Financing Study Guide

Conventional Loan

A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.

FHA Loan

An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.

VA Loan

A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.

Fixed-Rate Mortgage

A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.

Loan-to-Value Ratio (LTV)

The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.

Debt-to-Income Ratio (DTI)

The debt-to-income ratio (DTI) compares a borrower's monthly debt obligations to their gross monthly income. It is used by lenders to determine how much mortgage a borrower can afford.

Closing Costs

Closing costs are the fees and expenses paid by the buyer and seller at the closing of a real estate transaction, beyond the purchase price. They typically range from 2-5% of the purchase price.

Discount Points

Discount points are upfront fees paid to a lender at closing to reduce (buy down) the interest rate on a mortgage loan. One point equals 1% of the loan amount and typically reduces the rate by approximately 0.25%.

Usury

Usury is the practice of charging an interest rate that exceeds the maximum rate permitted by state law. Usury laws protect borrowers from excessive interest charges on loans.

Predatory Lending

Predatory lending refers to unfair, deceptive, or abusive lending practices that impose unjustified terms on borrowers, often targeting vulnerable populations. It includes practices like excessive fees, inflated appraisals, and unnecessary refinancing.

RESPA (Real Estate Settlement Procedures Act)

RESPA is a federal law that requires lenders to provide borrowers with information about settlement costs, prohibits kickbacks and referral fees, and limits escrow account deposits. It applies to federally related mortgage loans.

TILA (Truth in Lending Act)

TILA is a federal law that requires lenders to disclose the true cost of credit to borrowers, including the annual percentage rate (APR), total finance charges, and loan terms. It is implemented by Regulation Z.

Secondary Mortgage Market

The secondary mortgage market is where existing mortgage loans are bought and sold between lenders, investors, and government-sponsored enterprises (GSEs) like Fannie Mae, Freddie Mac, and Ginnie Mae.

Mortgage Types Comparison

A comparison of the major mortgage loan types—conventional, FHA, VA, and USDA—covering their eligibility requirements, down payment amounts, mortgage insurance rules, and best use cases.

Foreclosure

Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.

Deed (in foreclosure context)

In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.

Trustee Sale

A trustee sale is a type of foreclosure where a trustee, appointed under a deed of trust, sells the property at auction to satisfy the debt.