General Mortgage Knowledge Flashcards

What is the purpose of an escrow account in a mortgage?

Answer: To collect and pay property taxes and insurance on the borrower's behalf

Escrow accounts collect monthly contributions from borrowers so the lender can pay property taxes and homeowner's insurance when they come due.

What does PMI stand for in the context of a mortgage?

Answer: Private Mortgage Insurance

PMI (Private Mortgage Insurance) protects the lender if the borrower defaults and is typically required when the down payment is less than 20%.

Which loan type is insured by the Federal Housing Administration and typically requires a lower down payment?

Answer: FHA loan

FHA loans are government-backed mortgages that allow down payments as low as 3.5% and are more accessible to borrowers with lower credit scores.

What is a balloon mortgage?

Answer: A loan with low or interest-only payments followed by a large lump-sum payment at the end

A balloon mortgage features relatively low initial payments but requires a large lump-sum payment (the 'balloon') when the loan term ends.

What is the 'principal' of a mortgage loan?

Answer: The original amount borrowed, excluding interest

Principal refers to the original loan amount borrowed, which decreases as payments are made over time.

What does 'amortization' mean in mortgage terms?

Answer: Paying off a loan through regular scheduled payments over time

Amortization is the gradual repayment of a mortgage through fixed periodic payments that cover both principal and interest.

Which document gives the borrower a detailed breakdown of all closing costs at least three business days before closing?

Answer: Closing Disclosure

The Closing Disclosure, required under TRID rules, provides a final itemized list of loan terms and closing costs at least three business days before the closing date.

What is a home equity line of credit (HELOC)?

Answer: A revolving credit line secured by the borrower's home equity

A HELOC is a revolving line of credit secured by home equity, allowing borrowers to draw funds as needed up to a set limit during the draw period.

What is the debt-to-income (DTI) ratio used for in mortgage underwriting?

Answer: To assess the borrower's ability to manage monthly payments relative to gross income

DTI compares a borrower's total monthly debt obligations to gross monthly income, helping lenders evaluate repayment capacity.

What is the difference between a rate lock and a float-down option?

Answer: A rate lock fixes the rate; a float-down allows the rate to decrease if market rates fall before closing

A rate lock guarantees a fixed interest rate for a set period, while a float-down option lets the borrower benefit if rates drop before closing.

What is a 'jumbo loan'?

Answer: A loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac

Jumbo loans exceed the conforming loan limits established by the FHFA and cannot be purchased by Fannie Mae or Freddie Mac.

What happens during the mortgage underwriting process?

Answer: The lender evaluates the borrower's creditworthiness and the property's value to approve the loan

Underwriting is the lender's risk assessment process, verifying income, assets, credit history, and the property appraisal before issuing a loan decision.

What is a 'points' in mortgage terminology?

Answer: Upfront fees paid to the lender equal to 1% of the loan amount, often to reduce the interest rate

Mortgage points (discount points) are prepaid interest; one point equals 1% of the loan amount and typically lowers the interest rate by a set amount.

What is the purpose of a title search in a real estate transaction?

Answer: To verify that the seller has clear ownership and there are no outstanding liens or encumbrances

A title search examines public records to confirm the seller legally owns the property and to identify any liens, judgments, or claims that could affect the sale.

If a borrower has a 30-year fixed mortgage at 7% interest, what remains constant throughout the loan?

Answer: The monthly payment amount and interest rate

With a 30-year fixed-rate mortgage, both the interest rate and the principal-and-interest portion of the monthly payment remain unchanged for the life of the loan.

What is 'loan-to-value' (LTV) ratio?

Answer: The percentage of the property's value that the loan represents

LTV is calculated by dividing the loan amount by the property's appraised value; a lower LTV indicates more equity and less risk for the lender.

Under the Real Estate Settlement Procedures Act (RESPA), what is prohibited?

Answer: Paying kickbacks or referral fees between settlement service providers

RESPA prohibits kickbacks and unearned fees between settlement service providers (e.g., realtors, lenders, and title companies) that inflate consumer costs.

What is a 'short sale' in real estate?

Answer: Selling a home for less than the outstanding mortgage balance with lender approval

A short sale occurs when a homeowner sells the property for less than what is owed on the mortgage, requiring the lender's approval to accept the reduced payoff.

What is an 'assumption' of a mortgage?

Answer: A buyer taking over the seller's existing mortgage terms and balance

An assumable mortgage allows a buyer to take over the seller's existing loan, including its interest rate and remaining balance, subject to lender approval.

Which federal law requires lenders to disclose the Annual Percentage Rate (APR) to borrowers?

Answer: The Truth in Lending Act (TILA)

TILA requires lenders to clearly disclose the APR and other loan terms to help borrowers understand the true cost of borrowing.