# Residential Mortgages: Lien Theory, Loan Types & Qualifying

> Florida's lien theory, the note and mortgage, common loan features, conventional vs. FHA vs. VA loans, assumptions, qualifying ratios, and the finance math the exam asks for.

**Source:** https://www.statereprep.com/learn/florida-real-estate/fl-mortgages  
**Published:** 2026-11-05

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Residential Mortgages is 9% of the Florida sales associate exam, one of the larger areas. The questions are a mix of Florida law (lien theory, foreclosure time limits, homestead protection) and national lending rules (FHA, VA, private mortgage insurance, loan-to-value). Many come with numbers attached, so this lesson works through the arithmetic too.

## Florida is a lien-theory state

Under § 697.02, a mortgage is **a specific lien** on the property it describes, *not* a conveyance of legal title or of the right of possession. The borrower (mortgagor) keeps title and possession. The lender (mortgagee) holds a lien it can enforce through foreclosure. Section 697.01 adds a rule against disguises: any instrument that conveys property **for the purpose of securing the payment of money** is treated as a mortgage. That includes a deed given only as security, and it is subject to the same foreclosure rules.

## The two loan instruments

Promissory noteThe borrower's written promise to pay the debt. In Florida it carries documentary stamp tax of 35 cents per $100. When the note is secured by a recorded mortgage, the tax is paid on the mortgage at recording and has no cap; the $2,450 cap applies only to notes that are not secured by a recorded mortgage. The closing lesson covers the math.Mortgage (security instrument)The document that gives the lender a security interest, which is what lets the lender foreclose if the borrower does not repay. The CFPB notes the most common names for it are "Mortgage" or "Deed of Trust."

## Loan features you must recognize

- **Adjustable-rate mortgage (ARM).** After the initial rate expires, the new rate is the **index plus the margin**, subject to any caps. The index moves with the market. The margin is set in the loan agreement and does not change after closing.
- **Balloon payment.** A large, one-time payment at the end of the loan term. Balloon loans generally run 5 to 10 years.
- **Negative amortization.** The payment does not cover the interest, so the unpaid interest is added to the balance and the amount owed goes *up*.
- **Prepayment penalty.** A fee some lenders charge if you pay off all or part of the mortgage early. Not all mortgages have one.
- **Reverse mortgage.** The borrower makes no monthly payments. Interest and fees are added each month, so the balance grows, and the loan is repaid when the borrower no longer lives in the home.

## Conventional, FHA and VA loans

**Conventional loans** make up the majority of loans, according to the CFPB, and they typically cost less than FHA loans but can be harder to get. With a down payment of **less than 20 percent**, the lender usually requires **private mortgage insurance (PMI)**, and PMI protects the lender, not the borrower. The borrower may ask to cancel PMI once the balance reaches **80 percent** of the original value. The servicer must end it automatically when the balance is scheduled to reach **78 percent**, provided the borrower is current.

**FHA loans** are *insured* by HUD's Federal Housing Administration. Key figures from HUD Handbook 4000.1:

- The borrower must make a Minimum Required Investment of at least **3.5 percent** of the Adjusted Value.
- The maximum purchase LTV is **96.5 percent** of the Adjusted Value, which is the lesser of the price (less inducements) or the property value.
- A credit score of **580** or more is needed for maximum financing. Scores from 500 to 579 are limited to 90% LTV.
- The upfront mortgage insurance premium is **175 basis points** (1.75%) and may be financed.
- The term may not exceed **30 years**.

**VA loans** are backed by the Department of Veterans Affairs. They can require **no down payment** as long as the price is not higher than the appraised value. They have no monthly mortgage insurance. Instead, the borrower pays a one-time **VA funding fee**.

## Buying a property that already has a mortgage

HUD defines an **assumption** as the transfer of an existing mortgage obligation from the existing borrower to the assuming borrower. Notifying HUD of an assumption does *not* formally release the original borrower from personal liability.

## Qualifying the buyer: the numbers

**LTV** compares the loan amount with the appraised value. **DTI** is all monthly debt payments divided by gross monthly income. **One point** equals one percent of the loan amount. Worked example (all figures exact):

- Price and appraisal $315,000; conventional loan $252,000. LTV = 252,000 ÷ 315,000 = **80%**. The 20% down payment means PMI is not normally required.
- Two points on $252,000 = 0.02 × 252,000 = **$5,040**.
- First-month interest at 6.5%: 252,000 × 0.065 ÷ 12 = **$1,365.00**.
- Gross income $9,000 a month; total monthly debts $2,700 (including the new housing payment). DTI = 2,700 ÷ 9,000 = **30%**.
- Same house with FHA: minimum investment 0.035 × 315,000 = **$11,025**. Maximum base loan 0.965 × 315,000 = **$303,975**, before any financed UFMIP.

Florida foreclosure facts

An action to foreclose a mortgage must be brought within five years (§ 95.11(2)(c)). Florida's homestead is protected from forced sale, but the Constitution excepts obligations contracted for the purchase, improvement or repair of the homestead. So a purchase-money mortgage can still be foreclosed on a homestead. A deed in lieu of foreclosure is the borrower's voluntary transfer of ownership to the lender to avoid foreclosure.

## Where this shows up on the exam

Residential Mortgages is **9%** of the exam (DBPR candidate booklet, January 2025). Expect lien theory vs. title theory, an FHA-vs-VA-vs-conventional comparison, a PMI cancellation number (80% vs. 78%), and at least one LTV, points or interest calculation.

Quick Check

A buyer pays $400,000 with an FHA loan; the appraisal is $410,000. What is the minimum required investment?

$14,000

$14,350

$12,000

$40,000

FHA's Minimum Required Investment is at least 3.5% of the Adjusted Value. For a purchase, that is the lesser of the price (less inducements) or the property value. Here it is $400,000, and 0.035 × 400,000 = $14,000. $14,350 wrongly uses the appraisal, $12,000 uses 3%, and $40,000 is the 10% figure.

## Sources

North Carolina law as published by the General Assembly and the Office of Administrative Hearings, checked 2026-11-05:

- § 697.01, Fla. Stat.
- § 697.02, Fla. Stat.
- § 201.08, Fla. Stat.
- § 95.11, Fla. Stat.
- Art. X, § 4, Fla. Const.
- HUD Handbook 4000.1 (Update 18)
- VA Home Loans: Purchase loan; Funding fee
- CFPB Ask CFPB: security interest, ARM, balloon, negative amortization, prepayment penalty, reverse mortgage, PMI, PMI removal, LTV, DTI, discount points, deed in lieu
- DBPR, Florida Real Estate Sales Associate Candidate Information Booklet (Jan 2025), content areas