Financing and Mortgages Flashcards

A homebuyer is purchasing a property for $400,000 and the lender has agreed to a loan with an 80% loan-to-value (LTV) ratio. What is the amount of the buyer's down payment?

Answer: $80,000

The loan-to-value (LTV) ratio represents the percentage of the property's value the lender is willing to finance. In this case, an 80% LTV on a $400,000 property means the loan amount is $320,000 ($400,000 * 0.80). The down payment is the remaining portion, which is 20% of the purchase price. Therefore, the down payment is $80,000 ($400,000 * 0.20 or $400,000 - $320,000).

Which of the following federal laws requires lenders to provide borrowers with a clear disclosure of the total cost of credit, including the annual percentage rate (APR), before they enter into a credit transaction?

Answer: Truth in Lending Act (TILA)

The Truth in Lending Act (TILA), implemented by Regulation Z, is a federal law designed to protect consumers in credit transactions by requiring clear disclosure of key terms and costs, most notably the Annual Percentage Rate (APR). RESPA focuses on settlement costs, the FHA prohibits housing discrimination, and ECOA prevents discrimination in lending.

A mortgage lender offers a local real estate agent a $500 gift card for every client they refer who closes a loan with the lender. This arrangement is a violation of which federal law?

Answer: Real Estate Settlement Procedures Act (RESPA)

Section 8 of the Real Estate Settlement Procedures Act (RESPA) prohibits kickbacks and unearned fees. It is illegal to give or receive any 'thing of value' (like a gift card) for the referral of settlement service business, such as a mortgage loan. This practice is seen as inflating the cost of settlement services for consumers.

A borrower secures a loan where for the first five years, the monthly payments only cover the interest. At the end of the five years, the entire principal balance is due in a single payment. What type of loan is this?

Answer: Interest-only loan

An interest-only loan is a type of financing where the borrower pays only the interest on the principal balance for a specified period. Unlike a fully amortized loan where payments include both principal and interest, the principal on an interest-only loan is not reduced during the interest-only period and must be paid off later, often as a lump-sum balloon payment.

Which of the following is a key characteristic of a Federal Housing Administration (FHA) insured loan?

Answer: It is insured by the government to protect the lender against borrower default.

FHA loans are insured by the Federal Housing Administration, which protects the lender in case the borrower defaults on the loan. This insurance allows lenders to offer loans with more flexible qualifying requirements, such as lower down payments and more lenient credit score criteria, than conventional loans. VA loans are for veterans, FHA does not lend money directly, and the down payment requirement is typically much lower than 20%.

The practice of charging an interest rate on a loan that is higher than the maximum rate permitted by state law is known as:

Answer: Usury

Usury is the illegal action or practice of lending money at unreasonably high rates of interest, specifically rates that exceed the legal maximum set by state law. Usury laws are in place to protect consumers from predatory lending practices.