By Mike Heayn Real Estate 101
IT SEEMS EVERYWHERE YOU TURN THERE is another gloom and doom real estate story in the media. If you are in financial trouble and possibly on the brink of losing your home, it is important to have an understanding of real estate terminology. Below are real estate terms and explanations to give you a little help while you’re dealing with a tough situation.
DEFAULT Just as it sounds, defaulting on a home loan is a failure to make a loan payment. When you pass the grace period and have not made a payment, you are in default of the loan. A loan with no payment 30 days after the due date is usually in default. Although most home loans are similar, every promissory note spells out how a borrower is in default of a loan. Unfortunately, many lenders will not talk to borrowers about short sales or loan modifications until a loan has been in default for two or more months.
DELINQUENCY Just like a credit card payment, when you fail to make a home loan payment by the due date, the loan is delinquent. Lenders will report a delinquent payment to the credit bureaus. The difference between a default and delinquency is time. If a payment is made within 30 days of the due date, but after the grace period it is delinquent. Obviously all home loans are different, but any lack of payment after 30 days from the due date is in default.
FORECLOSURE Possibly the scariest word to any homeowner a foreclosure is caused by a lack of loan payments putting a loan in default. A foreclosure is the process by which the note holder (usually the lender), takes control of the collateral (usually the house), and forces a sale at public auction. Depending on the state you live in, the foreclosure process can begin 30 days after you default on a loan or up to a year later.
SHORT SALE In real estate terms, it is when a real estate asset, such as a home, is sold for less than the mortgage owed. For example, Joe sells his home for $800,000 when he owes the bank $1,000,000. Some lenders are willing to do short sales to avoid the foreclosure process since it can be more cost effective. However, not all lenders are willing to do short sales and many lenders will not discuss the option until a borrower is in default of a loan.
INTEREST RATE ADJUSTMENT Possibly the three words that will epitomize the subprime debacle are interest rate adjustment, which is when an interest rate adjusts. An interest rate is made up of two components: A margin, which is set by the bank, and an index. The index is usually tied to a common index such as the 12-month Treasury average of the one-year Treasury bill or 12 MTA. Many subprime loans were fixed for two years at low rates but adjusted to higher levels after the fixed term. Many borrowers are experiencing that adjustment today, which has caused many payments to skyrocket — sometimes doubling.
If you are in trouble or realize you are about to be in trouble with your loan, talk to your lender to see if they can help you. Sometimes lenders will not talk to borrowers until they are in default, but try to avoid that since a delinquent loan payment will negatively impact your credit.
MIKE HEAYN is a Washington Mutual multi-family loan consultant. He (310) 428-1342, or e-mailed at
Originally published in the Santa Monica Daily Press print edition on July 2, 2008. Read the original PDF.