Rehab Lending Terms and Definitions [Quiz]
Every day we talk to people about our loan products using words like, points, interest rate, prepayment fees, and underwriting. Rarely does anyone ask us what these terms mean, but at some point during the loan process, we realize they do not know the definitions of these important words. I suspect they think they should know, so are embarrassed to ask. In order to make the process easier to understand, I have defined some of the most commonly used terms below. Study the words and their definitions first, then take the quiz at the end of the article!
What are points?
Points are a percentage of your loan amount that is paid to your lender as an origination fee at closing. One point is worth 1% of your loan amount, so a $100,000 loan with 3 points, would mean you would need to pay your lender $3000 at closing. Learn more about what you’ll need to know at closing.
What does interest rate mean?
The interest rate is the amount of interest you will pay on a monthly basis for the money you have borrowed. Typically, it is quoted to a borrower as an annual rate, meaning that an interest rate of 14.9%, means that a payment of 1.24% of the loan amount each month that the loan is outstanding. If the loan is for $100,000 and the interest rate is 14.9%, the monthly payment would be $1,241.67 (($100,000 x .149)/12).
What does interest only mean?
Interest only means that the monthly payments cover the fees from the lender, but do not pay down the principal of the loan. These loans are non-amortizing, meaning the total amount due to the lender does not change; only interest is being paid each month.
What are prepayment prohibitions, fees or penalties?
Some lenders require that a borrower keep a loan outstanding for a certain period of time before it can be paid off. The language of the loan documentation should be reviewed to make sure that there is nothing in the wording that prohibits paying off before a certain period of time, or requires that a fee or penalty be paid for early payoff.
What does underwriting mean?
Underwriting is the process done by the lender that examines your credit, income and financial history to determine if you are approvable for the type and amount of loan requested. The underwriter is generally the decision maker on credit worthiness and any request from them for additional information should be quickly responded to.
What is a mortgage, deed of trust or security deed?
These vary in name and language from state to state, but all have the effect of giving the lender a security interest in the real estate named in the document. They are generally filed with the real estate recording office of the county in which the real property is located, and give notice to others that the property is encumbered by a lien in favor of the lender.
What is a promissory note?
A promissory note is a promise to pay the amount set forth in the language of the document, under the conditions set forth in the note itself. If signed in conjunction with a mortgage, deed of trust or security deed, it is considered secured debt. If signed alone, with no supporting collateral, it is considered unsecured debt.
It’s time to put your knowledge to the test!
Take our quiz below to see how you much you know about rehab lending terms!