REAL ESTATE LOAN TERMS: GLOSSARY AND DEFINITIONS
ACCELERATION CLAUSE
A common provision in a loan document giving the lender the right to demand immediate payment of the entire loan in the event the borrower is in violation of one or more loan provisions.
APPRAISAL
A written report of the value of a property, primarily based on an analysis of recent sales of comparable properties.
AFTER REPAIR VALUE (ARV)
The value of a property needing repairs once the repairs have been completed. It is often used by hard money lenders and investors in fix and flip loans.
ASSESSOR
A public official who establishes the value of real property for taxation purposes.
BACK END FEE
A fee charged by some lenders that is due when the loan is paid off.
BALLOON LOAN
A loan that requires the remaining principal balance to be paid at a specific point in time. This payment is referred to as a BALLOON PAYMENT.
BPO: BROKER PRICE OPINION
A written opinion by a licensed real estate broker, of the value of a property based on sold or listed comparable properties, current market conditions, and the broker’s general knowledge. A BPO is sometimes used by a lender in place of an appraisal.
BRIDGE LOAN
A short term loan that is intended to be paid off upon the sale or refinance of the property. Hard money loans are usually obtained for this purpose.
CAP
An interest rate cap is a provision contained in most adjustable rate loans. It is a limit on the interest rate adjustment both within short term periods and over the life of the loan.
CASH OUT LOAN
When a borrower obtains a loan for a higher amount than the current loan balance, he or she is said to take “cash out” of the loan transaction.
CLOSING: LOAN
The date on which the Trust Deed is signed and delivered, and the proceeds of the loan are delivered to the borrower.
CLOSING: REAL ESTATE SALE
The date on which the title to the property is conveyed to the buyer and the sale proceeds are transferred to the seller. This process is almost always handled by a title company in Colorado.
COLLATERAL
The asset pledged by a borrower to secure payment of a loan. In a real estate loan, the property is the collateral and the borrower risks losing it if the loan is not repaid in accordance with the terms of the loan.
DEED IN LIEU OF FORECLOSURE
A conveyance of the title to the property by the borrower to the lender when the borrower is in default and wishes to avoid the foreclosure process.
DEED OF TRUST
See Trust Deed.
DEFAULT
Failure of the borrower to honor one or more of the terms in the loan documents. In most cases, this will be a failure to make on or more payments on time but it can also be failure to pay real estate taxes or hazard insurance premiums.
DUE ON SALE CLAUSE
A provision in a Note and/or Trust Deed that allows the lender to demand payment in full if the borrower sells the property that serves as the collateral for the loan.
ENCUMBRANCE
Anything that affects or limits the title to a property, such as trust deeds, liens, leases, easements, or restrictions. Encumbrances are typically recorded in the County Clerk and Recorder’s office in the County where the property is located.
EQUITY
The difference between the value of the property and the total of the outstanding loan(s) on the property. For example, if the property is worth $100,000 and the outstanding loan(s) total $40,000, then the equity is $60,000.
EXIT STRATEGY
The borrower’s plan to repay the loan. This plan is usually to sell the property or to refinance it.
FORBEARANCE AGREEMENT
An agreement by the lender not to exercise the right to foreclose in exchange for an agreement by the borrower to a plan that will cure a default. It is not a permanent loan modification.
FORECLOSURE
The legal process by which a borrower in default under a trust deed or mortgage is deprived of his interest in the property. This usually involves a forced sale of the property at public auction.
FORM 4506
Request for Copy of Tax Return, an IRS form used to request a coy of the borrower’s tax returns. Some lenders require this form as a part of the application process.
JOINT TENANCY
A form of ownership or taking title to property which means that each party owns the whole property and that ownership is not separate. In the event of the death of one party, the survivor owns the property in its entirety. A married couple will typically take title as joint tenants.
LEGAL DESCRIPTION
A property description, recognized by law, that is sufficient to locate and identify the property.
LIEN
A legal claim against the title of a property that must be paid when the property is sold and can be foreclosed on by the lien holder. A Trust Deed is a lien. Other examples of liens are tax liens, judgment liens, and mechanic’s liens.
LOAN ORIGINATION FEE
A fee charged by a lender, usually expressed as a percentage of the loan amount (points), for originating and closing the loan.
LTV (LOAN TO VALUE RATIO)
The relationship between the amount of the loan and the value of the property. This is usually expressed as a percentage. For example, if the value of the property is $100,000 and the loan amount is $40,000, then the LTV is 40%.
MATURITY
The date on which the principal balance of a loan comes due is said to be the maturity date.
MODIFICATION
When a lender agrees to modify the terms of a loan without requiring a refinance, this is called a modification. Examples of loan modifications are an extension in the due date of the loan and/or a change in the interest rate or monthly payment.
NOTE
See Promissory Note
POINT
A point is 1% of the amount of the loan. It is a fee charged by the lender, usually at the origination of the loan. 4 points would be 4% of the amount of the loan.
PREPAYMENT PENALTY
A fee that may be charged to a borrower who pays off a loan before it is due. It is a clause that is contained in the loan documents. It is usually expressed as either a percentage of the loan amount or a specified number of months of interest.
PROMISSORY NOTE
A written promise to repay a specified amount over a specified time at a specified rte of interest. The Promissory Note is secured by a Deed of Trust that is recorded against the collateral in the County Clerk and Recorder’s office in the County where the collateral is located.
QUITCLAIM DEED
A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
RECORDER
The public official who keeps records of transactions that affect real property in the area. In Colorado, this is the County Clerk.
RECORDING
The noting in the office of the County Clerk and Recorder of the details of a properly executed document such as a Deed, Trust Deed, Release of a Trust Deed, or lien, thereby making it a part of the public record.
REO (REAL ESTATE OWNED)
A class of property owned by a lender after an unsuccessful sale at a foreclosure auction. As soon as the lender repossesses the property it is listed on their books as REO and categorized as a non performing asset.
SHORT SALE
A sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts, and whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt.
TENANCY IN COMMON
As opposed to joint tenancy, this type of ownership does not pass ownership to the others when there are two or more people on title.
TITLE
A legal document evidencing a person’s right to ownership of a property.
TITLE COMMITMENT
A commitment on the part of a title insurance company to provide the proposed insured with title insurance once a title search has been completed and the requirements for coverage met.
TITLE INSURANCE
Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from defects in the title of a property.
TRUST DEED
A deed wherein the legal title to real property is transferred to a Trustee, which holds it as security for a loan between a borrower and lender. The borrower is the Trustor and the lender is the Beneficiary of the Trust Deed. In Colorado, the Trustee is know as the Public Trustee. The Public Trustee is the County Clerk and Recorder in most Colorado counties. The Trust Deed is recorded in the County Clerk and Recorder’s Office in the county where the property is located.
TRUSTEE
A fiduciary who holds or controls property for the benefit of another.