By Sarah Everhart
Unfortunately the terminology used in lending transactions, especially those associated with the purchase of property, can be confusing and make the process stressful. The following are some common terms that you might come across in a lending document and the associated meanings. (For a comprehensive overview of lender requirements for beginning farmer loan programs check out this publication-http://extension.umd.edu/learn/pubs/review-lender-requirements-beginning-farmer-loan-programs-fs-975)
Acceleration– A provision that allows a lender to demand payment of the total outstanding balance or demand additional collateral under certain circumstances, such as failure to make payments, bankruptcy, nonpayment of taxes on mortgaged property, or the breaking of loan covenants.
Amortization– This is the way a loan or other debt is paid off by equal periodic payments (usually monthly), which are calculated to pay off the debt at the end of a fixed period of time. The calculations include the accrued interest on the outstanding balance.
Deed of Trust/Mortgage– A legal document or deed in which title to the property is broken down into legal title and equitable title. Legal title in real property is transferred to a trustee, who holds it as security for a loan between a borrower and lender described in the Note or Loan Agreement. The equitable title remains with the borrower. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary. This is the document the trustee uses to foreclose on the property if the borrower does not pay the mortgage.
Financing Statement– A document filed by the lender which gives notice to the public that the lender has an interest or right in the personal property of the debtor and it may take possession of and sell the property if the debtor fails to pay the debt. The interest of the lender in the debtor’s property is called a security interest because it secures a debt.
Grantor/Grantee– A Grantor conveys whatever title the Grantor possesses in real estate to a Grantee, the buyer. Grantor = seller Grantee=Buyer
Guarantor– A person giving a guarantee to secure a loan is a Guarantor. A Guarantor is usual liable for the full amount of the debt if the borrower fails to pay the obligation.
Joint and Several Liability– A form of liability where if two or more people are found liable for damages the winning plaintiff in such a case may collect the entire judgment from any one of the parties, or from any and all of the parties in various amounts until the judgment is paid in full.
Note/Promissory Note– A document that describes the details of the lending transaction such as that the borrower agrees to repay a loan at a stipulated interest rate within a specified period of time. The note may specify a variable, fixed or adjustable rate, and whether line-of-credit financing is being used. The Note is usually secured by a separate document such as a Deed of Trust or Security Agreement. Sometimes referred to as the Loan Agreement. Power of Sale- A clause commonly inserted in a mortgage and deed of trust that grants the creditor or trustee the right and authority, upon default in the payment of the debt, to advertise and sell the property at public auction, without resorting to a court for authorization to do so.Security Agreement- A document signed by a borrower granting a security interest to a lender in specified personal property pledged as collateral to secure a loan. Essentially, a security agreement states what happens to the collateral if a borrower fails to perform as promised.
Title Insurance– An insurance policy, usually issued by a title insurance company, which insures a buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller.
Title Search– An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Underwriting– The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.