Basic Financing Concepts and Terminology Flashcards
(10 cards)
What is a buy down?
A buydown is a way to temporarily (or permanently) lower the initial interest rate on a mortgage or deed of trust loan. Perhaps a homebuilder wishes to stimulate sales by offering a lower-than-market rate, or a first-time residential buyer may have trouble qualifying for a loan at the prevailing rates. In any case, a lump sum is paid in cash to the lender at the closing. The payment offsets (and so reduces) the interest rate and monthly payments during the mortgage’s first few years.
What is loan-to-value ratio and how is is calculated?
Mortgage loans are generally classified based on their loan-to-value (LTV) ratios. The LTV is the ratio of debt to value of the property (the sale price or the appraisal value, whichever is less). The lower the ratio of debt to value, the higher the down payment by the borrower. For the lender, the higher down payment means a more secure loan, which minimizes the lender’s risk.
Mortgage amount ÷ appraised value of the property = LTV ratio
Cancellation of PMI happens once the borrower reaches what % equity position based on the original value of the property at the time the loan was originated with no allowance for appreciation or depreciation if the loan was written after July 29, 1999, and the borrower is current on mortgage payments?
22%
What is the truth in lending act?
TILA, often called Regulation Z, requires that credit institutions inform borrowers of all finance charges and the true interest rate before a loan is completed. Because of TILA, borrowers can compare the costs of various lenders and avoid the uninformed use of credit. Regardless of the loan amount, TILA applies when a credit transaction is secured by a residence. The regulation does not apply to business or commercial loans or to agricultural loans of any amount.
What is a straight loan?
A straight loan (also called an interest-only loan or term loan) is a nonamortized loan that essentially divides the loan into two amounts to be paid off separately. The borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the term.
What is an amortized loan?
Unlike a straight loan payment, the payment in an amortized loan (also called a direct reduction loan) partially pays off both principal and interest. Most mortgage and deed of trust loans are amortized loans. Regular periodic payments are made over a term of years, generally 15 or 30 years, and at the end of the term, the full amount of the principal and all interest due is reduced to zero.
What is title theory?
In title theory states, the mortgagor actually gives legal title to the mortgagee (or some other designated individual) and retains equitable title. Legal title is returned to the mortgagor when the debt is paid in full (or some other obligation is performed). In theory, the lender actually owns the property until the debt is paid. The lender allows the borrower all the usual rights of ownership, such as possession and use. Because the lender holds legal title, the lender has the right to immediate possession of the real estate and rents from the mortgaged property if the mortgagor defaults.
What is lien theory?
In lien theory states, the mortgagor/borrower holds both legal and equitable title. The mortgagee/lender simply has a lien on the property as security for the mortgage debt. The mortgage is nothing more than collateral for the loan. If the mortgagor defaults, the mortgagee must go through a formal foreclosure proceeding to obtain legal title. The property is offered for sale, and sale proceeds are used to pay all or part of the remaining debt. In some states, a defaulting mortgagor may redeem the property during a certain period after the sale. A borrower who fails to redeem the property during that time loses the property irrevocably.
What is intermediate mortgage theory?
A number of states have adopted an intermediate mortgage theory based on the principles of title-theory states but still requiring the mortgagee to formally foreclose to obtain legal title.
What is the simple difference between title theory and lien theory?
a state is a title theory or a lien theory state by recalling what the lender “holds” during the repayment period. If the lender holds the title, it’s a title theory state. If the lender holds a lien, it’s a lien theory state.
