WORKOUT OPTIONS AND TERMS
Deed-in-Lieu To avoid foreclosure (“in lieu” of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process does not allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure.
Forbearance Agreement A lender may decide not to take legal action when a borrower is late in making a payment. Usually this occurs when a borrower sets up a plan that both sides agree will bring overdue mortgage payments up to date. The lender generally will take a portion of the reinstatement figure up front and have the homeowner pay the rest over the course of the next 3 - 9 months. This can raise the payment amount during the payback period or sometimes the forbearance agreement can be better managed with a temporary interest rate deduction over the period of the agreement.
• Special Forbearance A loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
Foreclosure A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower. Foreclosure laws are based on the statutes of each state.
• Pre-Foreclosure Sale Allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
• Reinstatement Period A phase of the foreclosure process where the homeowner has an opportunity to stop the foreclosure by paying money that is owed to the lender. A number is calculated to determine how much money the Homeowner needs to come up with to pay back all of their back payments, late fees, attorney fees, back interest, etc.
Loss Mitigation A process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan. The lender agrees to restructure or modify the terms of a mortgage without refinancing the loan.
• Mortgage Modification A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
Notice of Default A formal written notice to a borrower that there is a default on a loan and that legal action is possible.
Partial Payment A payment that is less than the total amount owed on a monthly mortgage payment. Normally, lenders do not accept partial payments. The lender may make exceptions during times of difficulty. Contact your lender prior to the due date if a partial payment is needed.
Refinancing Paying off one loan by obtaining another; refinancing is generally
done to secure better loan terms (like a lower interest rate).
Repayment plan An agreement between a lender and a delinquent borrower where the borrower agrees to make additional payments to pay down past due amounts while making regularly scheduled payments.
Short Sale A sale of a house in which the proceeds fall short of what the owner owes. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender avoids a lengthy and costly foreclosure, and the owner is able to pay off the loan.
TYPES OF MORTGAGES OR LOANS
ARM Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly payment amount, however, is usually subject to a cap.
• 2/28, 3/27 Fixed 30 year mortgage at a low introductory rate for two or three years and then the adjustments start to occur at regular intervals.
• 2/38, 2/37 Fixed 40 year mortgage at a low introductory rate for two or three years and then the adjustments start to occur at regular intervals.
o These programs were mostly offered to borrowers with bad credit (Subprime borrowers) or jumbo loans
• 3/1, 5/1, 7/1, 10/1 Fixed three to ten year terms at a low introductory rate until the adjustments start to occur at regular intervals.
Adjustable-Rate Mortgage (ARM) A mortgage loan that does not have a fixed interest rate. During the life of the loan the interest rate will change based on the index rate. Also, referred to as adjustable mortgage loans or variable-rate mortgages.
• Adjustment Date The actual date that the interest rate is changed for an ARM.
• Adjustment Index The published market index used to calculate the interest rate of an ARM at the time of origination or adjustment.
• Adjustment Interval The time between the interest rate change and the monthly payment for an ARM. The interval is usually every six months; or every one, three, five or ten years depending on the index.
4-Option ARM (also known as a Negative Amortization loan) This is a loan where the borrower has an option of four different payments each month. A traditional 15 year fixed, fully amortized payment (highest payment), a 30 year fixed, fully amortized payment (next highest payment), an Interest Only payment (lesser payment due to no principal balance being paid down) and a minimum payment (least expensive payment, but the payment doesn’t even cover the interest payment on the loan). The biggest problem with this loan is that most borrowers make the minimum payment and any outstanding interest continues to add to the principal balance, so the loan gets larger instead of smaller. If this is the case, the borrower will end up owing more than the value of the home or what they paid for it.
Balloon Loan or Mortgage A mortgage that typically offers low rates for an initial period of time (usually five, seven or ten years); after that time period elapses, the balance is due or is refinanced by the borrower.
• Balloon Payment The final lump sum payment due at the end of a balloon mortgage.
Bridge Loan A short-term loan paid back relatively fast. Normally used until a long-term loan can be processed.
Cash-Out Refinance When a borrower refinances a mortgage at a higher principal amount to get additional money. Usually this occurs when the property has appreciated in value. For example, if a home has a current value of $100,000 and an outstanding mortgage of $60,000, the owner could refinance $80,000 and have additional $20,000 in cash.
• No Cash-Out Refinance A refinance of an existing loan only for the amount remaining on the mortgage. The borrower does not get any cash against the equity of the home. Also called a "rate and term refinance.”
Conforming Loan A loan that does not exceed Fannie Mae’s and Freddie Mac’s loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.
Conventional Loan A private sector loan, one that is not guaranteed or insured by the U.S. Government.
Convertible ARM An adjustable-rate mortgage that provides the borrower the ability to convert to a fixed-rate within a specialized time.
• Conversion Clause A provision in some ARMS allowing it to change to a fixed-rate loan at some point during the term. Usually conversions are allowed at the end of the first adjustment period. At the time of the conversion, the new fixed rate is generally set at one of the rates then prevailing for fixed rate mortgages. There may be additional cost for this clause.
Fixed-Rate Mortgage A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change. 15 and 30 year fixed loans are the most common.
FHA Mortgage Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans. Assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults. This encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
Graduated Payment Mortgages Mortgages that begin with lower monthly payments that get slowly larger over a period of years, eventually reaching a fixed level and remaining there for the life of the loan. Graduated payment loans may be good if you expect your annual income to increase.
Hard Money Loan A specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of investment or commercial real estate. They are typically issued at much higher interest rates than conventional loans and are almost never issued by a commercial bank or other deposit institution. Hard money is similar to a bridge loan and is of a shorter duration, usually six months to two years. The loan to value never exceeds 65% - 70% to provide added security for the private investor.
High Balance Loan Sometimes called 80/20 loans. These are separated first and second liens to avoid Mortgage Insurance (MI). When the Homeowner secures their property in this way, the loan can also be referred to as a Piggy-back loan.
Home Equity Line of Credit (HELOC) A mortgage loan (lien), usually a second mortgage, allowing a borrower to obtain cash against the equity of a home, up to a predetermined amount.
Home Equity Loan (Closed end Second or Second Lien) A loan backed by the value of a home (real estate). If the borrower defaults or does not pay the loan, the lender has some rights to the property. The borrower can usually claim a home equity loan as a tax deduction.
• Second Mortgage An additional mortgage on a property. In case of a default the first mortgage must be paid before the second mortgage. Second loans are more risky for the lender and usually carry a higher interest rate.
• Subordinate To place in a rank of lesser importance or to make one claim secondary to another.
Interest-Only Loans A common mortgage feature that allowed for payment on a loan for a period of time that consisted of the interest payment exclusively. Generally, the interest rate was slightly higher, but lower in the amount of the monthly payment. This feature was offered for Fixed and Adjustable products for a period of 3 - 10 years depending on the program.
Jumbo Loan or Non-conforming loan is a loan that exceeds Fannie Mae's and Freddie Mac's loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans.
Lease Purchase (Lease Option) Assists low to moderate income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.
Negative Amortization Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn't covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.
No Cost Loan There are many variations of a no cost loan. Generally, it is a loan that does not charge for items such as title insurance, escrow fees, settlement fees, appraisal, recording fees or notary fees. It may also offer no points. This lessens the need for upfront cash during the buying process however no cost loans have a higher interest rate.
Reverse Mortgages A mortgage used by senior homeowners age 62 and older to convert the equity in their home into monthly streams of income and / or a line of credit to be repaid when they no longer occupy the home. A lending institution such as a mortgage lender, bank, credit union or savings and loan association funds the FHA insured loan, commonly know as HECM.
Sub-Prime Loan "B" Loan or "B" paper with FICO scores from 620 - 659. "C" Loan or "C" Paper with FICO scores typically from 580 to 619. An industry term used to describe loans with less stringent lending and underwriting terms and conditions. Due to the higher risk, sub-prime loans charge higher interest rates and fees.
Two Step Mortgage An adjustable-rate mortgage (ARM) that has one interest rate for the first three to ten years of its term and a different interest rate for the remainder of the term.
VA Mortgage A mortgage guaranteed by the Department of Veterans Affairs (VA).
FINANCIAL TERMS APPLICABLE FOR LOAN MODIFICATION
Balance Sheet A financial statement that shows the assets, liabilities and net worth of an individual or company.
Capital or Cash Reserves An individual's savings, investments, or assets.
Charge-Off The portion of principal and interest due on a loan that is written off when deemed to be uncollectible.
Debt - to - Income Ratio A comparison or ratio of gross income to housing and non-housing expenses. With the FHA, for example, the monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
First Mortgage The mortgage with first priority if the loan is not paid.
Fixed Expenses Payments that do not vary from month to month.
Gross Income Money earned before taxes and other deductions. Sometimes it may include income from self-employment, rental property, alimony, child support, public assistance payments, and retirement benefits.
Hazard Insurance Protection against a specific loss, such as fire, wind, etc., over a period of time that is secured by the payment of a regularly scheduled premium. Most often, this is included in the monthly mortgage payment and handled by an escrow account. If not, and the borrower chooses to pay this on their own it is called “no impounds”.
Interest Rate The amount of interest charged on a monthly loan payment, expressed as a percentage.
Liabilities a person’s financial obligations such as long-term / short-term debt and other financial obligations to be paid.
Lien A legal claim against property that must be satisfied when the property is sold. A claim of money against a property, wherein the value of the property is used as security in repayment of a debt. Examples include a mechanic's lien, which might be for the unpaid cost of building supplies, or a tax lien for unpaid property taxes. A lien is a defect on the title and needs to be settled before transfer of ownership. A lien release is a written report of the settlement of a lien and is recorded in the public record as evidence of payment.
Life Cap A limit on the range interest rates can increase or decrease over the life of an adjustable-rate mortgage (ARM).
Liquid Asset A cash asset or an asset that is easily converted into cash.
Loan Servicer The company that collects monthly mortgage payments and disperses property taxes and insurance payments. Loan servicers also monitor nonperforming loans, contact delinquent borrowers, and notify insurers and investors of potential problems. Loan servicers may be the lender or a specialized company that just handles loan servicing under contract with the lender or the investor who owns the loan.
Loan to Value (LTV) Ratio A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Mortgage-Backed Security (MBS) A Fannie Mae security that represents an undivided interest in a group of mortgages. Principal and interest payments from the individual mortgage loans are grouped and paid out to the MBS holders.
Net Income Your take-home pay, the amount of money that you receive in your paycheck after taxes and deductions.
Payment Cap A limit on how much an ARM's payment may increase, regardless of how much the interest rate increases.
• Rate Cap A limit on an ARM on how much the interest rate or mortgage payment may change. Rate caps limit how much the interest rates can rise or fall on the adjustment dates and over the life of the loan.
Payment Change Date The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the interest rate adjustment date.
Payment Due Date Contract language specifying when payments are due on money borrowed. The due date is always indicated and means that the payment must be received on or before the specified date. Grace periods prior to assessing a late fee or additional interest do not eliminate the responsibility of making payments on time.
PITI: Principal, Interest, Taxes, and Insurance The four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion than covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
• PITI Reserves A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.
Predatory Lending Abusive lending practices that include a mortgage loan to someone who does not have the ability to repay. It also pertains to repeated refinancing of a loan charging high interest and fees each time.
Prepayment Payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.
• Prepayment Penalty A provision in some loans that charge a fee to a borrower who pays off or re-finances a loan before it is due. These could run one to three years with some loans.
Prime Rate The interest rate that banks charge to preferred customers. Changes in the prime rate are publicized in the business media. Prime rate can be used as the basis for adjustable rate mortgages (ARMs) or home equity lines of credit. The prime rate also affects the current interest rates being offered at a particular point in time on fixed mortgages. Changes in the prime rate do not affect the interest on a fixed mortgage.
Principal The amount of money borrowed to buy a house or the amount of the loan that has not been paid back to the lender. This does not include the interest paid to borrow that money. The principal balance is the amount owed on a loan at any given time. It is the original loan amount minus the total repayments of principal made.
Property Tax A tax charged by local government and used to fund municipal services such as schools, police, or street maintenance. The amount of property tax is determined locally by a formula, usually based on a percent per $1,000 of assessed value of the property.
RESPA Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships.
Servicer A business that collects mortgage payments from borrowers and manages the borrower's escrow accounts.
• Servicing The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Terms The period of time and the interest rate agreed upon by the lender and the borrower to repay a loan.
Variable Expenses Costs or payments that may vary from month to month, for example, gasoline or food.
GOVERNMENT PROGRAMS
Fannie Mae Federal National Mortgage Association (FNMA) A federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors. By purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers. Also known as a Government Sponsored Enterprise (GSE).
Freddie Mac Federal Home Loan Mortgage Corporation (FHLM) A federally
chartered corporation that purchases residential mortgages, securitizes them,
and sells them to investors. This provides lenders with funds for new
homebuyers. Also known as a Government Sponsored Enterprise (GSE).
Ginnie Mae Government National Mortgage Association (GNMA) A government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment. As with Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.
HUD The U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans. It does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
VA (Department of Veterans Affairs) A federal agency, which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.
GLOSSARY OF OTHER LENDING AND REAL ESTATE TERMS
Amortization A payment plan that enables you to reduce your debt gradually through monthly payments. The payments may be principal and interest, or interest-only. The monthly amount is based on the schedule for the entire term or length of the loan, for example 15 or 30 years.
Annual Percentage Rate (APR) A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest of the mortgage.
Appraisal A document from a professional that gives an estimate of a property’s fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value or the property. Cost runs $450 to $575.
• Appraised Value An estimation of the current market value of a property.
• Appreciation An increase in property value.
• Assessed Value The value that a public official (assessor) has placed on any asset (used to determine taxes). This is not always an accurate value; can be higher or lower than market reality. Can be disputed at the county level if over-inflated.
• Comparative Market Analysis (COMPS) A property evaluation that determines property value by comparing similar properties sold within the last year. A modification process sometimes utilizes this method to determine property value. Cost runs $100 to $200.
Back End Ratio (debt ratio) A ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to gross monthly income.
Bankruptcy A federal law whereby a person’s assts are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.
• Chapter 7 Bankruptcy Requires assets be liquidated in exchange for the cancellation of debt. A modification process can be initiated after discharge date.
• Chapter 13 Bankruptcy Sets a payment plan between the borrower and the creditor monitored by the court. The Homeowner can keep the property, but must make payments according to the court’s terms within a three to five year period. A modification process can be initiated at any time during the payment period as long as the trustee agrees.
Broker A licensed individual or firm that charges a fee to serve as the mediator between the buyer and seller. Mortgage brokers are individuals in the business of arranging funding or negotiating contracts for a client, but who does not loan the money. A real estate broker is someone who helps find a house.
Cap A limit, such as one placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage. Payment caps do not limit the amount of interest the lender is earning, so they may cause negative amortization.
Cash Reserves A cash amount sometimes required of the buyer to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
Closing Costs Fees for final property transfer not included in the price of the property. Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, survey, title insurance, legal fees, and real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes. A common estimate of a Buyer's closing costs is 2 to 4 percent of the purchase price of the home. A common estimate for Seller's closing costs is 3 to 9 percent.
Deed A document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner’s signature. Also known as the Title.
Default The inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when payment has not been paid after 60 to 90 days. Once in default, the lender can exercise legal rights defined in the contract to begin foreclosure proceedings.
Depreciation A decrease in the value or price of a property due to change in market conditions, wear and tear on the property, or other factors.
Equity An owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
FICO Score FICO is an abbreviation for Fair Isaac Corporation and refers to a person’s credit score based on credit history. Lenders and credit card companies use the number to decide if the person is likely to pay his or her bills. A credit score is evaluated using information from the three major credit bureaus (Experian, Equifax, and Transunion) and is usually between 300 and 850.
Float The act of allowing an interest rate and discount points to fluctuate with changes in the market.
Front End Ratio A percentage comparing a borrower's total monthly cost to buy a house (mortgage principal and interest, insurance, and real estate taxes) to monthly income before deductions.
Guaranty Fee Payment to FannieMae from a lender for the assurance of timely principal and interest payments to MBS (Mortgage Backed Security) security holders.
Homeowner’s Insurance An insurance policy, also called hazard insurance, that combines protection against damage to a dwelling and its contents including fire, storms or other damages with protection against claims of negligence or inappropriate action that result in someone’s injury or property damage. Most lenders require homeowners insurance and may escrow the cost. Flood insurance is generally not included in standard policies and must be purchased separately.
Index The measure of interest rate changes that the lender uses to decide how much the interest rate of an ARM will change over time. No one can be sure when an index rate will go up or down. If a lender bases interest rate adjustments on the average value of an index over time, your interest rate would not be as volatile. You should ask your lender how the index for any ARM you are considering has changed in recent years, and where it is reported. (COFI and LIBOR are the most common).
Joint Tenancy (with Rights of Survivorship) Two or more owners share equal ownership and rights to the property. If a joint owner dies, his or her share of the property passes to the other owners, without probate. In joint tenancy, ownership of the property cannot be willed to someone who is not a joint owner.
Judgment A legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.
Margin The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Mortgage Banker A company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.
Mortgage Broker A firm that originates and processes loans for a number of lenders.
Mortgage Insurance A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. Insurance purchased by the buyer to protect the lender in the event of default. Typically purchased for loans with less than 20% down payment. The cost of mortgage insurance is usually added to the monthly payment. Mortgage insurance is maintained on conventional loans until the outstanding amount of the loan is less than 80 percent of the value of the house or for a set period of time (7 years is common). Mortgage insurance also is available through a government agency, such as the Federal Housing Administration (FHA), VA or through companies (Private Mortgage Insurance or PMI).
• Mortgage Insurance Premium (MIP) A monthly payment - usually part of the mortgage payment - paid by a borrower for mortgage insurance.
• Private Mortgage Insurance (PMI) A privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
Mortgagee The lender in a mortgage agreement. Mortgagor - The borrower in a mortgage agreement.
Mortgagor The borrower in a mortgage agreement
Multifamily Housing A building with more than four residential rental units.
Multiple Listing Service (MLS) Within the Metro Columbus area, Realtors submit listings and agree to attempt to sell all properties in the MLS. The MLS is a service of the local Columbus Board of Realtors®. The local MLS has a protocol for updating listings and sharing commissions. The MLS offers the advantage of more timely information, availability, and access to houses and other types of property on the market.
Secondary Mortgage Market The buying and selling of mortgage loans. Investors purchase residential mortgages originated by lenders, which in turn provides the lenders with capital for additional lending.
Title A legal document establishing the right of ownership and is recorded to make it part of the public record. Also known as a Deed.
Treasury Index Can be used as the basis for adjustable rate mortgages (ARMs). It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities.
Truth - in- Lending A federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.