Glossary of Loan Terminology
Glossary of Loan Terminology
Content
Acceleration:
Repayment of obligation that is sooner than originally contracted for.
Accrued Interest: Interest that is earned by the lender and payable by the
borrower. Each day interest is calculated on the unpaid principal balance and
becomes “accrued interest.”
Amortization:
The gradual repayment of a debt by periodic (usually monthly) installments of
principal and interest.
Annual Percentage Rate (APR): The total cost of borrowing money expressed as an annual rate.
Assignment:
The transfer of the note to another eligible lender. The borrower’s
responsibility and obligations do not change.
Capitalization:
The addition of unpaid accrued interest applied to the principal balance of a
loan which increases the total debt outstanding.
Consolidation:
Combining two or more educational loans into a new loan with a new payment
schedule and interest rate.
Cumulative debt limit: The maximum principal borrowing amount of all outstanding
student loan debt allowed by lenders.
Daily Interest Credit: The method of calculating the rebate of precomputed interest.
If prepayment is made, the interest charge (finance charge) will be reduced to
the amount earned to the day of prepayment, also known as “actuarial method.”
Default: The failure to repay
a loan in accordance with the terms of the promissory note. Default occurs
after 180 days of non-payment on an account.
Deferment Period: Under certain conditions, once the repayment period has begun,
principal payments (and interest payments under some loan programs) are
postponed during specified periods. The borrower must provide documentation to
establish eligibility for a deferment when the deferment begins.
Delinquent:
The borrower has failed to make an installment payment when due, or to meet
other terms of the promissory note.
Demand Note:
A promissory note that is payable (due in full) whenever the holder demands
payment.
Disbursement:
A transaction that occurs when a lender releases loan funds.
Due Diligence:
The efforts and practices of a lender, in the making, servicing, and collection
of loans, which are at least as extensive and forceful as those generally
practiced by financial institutions for consumer loans.
FDSLP: Federal Direct
Student Loan Program.
Federal Reserve Regulation: The truth-in-lending law that requires disclosure of finance
charges and the annual percentage rate.
Financial Need:
The difference between the student’s educational costs and the Assessed Family
Resources.
FFELP: Federal Family
Education Loan Programs, formerly known as the GSL — Guaranteed Student Loan
Programs.
Forbearance:
Permitting the temporary cessation of payments or accepting smaller payments
than were previously scheduled. Forbearance is granted at the discretion of the
lender except that it is mandatory for a lender to grant forbearance on
Stafford and SLS loans to a physician still in residency.
Grace Period:
A 6- or 9-month period before the borrower enters a repayment period. The grace
period begins on the day the student ceases to be at least a half-time student
at a participating school.
Guarantor:
A state agency or private, nonprofit institution or organization which
administers a student loan insurance program. The institution or organization
guarantees repayment of student loans to private lenders in the event a
borrower dies, becomes permanently and totally disabled, has a loan discharged
in bankruptcy, or defaults.
Holder (Lender or Payee): Harvard University, a bank, a credit union, etc.
Holder in Due Course (Bearer in Due Course): A person or entity other than the original
holder who holds a legally effective promissory note and has the right to
collect from the borrower.
Insolvency:
The inability to make payments.
Installment Note (Renewal Note): A new note written to satisfy the terms of a previously signed
demand note. The installment note specifies a repayment schedule.
Promissory Note: The legal and binding contract signed between the lender and
the borrower which states that the borrower will repay the loan as agreed upon
in the terms of the contract.
Renewable Grace Period: Under some loan programs, repayment does not begin or resume
immediately after a deferment period ends. This period before repayment begins,
but after deferment ends, is in addition to the original grace period. No loans
issued after 10/1/81 have a renewable grace period and only some loan programs
had this feature previously.
Renewal Note:
See Installment Note.
Sealed Instrument: In Massachusetts, a sealed instrument provides for fewer
limitations on the lender’s ability to collect a note. It changes the statute
of limitations for collections of a note from 6 to 20 years.
Servicer: An organization that
acts on behalf of the lender to administer their student loan portfolio and is
paid a fee to do so.
Student Aid Report (SAR): The form a student receives after filing a FAFSA application.
The SAR notifies the student of his eligibility for federal student aid.
Subsidized Loan: A subsidized loan is awarded on the basis of financial need,
which is determined by the information provided on the HLS financial aid
application and/or the Free Application for Federal Student Aid (FAFSA). For
those who qualify for a subsidized loan, interest does not accrue until
repayment begins.
Unsubsidized Loan: A loan on which the student is responsible for paying the
interest that accrues on the loan from the date of disbursement until the loan
is paid in full, regardless of enrollment status.
Waives Presentment, Demand Notice, Protest and All Other Demands: The borrower cannot claim that payment is
not due because the lender did not notify or bill him/her before the due date.
It is the borrower’s responsibility to make payments when due, even if the
lender has not sent a bill or coupon repayment book.
Loan Terms Definition: Terms and Conditions
“Loan terms”—plural—is
generally a shorthand way to refer to your loan’s terms and conditions. These
are all the rules that define how your loan works. The loan agreement you sign
when you accept your loan outlines these rules.
The most important loan
terms for you to know are:
·
Annual
percentage rate (APR). This
measures how expensive your loan is by combining your interest rate and any
finance charges into one figure. You can use this to shop around and compare
different loan options.
·
Monthly
payment. How much you’ll
pay each month to your lender. Some of this goes toward paying down your loan’s
principal amount and some goes toward paying down your interest.
·
Fees. This can include fees such as origination fees,
application fees, late fees or prepayment penalties.
·
Due
date. This is when
your payment is due each month. If you don’t pay it on time, your loan
agreement outlines what will happen, such as when your lender will charge you a
late fee.
·
Term
length. This is the
amount of time you have to repay your loan, as discussed above.
What Is Foreclosure?
Foreclosure
is the legal process by which a lender attempts to recover the amount owed on
a defaulted loan by taking ownership of and
selling the mortgaged property. Typically, default is triggered when a borrower
misses a specific number of monthly payments, but it can also happen when the
borrower fails to meet other terms in the mortgage document.1
KEY
TAKEAWAYS
- Foreclosure
is a legal process that allows lenders to recover the amount owed on a
defaulted loan by taking ownership of and selling the mortgaged property.
- The
foreclosure process varies by state, but in general lenders try to work
with borrowers to get them caught up on payments and avoid foreclosure.
- The most recent national average number of days for the
foreclosure process is 830; however, the timeline varies greatly by state.
What Is Foreclosure?
Foreclosure happens when a
borrower fails to pay their mortgage payments and the lender or mortgage
investor must repossess and then sell the home. Foreclosure can also happen
when the homeowner fails to pay their property taxes or homeowners association fees.
When it comes to understanding
foreclosure, there are three important definitions to know:
·
Foreclosure: the
legal process in which a lender or mortgage investor takes back unpaid
property
·
Home in foreclosure: a property going through the foreclosure process
·
Foreclosed home or REO: a property that has gone through the foreclosure process and
is now owned by the lender or bank, also known as a real estate-owned property
(REO)
Foreclosed homes and REOs are usually of
particular interest to buyers, since these properties typically come at a lower
price than comparable, non-foreclosed homes.
How Foreclosure Works
After the foreclosure,
the mortgage lender will take control of the property and attempt to sell it to recoup the money it lost from the mortgage default. The lender is allowed to
take back the home because a mortgage is a secured loan. That means the
borrower guarantees repayment by providing collateral. If they can’t pay back
the loan with money, they use the collateral instead.
In the case of a mortgage, the home is used as collateral and,
upon signing closing documents, the borrower recognizes that the lender has the
right to foreclose on the home if they default on the loan. This is also known
as putting a lien on the title of the home. Once the
mortgage is paid off, this lien on the title of the home is removed.
Why Do Homeowners Go Into Foreclosure?
At the time of getting
their mortgage, most people are typically in a position to successfully make
payments on their loan. And most lenders ensure this by verifying income,
reviewing credit history and putting a limit on the borrower’s debt-to-income ratio (DTI).
But despite all of these assurances, things don’t always go as expected, and
there are a number of reasons a homeowner may fail to make their payments.
Unforeseen Circumstances
Many times, a person facing
foreclosure has experienced a life event that changed their financial
circumstances. Because of this, they can no longer afford their monthly
payment. Examples of such events include:
·
Loss of employment
·
Taking on excessive
debt
·
Experiencing a medical
emergency
·
Incurring a large,
unexpected expense
·
Losing part or all of
their income due to divorce or death
·
Experiencing an
increase in living expenses
·
Relocating before
selling the home
·
Experiencing distress
from a natural disaster
Increased Mortgage Payments
It isn’t just a hardship that
causes homeowners to go into foreclosure. It could also be something as simple
as an increase in their mortgage payment.
For example, those with an adjustable-rate mortgage may have an increase in
interest, which will raise their mortgage payment. Or, if there is an escrow shortage due
to a rise in property taxes or insurance premiums, the escrow payment will
increase. And since property taxes and homeowners insurance are typically paid
through the monthly mortgage payment, the monthly payment will rise as well.
These instances are not
uncommon with mortgages, and they depend on the terms of the mortgage in
question. However, homeowners who don’t understand their mortgage terms may be
caught off guard and unprepared for even the slightest change.
Underwater Mortgage
While most homeowners go into
foreclosure because they cannot make their mortgage payment, some enter into
foreclosure because they intentionally miss their payments. This often happens
when their home is underwater and they no longer have any financial motivation
to continue to pay their mortgage.
When a home is underwater, the
amount owed on the mortgage is more than the home is worth. When they no longer
have equity, some homeowners see no reason to continue making their payments.
Instead, they “walk away” from the home, leaving the lender to deal with it.
The Foreclosure Process
There are two types of
foreclosures:
·
A judicial foreclosure involves going through a court and
allows the homeowner to contest the foreclosure.
·
A nonjudicial foreclosure does not require court action. The type
of foreclosure and the process it uses will differ from state to state.
Whatever the type of
foreclosure and whatever the state, the process generally involves five stages.
Stage 1: Missed Payments
No matter the reason a
homeowner goes into foreclosure, the process begins the same way: with missed
payments. Once the homeowner begins missing payments, they are no longer
upholding their responsibilities of the loan, and the lender can come to collect.
What many homeowners don’t realize is the foreclosure process can
be expensive for the lender, so they will want to avoid foreclosure, too, if
possible. In most cases, lenders are willing to work with the homeowner to
restructure the loan and lower or delay payments. If the homeowner needs
additional assistance, they may find it through:
·
Foreclosure mediation
·
HUD-certified
financial counseling
·
Government mortgage
relief programs
·
Home loan modification
programs
There are steps you
can take to avoid foreclosure. If
you are a Quicken Loans® client and need assistance, please
call our customer service number at (800) 508-0944 so we can go over your
options to help you get back on track.
Stage 2: Public Notice
Once the homeowner misses 3 – 6
months’ worth of payments, the lender will give a public notice or file a
lawsuit with the court. Also called a Notice of Default (NOD), or lis pendens
(suit pending), the public notice is a written notification to the homeowner
that the lender will pursue legal action if the debt is not paid.
Let a pro help.
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Stage 3: Foreclosure
Once the lender records the
public notice, the foreclosure stage begins, and the home
enters the early stages of repossession. At this point, the homeowner typically
has 90 days to take action. If they want to avoid a foreclosure sale and avoid
eviction, they have a few options:
·
Reverse the default by paying
the outstanding balance
·
Sell the property because there
is equity to complete a full pay off of the loan.
·
Sell the property in a short
sale before it goes to foreclosure
·
Sign the deed over to the
lender through a deed in lieu of foreclosure
The Short Sale Option
A short sale is a
voluntary sale of the home before foreclosure. It is called a short sale
because the sale price usually comes up “short” of the balance owed. When that
happens, all of the proceeds from the sale go to the lender and the sale cannot
happen unless the lender approves it.
A short sale is usually
preferable for both the homeowner and the lender because:
·
It will be less damaging to the
homeowner’s credit and ability to obtain another mortgage in the future.
·
It will help the lender recover
as much of the loan balance as possible while avoiding the cost of a
foreclosure.
·
If the sale price is more than
what is owed, the homeowner will get to keep whatever money is left after the
mortgage is paid off.
The Deed In Lieu Of Foreclosure Option
Another way for both parties to
avoid foreclosure is with a deed in lieu of foreclosure.
In this transaction, the homeowner voluntarily signs the deed over to the
lender or bank and is released of all mortgage obligations.
Again, by avoiding foreclosure, the homeowner’s credit and mortgage
eligibility may take less of a hit. The lender may benefit by avoiding the
costs and additional time involved in the foreclosure process. However, it may
only approve a deed in lieu of foreclosure if the homeowner cannot sell the
home in a short sale and there are no other liens on the property. Even then,
the lender may not accept this offer.
If the homeowner cannot sell
the home in a short sale, make up the late payments or pursue a deed in lieu of
foreclosure, the home will then go to public auction.
Stage 4: Auction
When the time comes, the
mortgage investor or its representative, the trustee, will put the home up for
auction. Also known as a foreclosure sale, the auction is open to the public
and will often take place on the steps of the county courthouse, in a
conference room or convention center, or even online. Before the auction, a
Notice of Trustee’s Sale (NTS) will notify the homeowner and the public of the
auction and provide such information as a date, time and location.
Since the mortgage investor,
terms of the loan and specific state guidelines control the policies of the
auction, every auction will be different. However, you can expect similar
processes and requirements.
At the auction, the minimum bid
is normally set at the balance owed on the loan, and the foreclosed home is
sold to the highest bidder. That person must pay cash for the full amount or a
significant deposit immediately. Though the highest bidder is the winner of the
auction, they may not necessarily win ownership of the home. In some states,
the previous homeowner has a “right of redemption” that allows them to buy
their home back even after it is sold at auction. Typically, they will need to
pay the sale price or full loan balance, plus any interest and costs the bank
incurred during the process. Depending on the state laws and the method of
foreclosure, a homeowner’s right of redemption could be valid up to the time
the court clerk files the certificate of sale, or as long as 1 year after the
sale.
Stage 5: Post-Foreclosure
If the home was purchased at
auction, the previous homeowner must move out of the home, and the new homeowner
can do with the home as they please. Some people move into the home as their
permanent residence while others rent out or sell the home and make a profit.
Oftentimes, the home does not
sell at auction because the mortgage investor does not approve any bids or the
pool of buyers who can pay cash is limited. When this happens, the foreclosed
home becomes a bank-owned property, also referred to as a real estate-owned
property. As stated before, an REO is not the same thing as a home in
foreclosure. A home in foreclosure is going through the process of being
repossessed by the bank, while an REO is a home that has already been
repossessed by the bank. In an REO, the bank is the sole owner of the property.
As the owner of the property,
the bank must pay property taxes on the home. Add that to the costs incurred
during the foreclosure process and the money lost during default, and it’s easy
to see why the bank will want to get rid of the REO home as soon as possible.
However, a motivated seller doesn’t always mean the home will sell for dirt
cheap. Keep this in mind when buying a home in any stage of the foreclosure
process.
What To Know Before Buying Foreclosed Properties
It can be hard to pass
up a good deal, especially when it’s on a large purchase like a home. That’s
why many home buyers turn to foreclosed homes in hopes of getting more space in
a better area and with a much lower price tag. But remember – the property may
not be perfect and the process isn’t always easy. It’s best to know what to
expect and what to be cautious of upfront before buying a foreclosed home.
The Foreclosure Market
Foreclosure purchases thrived in 2009 – 2010
when a recession-battered housing market hit its peak foreclosure rate. During
that time, more than 5 million homes went into foreclosure, and home buyers
could often purchase them at more than half off the original price in many
areas across the U.S.
Now that the market is
in better health and due to the foreclosure moratorium in response to COVID-19,
foreclosed homes are at a 16-year low, with only 214,323 properties filing for
foreclosure in 2020, according to the ATTOM Data Solutions 2020 Foreclosure Market Report.
With less of these homes available at a higher value than before, the
foreclosure market may be slowing down. But foreclosed homes are still priced
much lower than the average American home for sale, and there is still an
opportunity to find that great deal for the person who knows how to navigate the
foreclosure market.
The Condition Of The Home
One important consideration is
that the condition of a foreclosed home can be a toss-up. Typically, there are
some issues with this type of home, and they can range from minor repairs to
absolute deal breakers. Think about it: If the home is going through foreclosure
because the person couldn’t afford their monthly payments, chances are they
didn’t have the extra funds for other housing costs, including general upkeep,
replacements and repairs.
The Purchase Method
There are also a few different
ways to buy the home, and some methods will fit your goals better than others.
How you purchase the home and from whom you purchase it will depend on if you
are buying a home in foreclosure or buying an REO property.
Because of this, there are specific factors to consider when purchasing from
the homeowner (stages 1 – 3), at the auction (stage 4)
or from the bank (stage 5).
The Bottom Line: Foreclosed Houses Can Become New Homes
For some buyers, the relatively low price tag
of a foreclosed house can make a huge difference for their prospects of
homeownership. Before you dive in, just make sure you know what you’re getting
yourself into. Research where you can, and think carefully about whether you’re
ready to take on some of the potential risks of purchasing foreclosed property.
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