fixed rate, adjustable rate, term, amortization period, principal reduction, interest allocation, payment schedule, maturity, unpaid balance, and extra principal
- Best exam move
- Compare payment pattern, balance behavior, and maturity amount rather than relying on the product name alone.
- Topic
- Loan Estimate comparison figures
- What to know
- Loan amount, interest rate, monthly principal and interest, projected payment, taxes, insurance, assessments, escrow, closing costs, cash to close, origination charge, points, lender credit, APR, TIP, five-year cost, rate lock, balloon, prepayment penalty, and negative amortization
- Best exam move
- Use the figure that answers the question: rate for interest, APR for specified cost comparison, payment for monthly burden, and cash to close for settlement funds.
- Topic
- Broker boundaries and transaction timing
- What to know
- Prequalification, preapproval, conditional approval, underwriting condition, appraisal contingency, financing contingency, rate lock, expiration, document request, changed circumstance, final approval, clear to close, closing disclosure, wire, fraud warning, lender communication, client consent, and no guarantee
- Best exam move
- Track the financing deadline and report lender facts accurately without acting as the underwriter or promising a result.
Which distinctions produce the most mistakes?
- Terms
- Note vs. mortgage
- Difference
- The note is evidence of the debt and promise to repay. The mortgage or security instrument pledges real estate as collateral for that debt.
- Question cue
- Debt instrument versus security instrument.
- Terms
- Mortgagor vs. mortgagee
- Difference
- The mortgagor is the borrower who gives the mortgage. The mortgagee is the lender that receives the security interest.
- Question cue
- Borrower gives; lender receives.
- Terms
- Interest rate vs. APR
- Difference
- The interest rate prices interest on the principal. APR expresses specified loan costs over the term as a rate for disclosure and comparison.
- Question cue
- Interest calculation versus broader disclosed credit cost.
- Terms
- LTV vs. DTI
- Difference
- LTV compares loan amount with collateral value. DTI compares monthly debt obligations with monthly gross income.
- Question cue
- Property leverage versus borrower payment burden.
- Terms
- Down payment vs. cash to close
- Difference
- The down payment is the price not financed by the primary loan. Cash to close includes settlement adjustments, costs, credits, deposits, and other required funds.
- Question cue
- Equity contribution versus final settlement funds.
- Terms
- Prequalification vs. preapproval
- Difference
- Prequalification is commonly a preliminary estimate based on limited information. Preapproval usually reflects more review but remains conditional and is not final loan approval.
- Question cue
- Early estimate versus stronger conditional review.
- Terms
- Underwriting vs. appraisal
- Difference
- Underwriting makes the credit and eligibility decision using the whole file. An appraisal develops a property value opinion for its stated purpose.
- Question cue
- Approve the risk versus value the collateral.
- Terms
- Fully amortizing vs. balloon loan
- Difference
- A fully amortizing schedule repays the balance by the final scheduled payment. A balloon structure leaves a larger unpaid amount due at maturity.
- Question cue
- Balance reaches zero versus large final payoff remains.
- Terms
- Loan originator vs. servicer
- Difference
- The originator helps create the loan transaction. The servicer manages payments, statements, escrow, borrower inquiries, and default administration after closing.
- Question cue
- Make the loan versus manage the loan.
The CREDIT workflow for financing questions
- Classify the question. Decide whether it asks about debt, collateral, qualification, payment, cost, disclosure, or settlement funds.
- Record the known values. Label price, appraised value, loan, rate, term, income, monthly debts, points, payment, and time before calculating.
- Express the formula first. Use LTV = loan / value, DTI = debt / income, interest = principal x rate x time, and points = loan x point percentage.
- Distinguish the documents. Put repayment terms in the note, lien rights in the mortgage, estimates on the Loan Estimate, and final terms on closing documents.
- Inspect the underwriting evidence. Separate credit, capacity, capital or funds, collateral, program eligibility, conditions, and verification.
- Track the transaction deadline. Watch application, Loan Estimate, rate lock, appraisal, underwriting, financing contingency, Closing Disclosure, and closing dates.
- Tell only what is confirmed. Attribute lender information, document changes, preserve client choices, and never guarantee approval, rate, payment, or closing.
- Question
- LTV
- Formula
- Loan / value
- Example result
- $240,000 / $300,000 = 80%
- Question
- Loan from LTV
- Formula
- Value x LTV
- Example result
- $350,000 x 80% = $280,000
- Question
- Down payment
- Formula
- Price - loan
- Example result
- $350,000 - $280,000 = $70,000
- Question
- Equity
- Formula
- Value - debt
- Example result
- $400,000 - $260,000 = $140,000
- Question
- Simple annual interest
- Formula
- Principal x rate x time
- Example result
- $200,000 x 6% x 1 = $12,000
- Question
- One point
- Formula
- Loan x 1%
- Example result
- $275,000 x 1% = $2,750
- Question
- DTI
- Formula
- Monthly debt / gross monthly income
- Example result
- $2,700 / $7,500 = 36%
- Question
- Gross monthly income
- Formula
- Annual gross / 12
- Example result
- $96,000 / 12 = $8,000
How do the rules work in scenarios?
Find the maximum loan from LTV
Scenario: A lender permits an 80% LTV on a property valued at $425,000. The exam asks for the maximum first-loan amount.
- Write loan = value x LTV.
- $425,000 x 0.80 equals $340,000.
Answer: The maximum loan is $340,000. If the purchase price is also $425,000 and no other financing applies, the price-minus-loan difference is $85,000 before closing costs.
Calculate back-end DTI
Scenario: A borrower earns $9,000 gross per month. The proposed housing obligation is $2,450, a car payment is $550, and qualifying revolving debt is $240.
- Total specified monthly debt is $2,450 + $550 + $240 = $3,240.
- $3,240 / $9,000 = 0.36.
Answer: The DTI is 36%. Whether it qualifies depends on the program, complete file, verified figures, and underwriting rules, not the arithmetic alone.
Choose the right instrument
Scenario: A borrower signs one document promising to repay $310,000 and another document granting the lender a security interest in the home.
- The repayment promise and debt terms belong to the promissory note.
- The lien and foreclosure remedy belong to the mortgage or security instrument.
Answer: The first document is the note; the second is the mortgage or security instrument.
Separate interest rate from APR
Scenario: Two Loan Estimates have the same loan amount. Offer A has a 6.25% rate with higher points, while Offer B has a 6.50% rate with lower upfront costs.
- The interest rate alone does not capture every specified credit cost.
- APR, origination charges, points, cash to close, payment, five-year cost, and expected holding period answer different comparison questions.
Answer: Compare the standardized disclosures and the borrower's expected use of the loan. Do not announce a winner from the note rate alone.
What are the common exam traps?
- Trap
- The mortgage is the borrower's promise to repay.
- Correction
- The note is the promise; the mortgage is the real-estate security instrument.
- Trap
- The mortgagee is the borrower.
- Correction
- The mortgagee is the lender; the mortgagor is the borrower who gives the mortgage.
- Trap
- LTV equals value divided by loan.
- Correction
- LTV equals loan divided by value.
- Trap
- A 20% down payment means 20% LTV.
- Correction
- With no secondary financing or financed additions, 20% down corresponds to 80% LTV.
- Trap
- Earnest money and down payment always mean the same amount.
- Correction
- Earnest money is a contract deposit that may be credited toward settlement funds; the down payment is the price portion not financed by the primary loan.
- Trap
- DTI uses net take-home pay.
- Correction
- Exam and mortgage underwriting ratios generally use qualifying gross monthly income unless the question states otherwise.
- Trap
- Every lender must approve the same DTI.
- Correction
- Thresholds and exceptions vary by program and underwriting standards; Regulation Z does not impose one universal DTI for every loan.
- Trap
- A good credit score guarantees loan approval.
- Correction
- Underwriting also evaluates verified repayment ability, funds, debts, collateral, eligibility, and documentation.
- Trap
- Interest rate and APR are interchangeable.
- Correction
- They are different figures that answer different loan-cost questions.
- Trap
- Preapproval means every condition has been cleared.
- Correction
- Preapproval remains conditional on the complete borrower, property, program, and closing file.
Can you answer these original practice questions?
These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.
1. Which document is the borrower's written promise to repay a mortgage loan?
- Promissory note
- Deed conveying title to the buyer
- Appraisal report
- Listing agreement
Show answer and explanation
Answer: A
The note evidences the debt and states the repayment terms. The mortgage separately secures that debt with the property.
2. A borrower obtains a $270,000 loan on a property valued at $337,500. What is the LTV?
- 75%
- 80%
- 90%
- 125%
Show answer and explanation
Answer: B
$270,000 divided by $337,500 equals 0.80, or 80%.
3. A borrower has $2,800 in qualifying monthly obligations and $7,000 in gross monthly income. What is the DTI?
- 25%
- 35%
- 40%
- 250%
Show answer and explanation
Answer: C
$2,800 divided by $7,000 equals 0.40, or 40%.
4. What is one discount point on a $320,000 loan?
- $320
- $1,600
- $3,200
- $32,000
Show answer and explanation
Answer: C
One point is 1% of the loan amount. $320,000 x 0.01 equals $3,200.
5. Which statement about underwriting is most accurate?
- It examines only the list price
- It evaluates verified repayment ability, credit, funds, collateral, and program eligibility
- It guarantees that property value will rise
- It is performed by the listing broker
Show answer and explanation
Answer: B
Underwriting applies lender and program standards to the borrower, property, and transaction evidence.
How should you study this area?
- Session
- 1. Label the loan documents
- Focus
- Note, mortgage, debt, security, borrower, lender, mortgagor, mortgagee, servicer, and foreclosure
- Proof you are ready
- Identify the correct document or party in twenty prompts.
- Session
- 2. Drill LTV and down-payment math
- Focus
- Loan, value, price, lower value, LTV, CLTV, down payment, equity, maximum loan, and mortgage insurance
- Proof you are ready
- Complete twenty mixed calculations at 90% accuracy.
- Session
- 3. Drill interest and points
- Focus
- Principal, rate, time, annual interest, fractional year, per diem concept, point percentage, discount point, and origination charge
- Proof you are ready
- Solve fifteen calculations with formulas written first.
- Session
- 4. Build the underwriting file
- Focus
- Income, assets, employment, proposed payment, simultaneous loan, mortgage obligations, debt, DTI, residual income, credit history, appraisal, title, insurance, and verification
- Proof you are ready
- Assign thirty documents to capacity, credit, funds, or collateral.
- Session
- 5. Compare loan disclosures
- Focus
- Rate, APR, payment, mortgage insurance, escrow, points, credits, costs, cash to close, TIP, five-year cost, balloon, prepayment, and negative amortization
- Proof you are ready
- Explain which figure answers twelve comparison questions.
- Session
- 6. Apply CREDIT
- Focus
- Question type, known values, formula, document, underwriting evidence, deadline, confirmed fact, and broker boundary
- Proof you are ready
- Score at least 90% on fresh financing scenarios.
Do not count recognition as mastery. Close the notes and explain the rule, apply it to a new fact pattern, and identify why each distractor fails.
Practice the topic in Pass Illinois
From concept to decision
Drill this topic, then review the explanation
Pass Illinois gives you original national and Illinois questions, topic-by-topic study, clear explanations, timed practice, flashcards, progress tracking, and Math Coach. Start free, find the weak distinction, and focus the next session there.
Questions students ask about Loan Math, Underwriting, and Promissory Notes
What is a promissory note in a mortgage loan?
The promissory note is the borrower's legal promise to repay. It states core debt terms such as the principal amount, interest rate, payment dates, repayment period, payment destination, and consequences of default. The note is evidence of the debt; it is not the document that creates the lender's lien on the real estate.
How is a promissory note different from a mortgage?
The note creates and describes the personal repayment obligation. The mortgage or other security instrument pledges the real estate as collateral and gives the lender foreclosure rights if the borrower defaults under the agreed terms. Exam shorthand is note equals debt, mortgage equals security.
How do you calculate loan-to-value ratio?
Divide the loan amount by the property's value used by the lender, then multiply by 100. A $240,000 loan on a $300,000 value has an 80% LTV because $240,000 divided by $300,000 equals 0.80. When price and appraised value differ, an exam question usually specifies the value to use or expects the lower figure in a purchase underwriting scenario.
How do you calculate a down payment?
Subtract the loan amount from the purchase price, or multiply the purchase price by the down-payment percentage. On a $325,000 purchase with 10% down, the down payment is $32,500 and the starting loan amount is $292,500, before financed fees or program-specific adjustments.
How do you calculate simple annual interest for an exam question?
Use interest equals principal times rate times time: I = P x R x T. For $180,000 at 6% for one year, interest is $10,800. For three months, use 3/12 as time, producing $2,700. This is simple-interest exam math, not the monthly amortization formula for a typical installment mortgage.
What is debt-to-income ratio?
DTI compares total monthly debt obligations with total monthly gross income. Divide qualifying monthly debt by qualifying gross monthly income. If obligations are $2,400 and gross income is $6,000, DTI is 40%. Actual underwriting decides which income and obligations qualify and does not use one universal threshold for every loan.
What does a mortgage underwriter evaluate?
The underwriter evaluates whether the borrower and property meet the lender and program rules. Core evidence includes verified income or assets, employment when relied upon, proposed housing payment, simultaneous loans, mortgage-related obligations, current debts, DTI or residual income, credit history, funds, appraisal, title, insurance, occupancy, and required documents.
What is amortization?
Amortization is repayment of debt through scheduled installments that reduce principal over time. In a fully amortizing fixed-rate loan, each scheduled principal-and-interest payment is generally level, early payments contain more interest, later payments contain more principal, and the scheduled balance reaches zero at the end of the term.
Are the interest rate and APR the same?
No. The interest rate is used to calculate interest on the principal balance. APR expresses specified credit costs over the loan term as a rate and can include certain charges. CFPB's Loan Estimate rule describes APR as the costs over the loan term expressed as a rate and expressly notes that it is not the interest rate.
Are these actual PSI exam questions?
No. They are original questions aligned to the public Financing outline effective June 24, 2026.
Primary sources
- PSI Illinois Candidate Information Booklet dated June 24, 2026
- CFPB Loan Estimate explainer
- CFPB Promissory Note explainer
- CFPB Guide to Closing Forms, including the mortgage or security instrument
- CFPB Regulation Z Section 1026.43, Ability-to-Repay standards
- CFPB loan-to-value guidance
- CFPB Regulation Z Section 1026.37, Loan Estimate content
- CFPB guidance for comparing Loan Estimates
The current official outline controls the tested scope. Statutes, regulations, and official agency materials control when a general study rule and a jurisdiction-specific rule differ.
Editorial status
Checked against primary sources
The Pass Illinois editorial team last checked this guide on August 1, 2026. Every practice question is an original study item, and the source links above let you verify the rules that support the lesson.