Mortgage Note Buyers and Sellers, Loan Servicing, and Hard Money Lenders

Owner Financing Glossary

What does that mean again?
Refresh your vocabulary with our Owner Financing Glossary

  • Amortization Period – a periodic payment plan to pay a debt in which the interest and a portion of the principal is included in each payment by an established mathematical formula. Most commonly it is used on a real estate property loan or when financing an automobile or other large purchase. By figuring the interest on the declining principal and the number of years of the loan, the monthly payments are averaged and determined. Since the main portion of the early payments is interest, the principal does not decline rapidly until the latter stages of the loan term. If the amortization leaves a principal balance at the close of the time for repayment, this final lump sum is called a “balloon” payment.
  • Balloon- A large payment on a note, usually due at the end of the payment schedule. Notes with balloon payments are considered riskier than fully amortizing notes unless there is a clear and obvious exit strategy. The availability of affordable conventional financing is crucial.  In the market we have today, a good balance between the risk of a balloon, and the ‘time value of money’ issue, is to create a balloon that is due 10-12 years out.
  • Deed of Trust a document which pledges real property to secure a loan. The property is deeded by the title holder (trustor) to a trustee which holds the title in trust for the beneficiary (the lender of the money). When the loan is fully paid, the trustor requests the trustee to return the title by reconveyance. If the loan becomes delinquent the beneficiary can file a notice of default and, if the loan is not brought current, can demand that the trustee begin foreclosure on the property so that the beneficiary may either be paid or obtain title.
  • Discounting – The practice of adjusting the price of a note to compensate for factors such as term, payments, interest rate and security.
  • Down payment – the payment is the initial upfront portion of the total amount due and it is usually given in cash at the time of finalizing the transaction.
  • Escrow – A neutral third party stakeholder that receives the instruments, contracts, documents and funds in a transaction as needed from both parties. Escrow sees that the terms and conditions of the contract are fulfilled according to the escrow instructions.
  • Equity – The amount left over after subtracting the loans from the value of the property.
  • Face Value – The original principal balance appearing on the face of the note.
  • Loan to Value (LTV) – The measure of the security of a given loan. It is calculated by taking the amount of the loan and any senior loans and dividing that by the properties current value.
  • Note – A written promise to pay with all terms and conditions of the obligation signed and in the proper legal format.
  • Note Finder – cash flow specialists who have an insider’s understanding of what note buyers are actually looking for. They will act as the go-between for the buyer and seller, scouring newspaper ads and MLS listings for properties advertised as For Sale By Owner. Getting a note finder on board early in the process can help a note seller immensely when it comes time to sell the note to an investor. A qualified, knowledgeable note finder can help design a note with the sort of payment characteristics that would make it salable and attractive to investors…before the mortgage note is even written!

  • Note Holder – The person or entity who owns the promissory note and is entitled to collect all its remaining payments.
  • Note Professional – Expert in seller financing techniques and strategies. Able to put together real estate transactions outside of conventional financing methods that benefit both the buyer and seller.
  • Note Seasoning – A note is considered seasoned when at least 12 payments have been received. A well-seasoned note is more valuable than a “green” note
  • Owner financing -Another term used for Seller financing, the terms are inter-changable.
  • Payor – The person obligated to make the payments on a note.
  • Protective Equity – The cash down payment made at the time of purchase represents the hard equity most important in determining the safety of a note. The less protective equity available, the less valuable the note is. A potential note buyer will always get an appraisal to establish the fair market value of the collateral securing the note;
  • Sales Price – refers to the amount that the property sold for.
  • Secured Loan – A loan (note) which has specific collateral pledged to secure its payment
  • Seller financing – Seller Financing occurs when real estate is sold and the seller provides financing to the buyer for all or part of the sale price. The seller becomes the lender, or the bank, by offering financing to the buyer in the sale of their property.
  • Settlement Statement(HUD) – A breakdown of costs involved in a real estate sale.  Before real estate is sold, federal law requires both the buyer and seller to provide a settlement statement. This official document lists all the costs involved in the sale. A settlement statement is typically prepared by either a lender or a third party known as an escrow agent, who must follow the regulations set forth in the Real Estate Settlement Procedures Act of 1974 (RESPA)
  • Term – The amount of time it takes a note to mature
  • Title Insurance – insurance that compensates for loss from title defects or encumbrances (as liens) that were unknown but should have been discovered at the time the policy was issued. Title insurance in the United States is indemnity insurance against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally a product developed and sold in the United States as a result of the comparative deficiency of the US land records laws. It is meant to protect an owner’s or a lender’s financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy
  • Warranty Deed – This Warranty Deed is a legal document that transfers the title of real property from one party to another. This type of deed provides a guarantee that the transfer is lawful, and requires the transferring party to defend against any adverse claims of ownership. A warranty deed provides the highest degree of protection to purchasers of real property. This should be used by individuals or entities that want to transfer the title of real property while providing a guarantee of rightful ownership.

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