Loan Terms Defined: Understanding Your Lender’s Requests

Anytime you begin the process to get a loan it helps to know the terms and definitions that are common in the world of finance. Kyla Craven and Lance Wardlaw, Carolina Farm Credit lenders in the Carthage and Pilot Mountain branches, respectively, share this list.

  • Purchase Agreement – This is a front-end agreement between a buyer and a seller. It can be for personal or commercial property. A bill of sale that includes a price and specifics about a piece of equipment, such as make, model, and serial number, is helpful to provide your lender. A bill of sale can be a handwritten agreement or an invoice. When it comes to real estate, details on location, acreage and coordinates are helpful. This helps the lender know what a borrower is seeking when it comes to a loan. There are a number of different types of agreements the lender will use, depending on the type purchase. A purchase agreement just for real estate will be different from a construction agreement for a construction project. They vary in length and scope depending on the type purchase.
  • Application – This is the paperwork you will need to fill out to apply for a loan. By completing it, you will be providing the basic but critical information such as your name, social security number, date of birth, address, employment information and history, and sources of income. 
  • Balance Sheet – The balance sheet gives your lender a look at your assets and liabilities. It helps provide information on your net worth, whether you have equity in place, and whether you can withstand the debt you are expecting to take on with a loan.
  • Income Statement – This provides information on income at the current point in time and also projected income for the coming years. For a home purchase, for example, your lender will likely want to project income for the next three years to make sure income is stable. 
  • Farm Plan – For new customers who are farmers, a farm plan describing the farm operation, including its business plan, will also need to include income, projected expenses and projected markets.
  • 1099 Form – Where applicable, this is a record that an entity or person paid you money.
  • W-2 Form – Where applicable, this record shows the amount of taxes withheld from your paycheck for the year.
  • Deed of Trust –This legal document, sometimes called the mortgage deed of trust, secures a real estate transaction and typically involves the lender, the borrower, and a third party which, in North Carolina, is the local register of deeds. This agreement between the customer and the lender is typically an 8-page document that outlines specific things you, the borrower, must abide by. Items include but are not limited to initial loan amount, property description, length of loan, loan requirements, and power of sale clause. As long as you pay your mortgage and the insurance on your property, along with taking care of your property, it should be smooth sailing for you. You have the right to live in or on the property and build equity as you make payments. If payments aren’t made and your lender has to foreclose, this is the document that will be used to begin the process. 
  • Promissory Note – This is the document you sign as a written promise that you will pay the stated sum to the lender. You are making an obligation to pay back the loan. The note includes information such as the gross loan amount you are borrowing, the interest rate, loan terms, which includes the maturity date when the loan will be paid off, and dates that payments are due (monthly or annually) including information on grace periods. As long as you pay by specified dates, you won’t be subject to a late charge or a late payment being filed on your credit. 
  • Collateral Description – This is a thorough and specific outline of what the lender is holding as collateral on a specific loan. This document is attached to the Deed of Trust. Depending on the transaction, either the closing attorney or lender will make sure the collateral description matches the description on the deed. If you cannot pay back your loan, the lender has the right to claim the collateral.
  • Security Agreement or UCC – This is used when you are taking a lien on some sort of personal property such as equipment, crops, or other farm products. It secures those products as collateral for the lender’s financing. For example, when it comes to equipment it will list out specifics such as make, model, year, and serial number. It’s critical to document specific and precise information on what you are purchasing as well as what the lender is holding as collateral. Any assets like equipment or other product collateral that are part of the security agreement or UCC are filed at the state level so that other lenders will know if there is already a lien on a piece of equipment or other item in the event other lenders are also trying to extend financing to a borrower. When it comes to real estate, the security document is the Deed of Trust. 

While the loan process may consist of many different documents, your Carolina Farm Credit lender will be with you every step of the way. If something is not clear, let your lender know.  They understand that for most borrowers obtaining a loan is a big and important step. They want you to be comfortable in asking questions so that you can obtain the information you need to make decisions and move forward with confidence.

By Leah Chester-Davis