Definitions of Major Subjects Flashcards
What are some of the most common laws that new MLO’s could unintentionally violate?
Keeping track of the various disclosures and sending them out in the appropriate time-frame would be difficult.
I also think the trigger scenarios will be difficult to keep track of too; ex: if applying for loan A you have to do this, but if you’re applying for loan B do this.
Interest vs APR:
When you’re refinancing or taking out a mortgage, keep in mind that an advertised interest rate isn’t the same as your loan’s annual percentage rate (APR). What’s the difference?
- Interest rate refers to the annual cost of a loan to a borrower and is expressed as a percentage
- APR is the annual cost of a loan to a borrower — including fees. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees such as mortgage insurance, most closing costs, discount points and loan origination fees.
Why the difference?
The APR is intended to give you more information about what you’re really paying. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing certain costs of loans. (Remember, though: Your monthly payment is not based on APR, it’s based on the interest rate on your promissory note.)
So evaluate carefully when you look at the rates lenders offer you. Compare one loan’s APR against another loan’s APR to get a fair comparison of total cost — and be sure to compare actual interest rates, too.
What Is Closed-End Credit?
- Closed-end credit is a loan or type of credit where the funds are dispersed in full when the loan closes and must be paid back, including interest and finance charges, by a specific date.
- Many financial institutions also refer to closed-end credit as “installment loans” or “secured loans.”
- Closed-end credit agreements allow borrowers to buy expensive items–such as a house, a car, a boat, furniture, or appliances–and then pay for those items in the future.
What Is an Open-End Mortgage?
- An open-end mortgage is a type of mortgage that allows the borrower to increase the amount of the mortgage principal outstanding at a later time. They permit the borrower to go back to the lender and borrow more money. There is usually a set dollar limit on the additional amount that can be borrowed.
- An open-end mortgage allows a borrower to take a portion of the loan value for which they have been approved to cover the costs of their home; by taking only a portion, the borrower can pay a lower interest rate since they are only obligated to make interest payments on the outstanding balance.
- An open-end mortgage is advantageous for a borrower who qualifies for a higher loan principal amount than may be needed to buy the home.
How an Open-End Mortgage Works:
An open-end mortgage is similar to a delayed draw term loan. It also has features similar to revolving credit. Open-end mortgages are unique in that they are a loan agreement that is secured against a real estate property with funds going only toward investment in that property.
What Is Amortization?
Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time. Concerning a loan, amortization focuses on spreading out loan payments over time. When applied to an asset, amortization is similar to depreciation.
• Amortization typically refers to the process of writing down the value of either a loan or an intangible asset.
• Amortization schedules are used by lenders, such as financial institutions, to present a loan repayment schedule based on a specific maturity date.
• Intangibles amortized (expensed) over time help tie the cost of the asset to the revenues generated by the asset in accordance with the matching principle of generally accepted accounting principles (GAAP).
The term “amortization” refers to two situations.
First, amortization is used in the process of paying off debt through regular principal and interest payments over time. An amortization schedule is used to reduce the current balance on a loan—for example, a mortgage or a car loan—through installment payments.
Second, amortization can also refer to the spreading out of capital expenses related to intangible assets over a specific duration—usually over the asset’s useful life—for accounting and tax purposes.
What is Negative Amortization?
Amortization means paying off a loan with regular payments, so that the amount you owe goes down with each payment. Negative amortization means that even when you pay, the amount you owe will still go up because you are not paying enough to cover the interest.
Your lender may offer you the choice to make a minimum payment that doesn’t cover the interest you owe. The unpaid interest gets added to the amount you borrowed, and the amount you owe increases.
What is a Qualified Mortgage?
A Qualified Mortgage is a category of loans that have certain, more stable features that help make it more likely that you’ll be able to afford your loan.
A lender must make a good-faith effort to determine that you have the ability to repay your mortgage before you take it out. This is known as the “ability-to-repay” rule. If a lender loans you a Qualified Mortgage it means the lender met certain requirements and it’s assumed that the lender followed the ability-to-repay rule.
Generally, the requirements for a qualified mortgage include:
• Certain risky loan features are not permitted, such as:
o An “interest-only” period, when you pay only the interest without paying down the principal, which is the amount of money you borrowed.
o “Negative amortization,” which can allow your loan principal to increase over time, even though you’re making payments.
o “Balloon payments,” which are larger-than-usual payments at the end of a loan term. The loan term is the length of time over which your loan should be paid back. Note that balloon payments are allowed under certain conditions for loans made by small lenders.
o Loan terms that are longer than 30 years.
- A limit on how much of your income can go towards your debt, including your mortgage and all other monthly debt payments. This is also known as the debt-to-income ratio.
- No excess upfront points and fees. If you get a Qualified Mortgage, there are limits on the amount of certain up-front points and fees your lender can charge. These limits will depend on the size of your loan. Not all charges, like the cost of a FHA insurance premiums, for example, are included in this limit. If the points and fees exceed the threshold, then the loan can’t be a Qualified Mortgage.
- Certain legal protections for lenders. Your lender gets certain legal protections when showing that it made sure you had the ability to repay your loan. Even with these protections, you may still be able to challenge your lender in court if you believe it did not make sure you had the ability to repay your loan.
What Is a Reverse Mortgage?
In a word, a reverse mortgage is a loan. A homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit. Unlike a forward mortgage—the type used to buy a home—a reverse mortgage doesn’t require the homeowner to make any loan payments.
Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home. Federal regulations require lenders to structure the transaction so that the loan amount doesn’t exceed the home’s value and that the borrower or borrower’s estate won’t be held responsible for paying the difference if the loan balance does become larger than the home’s value. One way that this could happen is through a drop in the home’s market value; another is if the borrower lives for a long time.
How a Reverse Mortgage Works
With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments and only pays interest on the proceeds received. The interest is rolled into the loan balance so that the homeowner doesn’t pay anything up front. The homeowner also keeps the title to the home. Over the loan’s life, the homeowner’s debt increases and home equity decreases.
As with a forward mortgage, the home is the collateral for a reverse mortgage. When the homeowner moves or dies, the proceeds from the home’s sale go to the lender to repay the reverse mortgage’s principal, interest, mortgage insurance, and fees. Any sale proceeds beyond what was borrowed go to the homeowner (if still living) or the homeowner’s estate (if the homeowner has died). In some cases, the heirs may choose to pay off the mortgage so that they can keep the home.
Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the Internal Revenue Service (IRS) considers the money to be a loan advance.
Non-Qualified Mortgages
The term non-qualified mortgage is not defined in lending laws or regulations, but is unofficially defined as a closed-end loan that does not meet the product feature prerequisites of a qualified mortgage, and does not satisfy the underwriting requirements that distinguish qualified mortgages from other mortgages.
Consumers who are shopping for non-qualified mortgages generally include:
• Those who cannot meet the debt-to-income or APR limit ratio requirements for a qualified mortgage
• Those who are nonprime borrowers due to lower credit scores, irregular employment histories, or other factors (note that the QM Rule does not establish minimum credit scores, but it is typically prime borrowers who qualify for qualified mortgages)
• Self-employed or seasonally-employed borrowers who may find it difficult to establish the income levels that are needed to meet the debt-to-income requirements for a qualified mortgage
• Those who need nontraditional mortgages, such as interest-only loans, negative amortization loans, and balloon mortgages
What is an RHS Loan?
An RHS loan is a type of financing provided or guaranteed by the Rural Housing Service (RHS) of the U.S. Department of Agriculture (USDA). The RHS lends directly to low-income borrowers in rural areas and guarantees loans issued by approved lenders that meet RHS requirements.
The RHS originates and guarantees more than home mortgages. It operates loan programs for community services such as healthcare clinics, police and fire stations, schools, and childcare centers—and things like first-responder vehicles and equipment.
Key Takeaways:
• The Rural Housing Service (RHS) provides loans directly to low-income borrowers in rural areas and guarantees loans provided by approved lenders.
• An RHS loan can help a borrower who otherwise might not qualify for a traditional mortgage because of low income or bad credit to buy a home in an approved rural area.
• The RHS also provides loans to communities in rural areas for services ranging from schools to police and fire stations.
Both types of RHS or 502 loans must:
• Be secured by property that the RHS has designated as a “rural area”
• Be secured by a dwelling that is “modest”
• Have a fixed interest rate
• Be offered to a borrower who can demonstrate repayment ability
Refinances are available in cases where the borrower may require payment assistance. Borrowers who are not eligible to obtain payment assistance as provided for under Subpart B of USDA RHS requirements, either because the loan was approved before August 1, 1968 or because the loan was made on above-moderate or nonprogram terms, may refinance the loan if:
• The borrower is eligible to receive a loan with payment assistance
• Due to circumstances beyond the borrower’s control, the borrower is in danger of losing the property
• The property is program-eligible
