FREE Real Estate Sales Financing and Mortgages Questions and Answers Flashcards

What is the purpose of private mortgage insurance (PMI) on a conventional loan?

Answer: To protect the lender against default when the down payment is less than 20%

PMI protects the lender from loss if the borrower defaults and is typically required when the loan-to-value ratio exceeds 80%.

What distinguishes a balloon mortgage from a fully amortizing loan?

Answer: A balloon mortgage has a large lump-sum payment due at the end of the term

A balloon mortgage requires a large final payment of the remaining principal balance at the end of a shorter loan term.

In mortgage lending, what does the term 'points' refer to?

Answer: Fees paid upfront to the lender to reduce the interest rate, each equal to 1% of the loan amount

Discount points are prepaid interest fees where each point equals 1% of the loan amount and typically lowers the interest rate.

What is the primary risk to a borrower who agrees to a negative amortization loan?

Answer: The loan balance can grow larger than the original amount borrowed

Negative amortization occurs when monthly payments are insufficient to cover the interest due, causing unpaid interest to be added to the principal balance.

Which federal agency insures loans made under the FHA mortgage program?

Answer: The Federal Housing Administration within HUD

The Federal Housing Administration, a division of the Department of Housing and Urban Development, insures FHA loans against borrower default.

What is an alienation clause (due-on-sale clause) in a mortgage?

Answer: A clause requiring full loan repayment upon transfer of property ownership

An alienation or due-on-sale clause requires the borrower to pay the remaining loan balance in full when the property is sold or transferred.