Glossary - Mortgage Terms - Page #1

1. Which choice best defines ADJUSTABLE RATE MORTGAGE (ARM)?

A short term loan with mortgage payments too low to pay off the balance in the specified time.

A loan with an interest rate that does not change or adjust during the life of the loan.

A loan that allows the interest rate to change periodically during the life of the loan.

An adjustable rate mortgage (ARM) is a type of loan where the interest rate can change periodically during the loan's lifespan. Unlike a fixed rate mortgage, the interest rate on an ARM is not fixed and can fluctuate based on market conditions. This means that the monthly mortgage payments can also change over time, potentially increasing or decreasing depending on the interest rate adjustments. This flexibility in interest rates is the defining characteristic of an adjustable rate mortgage.

Explanation

An adjustable rate mortgage (ARM) is a type of loan where the interest rate can change periodically during the loan's lifespan. Unlike a fixed rate mortgage, the interest rate on an ARM is not fixed and can fluctuate based on market conditions. This means that the monthly mortgage payments can also change over time, potentially increasing or decreasing depending on the interest rate adjustments. This flexibility in interest rates is the defining characteristic of an adjustable rate mortgage.

2. Which choice best defines CONSUMER REPORTING AGENCY?

Companies such as Equifax, Experian and TransUnion that collect data from creditors and public records.

Enacted in 1996, this act exercises control over the Credit Report Agencies.

A legal entity that is separate from its shareholders, officers and directors.

A consumer reporting agency refers to companies like Equifax, Experian, and TransUnion that gather information from creditors and public records. These agencies compile this data to create credit reports and scores for individuals. They play a crucial role in providing accurate information about an individual's creditworthiness to lenders, landlords, and other entities that use this information to make decisions. By defining a consumer reporting agency as such, it highlights the specific companies involved in this process and their role in collecting and reporting credit information.

Explanation

A consumer reporting agency refers to companies like Equifax, Experian, and TransUnion that gather information from creditors and public records. These agencies compile this data to create credit reports and scores for individuals. They play a crucial role in providing accurate information about an individual's creditworthiness to lenders, landlords, and other entities that use this information to make decisions. By defining a consumer reporting agency as such, it highlights the specific companies involved in this process and their role in collecting and reporting credit information.

3. Which choice best defines APPRAISAL?

The document that describes the value of a property as determined by a licensed appraiser.

A certified inspector checks the property for sound structure & that everything is working correctly.

A document that provides the value of a property by a certified underwriter.

An appraisal is a document that provides an estimate or determination of the value of a property. It is conducted by a licensed appraiser who evaluates various factors such as the property's condition, location, and comparable sales in the area. This document is important in real estate transactions as it helps lenders, buyers, and sellers understand the fair market value of the property. It is different from a certified inspection, which focuses on the property's physical condition and functionality. The appraisal is typically used to determine the maximum loan amount that can be approved for the property.

Explanation

An appraisal is a document that provides an estimate or determination of the value of a property. It is conducted by a licensed appraiser who evaluates various factors such as the property's condition, location, and comparable sales in the area. This document is important in real estate transactions as it helps lenders, buyers, and sellers understand the fair market value of the property. It is different from a certified inspection, which focuses on the property's physical condition and functionality. The appraisal is typically used to determine the maximum loan amount that can be approved for the property.

4. Which choice best defines AMOUNT FINANCED?

The fee charged to cover the company expense in setting up the loan for processing.

The amount of credit provided to the borrower.

A fee charged to the escrow agent to hold and disburse the funds.

The correct answer is "The amount of credit provided to the borrower." AMOUNT FINANCED refers to the total sum of money that is borrowed by the borrower, excluding any additional fees or charges. It represents the actual amount of credit that the borrower will have access to and is responsible for repaying.

Explanation

The correct answer is "The amount of credit provided to the borrower." AMOUNT FINANCED refers to the total sum of money that is borrowed by the borrower, excluding any additional fees or charges. It represents the actual amount of credit that the borrower will have access to and is responsible for repaying.

5. Which choice best defines COMBINED LOAN - TO - VALUE (CLTV)?

A ratio determined by dividing the mortgage balance on a property by the lesser of the sales price or value.

A fee collected by the lender to cover their costs to make the loan.

CLTV, or Combined Loan-to-Value, is a ratio that is calculated by adding up all of the outstanding balances that will be remaining when a loan is closed and dividing it by the lesser of the sales price or value of the property. This ratio helps lenders assess the risk associated with a loan by considering the total amount of debt on the property in relation to its value. A higher CLTV indicates a higher level of risk for the lender.

Explanation

CLTV, or Combined Loan-to-Value, is a ratio that is calculated by adding up all of the outstanding balances that will be remaining when a loan is closed and dividing it by the lesser of the sales price or value of the property. This ratio helps lenders assess the risk associated with a loan by considering the total amount of debt on the property in relation to its value. A higher CLTV indicates a higher level of risk for the lender.

6. Which choice best defines AUTOMATED UNDERWRITING SYSTEM (AUS)?

A report issued by a credit bureau that indicates current outstanding debts and past payment history of a borrower.

The automated underwriting system created by Freddie Mac.

An Automated Underwriting System (AUS) is a complex computer program that analyzes historical data from millions of loans to assess whether the information provided on a loan application aligns with the requirements set by the lender or agency. By utilizing this vast amount of data, the AUS can efficiently evaluate the risk associated with a loan and make a decision on whether to approve or deny it.

Explanation

An Automated Underwriting System (AUS) is a complex computer program that analyzes historical data from millions of loans to assess whether the information provided on a loan application aligns with the requirements set by the lender or agency. By utilizing this vast amount of data, the AUS can efficiently evaluate the risk associated with a loan and make a decision on whether to approve or deny it.

7. Which choice best defines ANNUAL PERCENTAGE RAGE (APR)?

The amount paid to the lender for use of the money that they lend the owner.

The amount that a lender adds to the index to determine an interest rate for an adjustable rate mortgage.

APR is a rate that shows the total cost of borrowing, including interest and other fees, as a percentage of the loan amount. It takes into account all the finance charges associated with the loan, such as origination fees, and provides a standardized way to compare different loan offers. By calculating APR, borrowers can easily compare the actual cost of borrowing from different lenders, helping them make informed decisions about their loans.

Explanation

APR is a rate that shows the total cost of borrowing, including interest and other fees, as a percentage of the loan amount. It takes into account all the finance charges associated with the loan, such as origination fees, and provides a standardized way to compare different loan offers. By calculating APR, borrowers can easily compare the actual cost of borrowing from different lenders, helping them make informed decisions about their loans.

8. Which choice best defines CLOSING FEE?

The fees collected by the lender needed to make the loan.

The closing fee refers to a fee paid to the title insurance company that covers the services provided by the closer, such as handling the signing of the closing documents and the disbursement of funds. This fee is separate from the fees collected by the lender for making the loan and the charge for preparing the application for underwriting.

Explanation

The closing fee refers to a fee paid to the title insurance company that covers the services provided by the closer, such as handling the signing of the closing documents and the disbursement of funds. This fee is separate from the fees collected by the lender for making the loan and the charge for preparing the application for underwriting.

9. Which choice best defines APPLICATION FEE?

The fees collected by the lender needed to make the loan.

An application fee is a charge that is collected by the lender to cover the cost of preparing the loan application for underwriting. It can also be used to describe the collection of fees for services such as the appraisal and credit report. This fee is typically paid by the borrower and helps cover the administrative costs associated with processing the loan application.

Explanation

An application fee is a charge that is collected by the lender to cover the cost of preparing the loan application for underwriting. It can also be used to describe the collection of fees for services such as the appraisal and credit report. This fee is typically paid by the borrower and helps cover the administrative costs associated with processing the loan application.