Applying for a Residential Loan

Question 1

What are the costs on a loan?

Answer 1

Origination fee - covers lender administrative costs

Discount points - buydown, these reduce the interest rate with upfront payment

Lock-in fee - lender’s charge to lock a rate for a specified period

Question 2

What is the Truth in Lending Act?

Answer 2

TILA - federal consumer protection act that requires lenders to disclose the complete cost of credit to consumer loan applicants. Implemented by Regulation Z, enforced by the CFPB.

Question 3

What does TILA cover?

Answer 3

Consumer loans <$58,300 and all consumer loans secured by real property regardless of amount.

Seller-financed transactions, commercial loans (to corporations or for business purposes) are exempt.

Question 4

What does TILA disclosure have to include?

Answer 4

APR (effective rate w/loan fees) and a right of recission (three days).

Appraisal fee and credit report are charged to borrower and not included in APR.

Question 5

What are the triggering terms for advertisements under TILA?

Answer 5

Downpayment, monthly payment, repayment period, loan fees, etc. trigger full disclosures - you can include APR or vague terms like “low downpayment” without triggering.

Question 6

What does the Fair Credit Reporting Act require?

Answer 6

It requires lenders to notify an applicant in writing if they are denying an application based on the credit report.

Question 7

Amortization

Answer 7

The gradual repayment of a debt with instalment payments that include both principal and interest.

Question 8

What is another name for “interest only loan”?

Answer 8

Term loan

Question 9

What is an index (lending)?

Answer 9

Published statistical rate that indicates the changes in the cost of money – ARM rates are adjusted periodically in response to the changes in the selected index during the adjustment period (usually once a year). The lender adds a margin to the index to cover admin expenses and profit, and the ARM usually has a cap.

Question 10

What is negative amortization?

Answer 10

This is when the unpaid interest on the loan is added to the balance, increasing the amount owed.

Question 11

What is a Hybrid ARM?

Answer 11

Loan that starts out as fixed for a certain number of years and then switches to an adjustable rate.

Question 12

Are FHA and VA Loans conventional?

Answer 12

No, these are unconventional loans because they are government-backed. The FHA insures loans through the Mutual Mortgage Insurance Premium (MIP) and is part of HUD (it doesn’t make loans).

Question 13

What are the characteristics of a FHA 203(b) loan?

Answer 13

• One to four units
• as little as 3.5% down
• lower interest rates (FHA insurance reduces risk to lender)
• Assumable (for primary residence)
• Appraised by certified FHA appraiser

Buyer or seller can pay discount points, and applications are made through an institutional lender.

Question 14

Who is eligible for a VA loan?

Answer 14

A vet who has served a minimum amount of time in the US armed forces. The VA will issue a Certificate of Eligibility as proof. Surviving spouse can use this benefit.

Question 15

What are the characteristics of a VA Loan?

Answer 15

• one to four units
• no downpayment required
• no mortgage insurance, the VA guarantees the loan up to the entitlement amount
• entitlement restore when the property is sold or assumed by another veteran

Question 16

What is a certificate of reasonable value (CRV) or Notice of Value (NOV)?

Answer 16

The VA version of an appraisal. VA will not guarantee the loan for more than the appraised value, so if it is less than the contract price the buyer will have to bring the difference in cash to closing.