Common Foreclosure-Related Definitions | Mortgage Terms & Definitions

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October 24, 2014 | By RGR Marketing Blog

Understanding More About Your Mortgage

If you’re new to the mortgage business, or you’re a first time home buyer who has just entered the market, your head may be swimming with questions and confusion over the abundance of terminology being thrown around. Below, you’ll find several of the most common foreclosure-related terms, and working definitions for each. These terms represent processes or actions that are involved with foreclosure, and are often used by investors, real estate professionals, and mortgage lenders.

Principal Write-Down or Principal Reduction

A principal write-down or principal reduction is essentially a decrease in the principal portion of a loan, which is often a home mortgage. The principal is written down to reduce the outstanding balance, typically on qualifying properties with negative equity. In many cases, this is performed to avoid having to foreclose on a property, because reducing the principal may end up being less costly to a bank or mortgage broker than going through the foreclosure process.

In the event of a principal write-down, a homeowner has to meet certain requirements to first qualify, such as proving the ability to make timely payments.

Home Mortgage Modifications

A mortgage modification is just about exactly what it sounds like: the process of modifying the original terms of the mortgage contract that were agreed upon by both the borrower and the lender. The modification of a loan is also often referred to as debt rescheduling.

A home mortgage can go through the modification process in many different ways, all of which tend to benefit the borrower. These may include:

Penalties or late fees associated with the mortgage can be reduced
The interest rate can be adjusted
The homeowner’s monthly payment may be capped according to a specific percentage of the household income
The mortgage can be changed to a fixed rate from a floating one
The mortgage principal can be reduced
A homeowner can participate in a mortgage forbearance program
The loan term can be lengthened

Short Sale of a Home

The short sale appears differently to various parties involved – from the perspective of the buyer, a short sale looks like cheap real estate; but for a homeowner who has fallen on tough financial times, a short sale might represent a way around foreclosure.

Typically, short sales occur when negative equity is involved with a home – the property is worth less than what is owed on the mortgage, often referred to as an upside-down loan, which can be a result of a few different scenarios including payments that have been missed, or a reduction in property value. When a short sale occurs, the lender agrees to accept a reduced amount for the home, with the total paid amounting to less than the mortgage balance.

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is an option that a borrower has access to, in order to avoid foreclosing on a home. In the event of a deed in lieu of a foreclosure, a borrower deeds the home or collateral property back to the lender. For their part, the lender agrees to release any and all obligations agreed to as part of the mortgage. Both the borrower and the lender must agree of their own will (voluntarily) and in good faith.

A potential option taken by a mortgagor (a borrower) to avoid foreclosure under which the mortgagor deeds the collateral property (the home) back to the mortgagee (the lender) in exchange for the release of all obligations under the mortgage. Both sides must enter into the agreement voluntarily and in good faith.

Out of Court Workouts

An out of court workout refers to a type of debt restructuring process whereby a homeowner who is facing financial distress can renegotiate current debt, including a home mortgage. By going through this process, a homeowner has the ability to restore liquidity to their financial picture, essentially replacing old debt that is unsustainable, with new debt that fits with their financial picture. Out of court workouts are also referred to as out of court restructurings.

[Photo Credit: Credit Blog]

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