Seller-Financing Glossary

 

Account Servicing: See Contract Servicing

Agreement for sale: A written contract between buyer and seller covering the sale of the property, also known as contract for deed, land contract, agreement for deed, and real estate contract. Seller retains title until paid in full in this form of sale. Terms of payment, remedies and legal description are all contained in the same document.

Alienation clause: See Due on Sale Provision

Annual percentage rate (APR): The cost of credit expressed as an annual percentage of the loan amount. It usually includes a combination of the base interest rate, points, and other fees the borrower paid to the lender to acquire a mortgage. The APR, which is usually slightly above the actual interest rate alone, is the most meaningful measure for comparing the cost of mortgage loans offered by different lenders.

Balance: The amount of remaining principal to be paid on a loan; sometimes known as the outstanding balance.

Balloon mortgage: A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at a specified date, usually at the end of the term.

Balloon payment: A payment under an installment note or obligation, which is substantially larger than previous installment payments and which often, pays the debt in full. Balloon payments can also be required annually to augment periodic monthly payments, thus causing a longer-term payment schedule to become much shorter.

Buyer Statement: A statement of contract account status, typically including a reminder to the buyer of his or her monthly payment amount and the due date of payment.

Capital gain: The taxable profit from a sale or exchange of a capital asset. The capital gain is the difference between the sales price and the basis of the property.

Carry-back financing: The seller takes back a note for all or part of the purchase price secured by a mortgage or deed of trust It can also refer to a seller selling on a real estate contract.

Collection: See Contract Servicing

Contract of sale: See Agreement For Sale.

Contract Servicing: An account established with an independent third party who receives payments from property buyers as agent for the sellers, calculates interest, principal and balance, may also take custody of tax and insurance reserve payments and make those payment obligations, and performs such administrative activity as is the responsibility of the seller on carry-back financing. Generally increases the security of the investment.

Coupon book: A book of printed tickets furnished to the borrower. One coupon is returned each month with a check or money order, enabling the mortgage servicer to identify the payment by name, loan number, and type of loan.

Deed: A written document by which a property owner (grantor) conveys to another (grantee) an ownership interest in a real property. There are many types of deeds, such as a warranty deed, a bargain and sale deed, a quitclaim deed and a trustee's deed. The major difference among the various kinds of deeds is the type of covenants made by the grantor.

Deed in Lieu of Foreclosure: A deed given by a borrower conveying mortgaged property to the lender. Given when the mortgage is in default as an alternative to a foreclosure action.

Deed of trust: A devise used to create an interest in property as security for payment of a debt (usually a promissory note). Under the deed of trust, authority to sell the real estate upon default of the debtor is transferred to a third party (trustee) by the grantor (borrower) to protect the beneficiary (lender). When the borrower fully repays the note secured by the deed of trust, the trustee executes a full reconveyence back to the grantor. If the borrower defaults under the terms of the note, the trustee, following a statutory procedure, conducts a trustee's sale.

Default: A failure to perform a duty or obligation that is part of a contract. The most common default is failure to make payments; other defaults are failure to maintain insurance coverage and failure to pay taxes.

Delinquency: A loan in which a payment is overdue but not yet in default.

Down payment: The part of the purchase price of a house that the buyer pays in cash and does not finance with a mortgage. The down payment commonly ranges from 5% to 20% of the purchase price.

Due on sale provision: A clause found in mortgages and deeds of trust requiring the borrower to pay off the debt when he sells the secured property.

Due-in-full date: The date the loan is due to be fully paid off.

Earnest money: The cash deposit paid by a prospective buyer of real property as evidence of his good faith intention to complete the transaction. May not be refundable in the event the buyer changes his mind.

Encumbrance: A lien attached to real property, which may lessen its value. There are two major types of encumbrances, those that affect the title to the property (such as a loan) and those that affect the physical condition of the property (such as easements).

Equity: The value remaining in property after deducting the amount of all liens and other charges from its marketable sales price.

Equity Ratio: The percentage relationship between the equity in a property and the total value of that property.

Escrow: The process by which money and/or documents are held by a disinterested third person until the conditions of the escrow instructions have been met. When the terms have been met, the money and documents are delivered. Also has meanings in contexts other than real estate closings, principally concerning holding funds for required performances.

Escrow collection: An account wherein a neutral third party holds documents until the completion of payment, during which time the escrow agent maintains an accounting of the interim payments. The party is also prepared to quote payoff requirements and to make delivery of the documents which are the subject of the escrow collection account (in many states a licensed function).

First mortgage: A real estate loan that creates a primary lien against real property.

For Sale By Owner: A property that is sold by the owner.

Forbearance: The act of refraining from taking legal action despite the fact that the mortgage is in arrears. It is usually granted only when a mortgagor makes satisfactory arrangements to pay the amount owed at a future date.

Foreclosure: A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payments or other provisions of the mortgage documents.

Fulfillment deed: A deed given on payoff of a real estate contract wherein the vendor conveys title in the described property to the vendee, and which makes the additional statement that the contract is fulfilled, thus canceling any further obligation.

Grace period: An agreed upon time after an obligation is past due during which a party can perform without being considered in default. For example, a payment is due on the ist, but the mortgage contains a 10-day grace period so the payor is not in default as long as payment is made by the nth.

Holding escrow: An arrangement where an escrow agent holds the final title or release documents until an obligation is paid in full.

Installment debt: Debts with a fixed number of months to repay.

Installment contract: See Agreement For Sale.

Installment note: A promissory note providing for installment payments.

Installment sale: A method of sale using an installment note or contract, also in tax language a method of reporting income received from the sale of real estate where the price is paid in installments. Seller financing typically involves an installment sale.

Interest: The sum charged by a lender in return for the use of money. Keep in mind that at some point, the seller may wish to resell the note for a lump sum. Notes with low interest rates will be significantly discounted.

Land contract: Agreement for deed, contract for deed, land contract, real estate contract are all synonymous with contract of sale. They differ little from state to state. Seller retains title until paid in full in this form of sale. Terms of payment, remedies and legal description are all contained in the same document.

Late payment penalty: An added charge a borrower is required to pay as a consequence of failing to pay a regular loan installment when due. It does not typically include additional interest and can only be required if a late payment clause is written in the contract. The penalty may be a stated sum, such as $50 if the payment is more than ten days late, or it may be a percentage of the payment.

Lien: A charge or claim which one person (lienor) has upon the property of another (lienee) as security for a debt.

Note: A general term for any kind of paper or document signed by a borrower that is an acknowledgment of the debt, and is, by inference, a promise to pay. When the note is secured by a mortgage, it is called a mortgage note and the mortgagee is named as the payee.

Notice of default: A notice to a defaulting party that there has been a default, usually providing a grace period in which to cure the default. This would typically be included to help the buyer and seller avoid foreclosure.

Owner financing: See Seller Financing.

Points: Fees charged by lenders that are expressed as a percentage of the mortgage amount. One point equals 1% of the amount of the mortgage.

Position: A first position real estate loan creates a primary lien against real property. A second position mortgage has rights subordinate to a first mortgage. Second mortgages are much more difficult to resell.

Prepayment penalty: The amount set by the creditor as a penalty for paying off the debt before a specified date. This is generally put in place if the seller wants to sustain the interest payments for the entire term of the contract.

Principal: The remaining amount borrowed, on which interest is calculated.

Promissory note: A promise to pay and it is the definition of payment terms. May reference a mortgage that secures it, but it is not the security instrument.

Probate: The formal judicial proceeding utilized to pay the debts and distribute the property of a deceased person to his or her heirs.

Purchase and sale agreement: A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold/purchased.

Real estate contract: A written agreement between a seller (vendor) and buyer (vendee) for the purchase of real property. When the conditions of the contract (including payment of the purchase price) have been met, the seller must deliver a deed to the buyer. Also known as a land sale contract, contract for deed, agreement for deed.

Seasoned mortgage or deed of trust: A loan or contract two or more years old, which reveals whether the payments are stable and consistent.

Second mortgage: A mortgage that has rights subordinate to a first mortgage. A property will have only one "first mortgage." It may have more than one "second" or junior mortgage against it.

Seller's assignment of contract and deed: This document transfers the seller's interest under a real estate contract to another. The transfer includes the right to receive payments under the contract and the obligation to deliver a deed to the purchaser when the contract is paid off.

Seller financing: An extension of credit provided by the seller to the buyer to cover part or all the sale price. It's usually in the form of a note secured by a deed of trust, and can also be a mortgage or a real estate contract.

Simultaneous Close: A seller-financed transaction where the seller carries the contract and then resells the note to a third party upon closing. Typically used when the buyer has imperfect credit.

Term: The period of time between the commencement date and termination date of a note, mortgage, legal document, or other contract.

Title: The right to and evidence of ownership of property.

True Escrow: A collection account wherein the escrow agent holds the final conveyance document to a real estate contract or note and deed of trust or mortgage, and so can make delivery of those documents to the payor upon satisfaction of the contract or note.

Usury: Charging a rate of interest in excess of that permitted by law.

Warranty deed: A deed in which the grantor fully warrants clear title to the premises. Also called a statutory warranty deed.

Wraparound: A mortgage or contract sale, which includes balance due on an underlying mortgage or contract and an additional amount advanced by the seller. The entire loan combines two or more debts and is treated as a single obligation. In some cases, a single payment is made to the seller, who then uses a portion of the payment to pay the underlying mortgage.

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