Zack Childress Real Estate Terms

Zack Childress Real Estate Terms

 

Here are some real estate terms as reviewed by Zack Childress.

Deflation debt

  • Definition

When the value of the asset or property that a borrower has used to secure the loan decreases, it is known as deflation debt.

  • Elaboration

Debt deflation has one benefit. It can lead to reduction in interest rates. When the lender knows that he will be paid back more money than he lent, he lowers the interest rate. However the cost of the debt remains the same.  This means the borrower still has to pay more to his lender.  Debt deflation is damaging since it might lead to modification of the loan. If deflation occurs and borrower fails to make a mortgage payment, then the lender will retake possession of borrower’s property or asset.

Debt service

  • Definition

The amount of cash that is required to make payments on the principal and interest of a loan for a particular time period is called as debt service

  • Elaboration

For example:

if borrower takes out a loan for $10,000,00 and he has to pay $1400 per month, then making those payments is called servicing the debt. Borrowers have to make the debt service payments to their lenders and companies too need to meet the debt service on loans and bonds issued to the public. Too much of debt is bad but a little debt is good for investors. In fact it is prudent to invest in companies who have debts but control them well. When companies approach the bank for loans, they have to calculate the debt service coverage ratio. This ratio is defined as the ratio of net operating income and the amount of interest and principal the firm must pay.

Deed in lieu of foreclosure

  • Definition

A deed in lieu of foreclosure is a deed instrument in which the mortgager deeds back all interests in real property to the mortgagee in exchange for release from a default loan and to avoid foreclosure.

  • Elaboration

The first step in deed in lieu of foreclosure is to request a loss mitigation package from the lender. This requires the mortgager to fill out an application and submit documents – proof of income, recent tax returns, statement showing monthly income and expenses, bank statement and a hardship letter. When this is submitted, the lender facilitates a verification process to check if there are any additional liens on the property. This is done because a deed in lieu is generally accepted only on a first mortgage. However the borrower can pay off all other liens before he approaches for a deed in lieu of foreclosure. An exception to this situation is the bank will accept deed on additional liens if it alone holds all the mortgages. Once it is clear that there are no additional liens, the bank arranges to determine the fair market price of the property. Next, after it agrees to accept the deed in lieu of foreclosure, the borrower signs a document – grant deed in lieu of foreclosure to surrender ownership rights to the bank. He also needs to state that he has not acted under stress and his decision was taken voluntarily.

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