Financing Review Flashcards

Flashcards covering key financing concepts, loan types, and legal regulations for real estate licensing exam preparation.

Loan-to-value ratio (LTV)

The ratio of the loan amount to the property value, which is the sales price or appraised value, whichever is lower; e.g., a $160,000$ loan on a $200,000$ home equals an LTV of $80\%$ ($160,000 \div 200,000 = .8$).

Private mortgage insurance (PMI)

Insurance required on conventional loans when the down payment is less than $20\%$ and the LTV is in excess of $80\%$; it protects the lender in case of borrower default.

PITI

A common mortgage loan payment that includes Principal, Interest, Taxes, and Insurance; it is often referred to as a budget mortgage.

Interest

A fee paid back to a lender for the use of its money, typically stated as an annual percentage (e.g., a $6\%$ interest rate is $6\%$ for the period of one year).

Annual percentage rate (APR)

A measure that includes both the interest rate and other fees associated with a mortgage loan.

Point

A unit of measure equal to $1\%$ of the borrower's loan amount; used for loan origination fees or discount points.

Discount points

Fees paid by borrowers at closing to permanently reduce a loan's interest rate.

Buydown

Interest pre-payment at closing to temporarily reduce the interest rate, usually for a period of one to three years (e.g., a 3-2-1 buydown).

Defeasance clause

A security instrument clause that orders the lender or trustee to immediately release full title to the borrower once the loan is paid in full.

Acceleration clause

A clause that makes the entire debt due immediately if the borrower defaults on the loan.

Due-on-sale clause (Alienation clause)

A requirement for the borrower to repay the loan when transferring ownership to another party.

Pre-payment penalty clause

A clause permitting the lender to charge a specified amount for interest lost when a borrower sells or pays off a loan early.

Housing ratio (Front-end ratio)

The borrower's projected monthly housing expense divided by income; for conventional loans, this is typically $25\%$ to $28\%$.

Debt ratio (Back-end ratio)

The total of all the buyer's debt obligations divided by income; typically $33\%$ to $36\%$ for conventional loans and up to $41\%$ for VA loans.

Deed of trust

A security instrument involving three parties: the trustor (borrower), the beneficiary (lender), and the trustee (independent third party).

Title theory

A state legal framework where the lender or trustee holds legal title to the property until the mortgage loan is paid in full while the borrower holds equitable title.

Equitable title

The right of a borrower in a title theory state to have possessory rights and the right to obtain legal title once the loan is paid off.

Power of sale clause

A clause in a deed of trust or mortgage that permits the lender to use a non-judicial foreclosure process without going to court.

Reconveyance deed

A document issued by the trustee to return legal title to the borrower once a deed of trust is paid in full.

Lien theory

A state legal framework where the mortgage places a lien against the property; the lender holds the lien, and the borrower holds legal title.

Promissory note

A negotiable financing instrument that serves as the borrower's written promise to repay the mortgage loan.

Conforming loan

A loan that meets the loan limit and other criteria set by Fannie Mae and Freddie Mac.

Jumbo loan

A conventional non-conforming loan that exceeds conforming loan limits but meets other requirements.

Amortized loan

A loan in which the principal is paid down over the life of the loan; in a fully amortized loan, the balance is zero after the last scheduled payment.

Adjustable-rate mortgage (ARM)

A mortgage where the interest rate fluctuates based on a selected economic index, such as LIBOR.

Negative amortization

Occurs when a monthly payment is insufficient to cover the interest due, causing the unpaid interest to be added to the loan's principal.

Mortgage insurance premium (MIP)

An insurance charge that applies to all FHA loans for the life of the loan, paid both upfront and annually.

VA-Guaranteed loan

A loan made to qualifying veterans that does not require a down payment or mortgage insurance and has no pre-payment penalties.

USDA Farm Service Agency (FSA) loans

Government loans for farmers, ranchers, and rural housing that can be up to $100\%$ of the purchase price with payback periods up to $33$ to $38$ years.

Land contract (Contract for deed)

A form of owner financing where the buyer makes installment payments and the seller retains title until the contract is fulfilled.

Purchase money mortgage

A loan issued by a seller to a buyer as part of the purchase transaction, often when the buyer cannot qualify for traditional financing.

Wrap-around mortgage

A form of owner financing where the seller's existing mortgage is combined with a new mortgage for the buyer; the seller continues paying the original loan.

Reverse mortgage

Also called a reverse annuity mortgage, it is designed for homeowners to use their home equity to receive payments from a lender.

Home Equity Line of Credit (HELOC)

A secondary loan based on home equity where borrowers use funds as needed for major purchases or repairs, often requiring interest-only payments.

Bridge loan (Swing loan)

A temporary, short-term loan that provides funds (often for a down payment) until a buyer can obtain permanent financing or sell an existing home.

Real Estate Settlement Procedures Act (RESPA)

A $1974$ consumer protection statute designed to protect homebuyers from unscrupulous lending practices and prohibited kickbacks.

Truth in Lending Act (TILA)

A $1968$ law (Regulation Z) requiring lenders to disclose credit terms and conditions when advertising trigger terms to avoid misleading consumers.

Trigger terms

Specific credit terms in advertisements, such as down payment or payment amount, that require full disclosure of all loan terms under TILA.

Loan Estimate (LE)

A TRID-required disclosure provided to applicants within three business days of loan application, detailing estimated settlement costs and loan features.

Closing Disclosure (CD)

A TRID-required disclosure provided at least three business days before closing, detailing final loan terms, payments, and fees.

Equal Credit Opportunity Act (ECOA)

A $1974$ law prohibiting lenders from discriminating against applicants based on protected class status rather than creditworthiness.

Primary mortgage market

The market where loans are provided directly to borrowers; includes commercial banks, savings and loan associations, credit unions, and mortgage bankers.

Secondary mortgage market

The market where lenders sell loan packages to entities like Fannie Mae and Freddie Mac to free up funds for more consumer loans.

Mortgage-backed securities (MBS)

Investment products created by the secondary mortgage market from repackaged lender loan packages.

GSEs (Government Sponsored Enterprises)

Privately held corporations with a public purpose, such as Fannie Mae and Freddie Mac, that purchase mortgage loan packages from lenders.

Qualified mortgage

A loan category meeting affordability features defined by the Dodd-Frank Act, prohibiting risky attributes like negative amortization or interest-only periods.

Equity skimming

A mortgage fraud scheme where an investor receives title (often via a straw buyer), collects rent, and fails to make mortgage payments until foreclosure.

Straw buyers

Individuals who conceal their real identity behind someone else's name and credit to obtain a loan.

Usury

The practice of lending money at an excessive or illegal interest rate.