When is private mortgage insurance (PMI) required?

On many conventional loans, borrower-paid PMI is required when the loan-to-value ratio is above 80% — usually when the down payment is less than 20%. Under the Homeowners Protection Act, the borrower can request PMI cancellation when the loan balance reaches 80% of the original value, if the loan meets the Act's conditions (good payment history and other lender requirements), and the lender must automatically terminate it at 78% of the original value based on the initial amortization schedule. Both thresholds use the original value (purchase price or original appraised value), not current market value — a nuance the exam tests directly.

What does the APR include that the note rate does not?

The APR includes most of the finance charges the buyer pays to obtain the loan — points, lender fees, and certain other prepaid finance charges — expressed as an annualized rate. It is generally higher than the note rate and lets a borrower compare loan offers on an apples-to-apples basis. The exam expects you to recognize that two loans with the same note rate can have very different APRs depending on points and fees.

What is the maximum LTV on a Texas home-equity loan?

80% of the fair market value of the homestead, under the Texas Constitution. The total of all liens against the homestead may not exceed 80% LTV. This is more restrictive than most other states and is a frequent exam item. The cap applies to the combined principal of all encumbrances against the homestead at the time the home-equity extension of credit is made — not just the new loan in isolation.

What is the difference between the primary and secondary mortgage market?

The primary market is where loans are originated between lenders and borrowers. The secondary market is where those loans are sold to investors — Fannie Mae, Freddie Mac, and Ginnie Mae are the largest participants. Selling loans on the secondary market lets primary lenders replenish capital and originate new loans, which is why the secondary market matters even to borrowers who never interact with it directly. Note that Ginnie Mae guarantees mortgage-backed securities backed by federally insured loans (FHA, VA) rather than purchasing loans directly the way Fannie and Freddie do — a precision the exam occasionally tests.

Texas Real Estate Finance & Mortgages — Study Guides & Practice Questions

Texas Real Estate Finance & Mortgages

The finance module tests whether a license holder understands how real estate transactions are funded, what the major loan products require, and what federal and Texas-specific rules govern lending. Most buyers in Texas borrow to close, which means license holders need to recognize qualifying ratios, loan-to-value thresholds, mortgage insurance triggers, and the difference between primary and secondary market activity. The exam also tests the Texas homestead rules that limit home-equity lending — a Texas-specific topic that does not appear in generic national prep materials and is therefore a reliable differentiator on test day. The questions in this module tend to combine concepts: a question may give you a loan-to-value ratio, ask about PMI, and require you to identify whether the Texas homestead limit is in play, all in a single prompt. Studying each concept in isolation is necessary but not sufficient — practice combining them.

Key Subtopics

Conventional, FHA, and VA loans — down payment, mortgage insurance, and qualifying requirements for each. The exam tests differences in down payment thresholds, mortgage-insurance structures (PMI vs. MIP vs. VA funding fee), and program eligibility.
LTV (loan-to-value) and DTI (debt-to-income) ratios — how lenders use them and the common thresholds. Be ready to compute LTV from price and loan amount, and to recognize when an LTV crosses a threshold that triggers PMI or changes the loan program.
APR vs. note rate — what the APR captures and why it appears on the Loan Estimate. APR includes most finance charges (points, lender fees) annualized into the rate, so it is generally higher than the note rate and lets a borrower compare loan offers.
Amortization, points, and the trade-off between rate and upfront cost. The exam tests the basic mechanics: paying points reduces the note rate, increasing the breakeven horizon a borrower needs to recoup the upfront cost.
Primary mortgage market vs. secondary market (Fannie Mae, Freddie Mac, Ginnie Mae). The primary market originates loans; the secondary market buys or guarantees them, letting primary lenders replenish capital and originate new loans.
Texas Constitution Article XVI §50 — homestead protection and the limits on home-equity loans. The 80% LTV cap on the total of all liens against the homestead is the single most-tested Texas-specific finance fact.
Commission calculations and how brokerage compensation flows from the closing statement. The exam tests the math directly (price × rate, split, agent share) and the principle that commissions are negotiable and not set by law.

Study This Cluster

Finance combines federal lending concepts (PMI, APR, TRID disclosures) with Texas-specific protections (the homestead 80% LTV cap) and pure math (commission, ratios). The most efficient study path is to lock in the federal rules first, then the Texas-specific overlays, then drill the math under time pressure. Use the cluster articles to build each concept, then test under timed conditions.

Commission Calculations — how commission splits and percentages are computed on the exam.
Commission Splits & Brokerage Compensation — how commission flows between brokers, sponsors, and agents.
Escrow & Trust Accounts — how broker-held funds are handled under TREC rules.
Homestead Exemption & Property Tax — the Texas homestead protections that affect financing.
Proration Explained — interest and tax prorations that show up on the closing statement.
Finance & Mortgages Practice Questions — timed practice with full explanations.

Frequently Asked Questions

When is private mortgage insurance (PMI) required?: On many conventional loans, borrower-paid PMI is required when the loan-to-value ratio is above 80% — usually when the down payment is less than 20%. Under the Homeowners Protection Act, the borrower can request PMI cancellation when the loan balance reaches 80% of the original value, if the loan meets the Act's conditions (good payment history and other lender requirements), and the lender must automatically terminate it at 78% of the original value based on the initial amortization schedule. Both thresholds use the original value (purchase price or original appraised value), not current market value — a nuance the exam tests directly.
What does the APR include that the note rate does not?: The APR includes most of the finance charges the buyer pays to obtain the loan — points, lender fees, and certain other prepaid finance charges — expressed as an annualized rate. It is generally higher than the note rate and lets a borrower compare loan offers on an apples-to-apples basis. The exam expects you to recognize that two loans with the same note rate can have very different APRs depending on points and fees.
What is the maximum LTV on a Texas home-equity loan?: 80% of the fair market value of the homestead, under the Texas Constitution. The total of all liens against the homestead may not exceed 80% LTV. This is more restrictive than most other states and is a frequent exam item. The cap applies to the combined principal of all encumbrances against the homestead at the time the home-equity extension of credit is made — not just the new loan in isolation.
What is the difference between the primary and secondary mortgage market?: The primary market is where loans are originated between lenders and borrowers. The secondary market is where those loans are sold to investors — Fannie Mae, Freddie Mac, and Ginnie Mae are the largest participants. Selling loans on the secondary market lets primary lenders replenish capital and originate new loans, which is why the secondary market matters even to borrowers who never interact with it directly. Note that Ginnie Mae guarantees mortgage-backed securities backed by federally insured loans (FHA, VA) rather than purchasing loans directly the way Fannie and Freddie do — a precision the exam occasionally tests.

Bottom Line

Finance questions reward candidates who understand the mechanics of loan qualification and can do quick math on LTV, DTI, and commission calculations. The Texas-specific homestead rules are the differentiator between generic prep and Texas-focused prep — do not skip them. If you can compute LTV in your head, identify which loan program a fact pattern points to, and quote the Texas 80% homestead cap from memory, you have the high-value items locked. For the full module weighting and the other tested clusters, see the Texas exam blueprint.