Home Foreclosure Mortgage Terms and Concepts
For homeowners, foreclosure is not only a stressful and emotionally charged process; it is complicated. Foreclosure laws can also differ between states. Notwithstanding, a shared foreclosure, mortgage, and financial vocabulary is used to describe the foreclosure process.
One way to reduce the stress of the foreclosure process is to educate yourself on your options. Learning the basic legal and financial terms commonly used in the foreclosure and mortgage process will better prepare you to make informed decisions.
Adjustable-Rate Mortgage (ARM)
A mortgage loan with an interest rate is subject to change and is not fixed at the same level for the life of the loan. These loans usually start with a lower interest rate but can subject the homeowner to payment uncertainty when the rate adjusts.
Affidavit
A sworn statement under oath in writing, usually in the presence of a notary.
Arrearage
The past due balance on your real estate loan includes the balance due on the loan, unpaid interest, late charges, and statutory attorney fees and costs.
Assignment
The transfer of real property to be held in trust or used for the lender’s benefit.
Auction
Usually, the final phase in the foreclosure process is in which your property is sold to the highest bidder.
Appraisal
A written estimate of a property’s current market value prepared by a professional appraiser. When a property is appraised in connection with a loan, the appraiser is selected by the lender, but the homeowner usually pays the appraisal fee.
Balloon Mortgage
A mortgage loan that requires a large payment due upon maturity (for example, at the end of ten years).
Certificate of Sale
A legal document tendered to the winning bidder at a foreclosure sale stating their rights to the property once the borrower’s redemption period has expired.
Credit Bid
A bid is usually on behalf of the lender at a foreclosure auction. The bid amount must be less than or equal to the loan balance that is in default.
Chapter 13 Bankruptcy
This type of bankruptcy sets a payment plan between an individual debtor (such as a homeowner) and the creditor monitored by the bankruptcy court. Under a Chapter 13 plan, a homeowner can keep the property but must make payments according to the court’s terms, usually within three to five years.
Chapter 7 Bankruptcy
In the case of an individual debtor, bankruptcy requires all assets to be liquidated in exchange for the discharge of debts, other than debts the individual debtor chooses to reaffirm, and certain obligations that cannot be discharged as a matter of law.
Closing
When selling a house, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the signing of all the documents associated with the sale and the loan. There is no transfer of ownership on a refinance, but the closing includes repayment of the previous lender.
Co-Borrowers
One or more persons who have signed a loan note are equally responsible for repaying the loan.
Collections
The efforts a lender takes to collect past due payments.
Convertible ARM
An adjustable-rate mortgage loan can be converted into a fixed-rate mortgage during a specific time period.
Debt-to-Income
A comparison or ratio of gross income to housing and other expenses (or debts) the homeowner owes.
Deed
A document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner’s signature. Also known as the title.
Deed-in-Lieu of Foreclosure
The process by which a homeowner may voluntarily transfer the deed to a home to the servicer when payments cannot be made.
Deferred Payments
Loan payments that are authorized to be postponed as part of a workout process to avoid Foreclosure.
Deficiency
The difference between the balance outstanding on the loan and proceeds from the sale of the loan collateral or property.
Delinquency
Failure to make a payment when it is due. A loan is generally considered delinquent when it is 30 or more days past due.
Deed of Trust
A legal document in which the borrower (trustor) pledges the property to a neutral third party (trustee) as security for repayment of the loan to the lender (beneficiary).
Deed in lieu of Foreclosure
The process and legal instrument in which the lender agrees to accept the deed to your real property in lieu of foreclosing and selling your property.
Default
Usually, a breach of the obligations in a promissory note in which the borrower has failed to comply with the terms of repayment in accordance with the loan and which the lender considers the default to be material enough to be in breach of the contract.
Deficiency
The difference between the balance of your unpaid loan and the proceeds received by your lender from the Foreclosure and sale of your property.
Equity
An owner’s financial interest in a property is calculated by subtracting the amount still owed on the mortgage loan(s) from the property’s current market value.
Escrow Account
A separate account into which a portion of each monthly mortgage payment is placed; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.
Escrow Analysis
A periodic review of escrow accounts to make sure that there are sufficient funds to pay the taxes and insurance on a home when they are due.
Equitable Title
The legal right to possess property and acquire legal title once certain conditions are met.
First mortgage
A mortgage with a first-priority claim against the property if the homeowner defaults on the loan.
Fixed-Rate Mortgage
A mortgage loan with a fixed interest rate that remains the same for the life of the loan.
Foreclosure
The legal process by which a property may be sold and the proceeds of the sale applied to the mortgage debt. A foreclosure occurs when the loan becomes delinquent because payments have not been made or when the homeowner defaults for reasons other than the failure to make timely mortgage payments.
Foreclosure Prevention
Steps by which the servicer works with the homeowner to find a permanent solution to resolve existing or impending loan delinquency.
Fair Market Value
The market price of a property in the open market.
Forbearance
The lenders’ agreement to refrain from foreclosing on the homeowner’s property to afford the borrower additional time to repay the loan in full.
Government-Sponsored Enterprises (GSEs)
The U.S. Government created private corporations to reduce borrowing costs. For example, Fannie Mae and Freddie Mac are GSEs.
Hazard Insurance
Insurance is generally required under mortgage contracts to pay for loss or damage to a person’s home or property.
Home Equity Line of Credit (HELOC)
A way of borrowing money against the equity in one’s home to pay for things such as home repairs, college education, or other personal uses.
Housing Expense
The sum of a homeowner’s mortgage payment, hazard insurance, property taxes, and association fees.
Interest-Only Mortgage
A mortgage in which the homeowner pays only the interest and none of the outstanding principal balance on a loan for a specified amount of time.
Investment Property
A property not considered a primary residence purchased to generate income, profit from appreciation, or take advantage of certain tax benefits.
Judgment
The trial judge issues a judicial decree after the hearing and presentation of the evidence and which states the specific outcome of the lawsuit, specifically whether the plaintiff lost or won and the sums owed, if any, between the parties to the lawsuit. A judgment could be appealed to a higher court to review the decision if there was an error of law during the judicial proceedings.
Lien
The lender has the right to claim the homeowner’s property if the homeowner defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.
Loan-to-Value
(LTV) Ratio: In real estate lending, the outstanding principal amount of the loan divided by the appraised value of the property underlying the loan.
Lis Pendens
A written notice of a pending legal action filed and recorded in the county recorders office relating to the specific property and to notify subsequent buyers and lenders that a lawsuit has been filed involving the property or its possession.
Promissory Note
A written promise legally obligates you to repay a specified sum loaned to you by the mortgage lender.
Monthly Gross Income
The total income of all homeowners who sign a mortgage before any taxes or other deductions is made.
Mortgage
A legal document that pledges property to a lender as security for the repayment of a loan. The term is sometimes also used to refer to the loan itself.
Mortgage Insurance (MI)
Insurance that protects lenders against losses caused by a homeowner’s default on a mortgage loan. MI is typically required if the homeowner’s down payment is less than 20% of the purchase price.
Mortgage Modification
A change in the interest rate and term of the loan in response to the homeowner’s inability to make the payments under the existing contract.
Mortgage Payment
The amount of money paid on a monthly basis for principal, interest, property taxes, hazard insurance, and homeowner’s association fees, if applicable.
Negative Equity
The condition of being underwater or owing more on the property than the property is worth.
PITIA
Shorthand for principal, interest, taxes, insurance, and, if applicable, association fees, which are the components of the housing expense.
Pre-Foreclosure Sale
Sale in which the servicer allows the homeowner to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the first mortgage. Also referred to as a “short sale.”
Primary or Principal Residence
The property in which the homeowner will live most of the time is distinct from a second home or an investment property that will be rented.
Principal Reduction
The reduction in a loan balance that occurs with each payment of a positively amortized mortgage.
Private-Label Mortgages
Loans that are not owned, guaranteed, or insured by Fannie Mae, Freddie Mac, Ginnie Mae, or another Federal agency.
Recast/Re-Amortize
In certain instances, when a substantial payment or contribution is made to reduce the unpaid principal balance of a homeowner’s mortgage loan, the homeowner could have the unpaid principal balance recast or re-amortized. This is when the mortgage company recalculates the monthly payment based on the lowered principal balance, using the same interest rate and time remaining under the existing mortgage terms.
Redemption Period
Redemption is a period of time after your home has already been sold at a foreclosure sale in which you can reclaim your home. To reclaim your home, you must pay the outstanding mortgage balance and reasonable costs incurred during the foreclosure process.
Refinance
The process of replacing an existing mortgage with a new one by paying off the current debt with a new loan under different terms.
Repayment Plan
A process in which a homeowner promises to pay down past due amounts on a mortgage while continuing to make regular monthly payments on a property.
Second Mortgage
A loan with a second-priority claim against a property if the homeowner defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.
Servicer
A mortgage company that works on behalf of the lender in support of a mortgage, including collecting mortgage payments, ensuring payment of taxes and insurance, managing escrow accounts, managing communications with the homeowner, mitigating loss, initiating foreclosures, and otherwise “servicing” the mortgage.
Servicing Transfer
When one servicer is replaced by another servicer by the lender.
Short Sale
A sale in which the servicer allows the homeowner to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the first mortgage. Also referred to as a “Pre-Foreclosure Sale.”
Title
The documented evidence that a person or organization has ownership of real property.
Trust
A relationship in which one person holds title to a property, subject to an obligation to keep or use the property for the benefit of another.
Trustee
The name of the party that holds legal title to the property as collateral to secure your repayment of the loan.
Underwater
The condition of having negative equity or owing more on the property than the property is worth.
Underwriting
The lender or business entity is responsible for all the data about a homeowner’s property and income documentation to determine whether the mortgage modification should be issued. The person who does this is called an underwriter.
Unpaid Principal Balance (UPB)
Amount of a loan that is due to the lender. This does not include additional charges, such as interest.
Weighted Average Life
An average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding.
Workout
A way to resolve or restructure a loan to prevent a homeowner from going into Foreclosure is through a loan modification, forbearance, or short sale.
Reference Source: U.S. Department of the Treasury, U.S. Department of Housing and Urban Development (2024)
