Our partnership group is in the business of helping troubled homeowners to stop foreclosure sale dates and help these homeowners to apply for Home Loan Modifications which lower interest rates and payments. We find that the terms we use to discuss this process for saving homes and getting homeowners back current on their loans are unfamiliar to most people. This is because they deal with the process of buying a home only very rarely in their lifetime.
Below are some of the most common terms for dealing with Foreclosures and Home Loan Modifcations
Foreclosure: This is a process by which your Lender repossesses your home when you default on the terms of the money that your Lender loaned to you to pay for your home when you purchased it.
Loan Officer: The Licensed Professional who helped you to arrange your loan and the terms of that loan.
Mortgage Loan Broker: This term applies to the company that the Loan Officer works for, and which arranged for a Lender to loan you the money to fund for your home purchase. This can be the same company as the Lender. You may have used a Mortgage Loan Broker to help you obtain a loan, or you may have used a Loan Officer who works directly with the Lender. Either way the money was funded by the Lender.
Principal Balance: This is always the amount of money that you still owe on your home after each payment. The Principal Balance is reduced with each payment by the amount of the payment which goes toward Principal Balance. Monthly interest is always charged on the Remaining Principal Balance and not on the original loan amount.
Promissory Note: The document that a Borrower signs, which is exactly as it sounds. It is your promise to pay the Lender back the money, that was loaned to purchase the house described and the terms of that loan. These terms would include items such as: interest rate; length of the loan; Principal (borrowed amount); Monthly Payments etc. Promissory Notes can be used for many other types of loans that homes and real estate. But Promissory Notes are always used for home purchases.
Interest Rate: This is the percentage rate that you are paying the Lender for using and keeping the money that was loaned to you. This interest usually charged as an annual rate, but paid monthly. The monthly payment that you pay includes both the payment towards the interest owed (this is the Lender’s profit) and payment toward the Principal Balance which remains to be paid.
Fixed Rate Loan: This is a loan that always maintains the same interest rate on the Principal Balance for the life of the loan. Most home loans are 15 year loans or 30 year loans. There are 180 equal monthly payments in a 15 year loan. There are 360 equal monthly payments in a 30 year loan.
Adjustable Rate Loan (ARM): Adjustable Interest Rate Loans (Adjustable Rate Mortgage) are known by their acronym
ARM. ARM loans adjust up or down according to the terms of loan. If the interest rate of an ARM loan adjusts upward to a higher interest rate, then your monthly payment will increase. If the interest rate adjusts downward to a lower interest rate, then your monthly payment will go down. Most ARM Loans are tied to other forms of interest, so they rise when interest rates rise and fall as interests rates fall. During the last 10 years, many ARM Loans were tied to time periods and would rise just because a certain time period had passed. These loans only go up and do not rise and fall with the economy.
Mortgage: Sometimes used to mean the same thing as the word “loan”, although this not correct. This is the document that you signed which created the loan and loan terms. This is recorded at your Courthouse and which the Lender uses to show why they are legally the Entity that loaned you the money for your house. This also is the document which contains the terms that allow the Lender to repossess your home if you do not pay for it. This document is usually used in States that use Judicial or “lawsuit” foreclosure. It typically takes longer to foreclose in these states, but can have greater negative effect on the foreclosed Borrower.
Deed of Trust: This item is a document similar to “Mortgage” above. It is used in Non-Judicial Foreclosure States. The Deed of Trust is a recorded document signed by you and the Lender which describes your Loan (Promissory Note) and gives the Lender the right to sell your home at auction if you default on your loan. In these States the Lender does not have to take you to court. A typical default would be a failure to make your payments on time to the Lender.
Home Loan Modification Process: The idea of Loan Modification is not new, but the use of it certainly was very rare historically compared to the wide spread use of the process today. Due to the very large number of badly written loans over the last 10 years and the very high current foreclosure rate, Lenders are seeing the need to try to get homeowners into monthly payments that are affordable. Each foreclosure costs a Lender a lot of money and hurts the value of homes everywhere. It generally believed today that changing some of the terms of a home loan to reduce the payment is preferable to foreclosure. A Home Loan Modification does exactly this, it changes the interest and monthly payment to keep the owner in an affordable situation.