The contractor’s financing dictionary

Whether you’re new to offering financing or an industry veteran, you’ll come across these common financing terms. We’ve compiled and defined them here so that you can better understand and guide your homeowners through their financing journey.

Homeowners can review these terms if they’re deciding between an secured and unsecured personal loan:

  • Personal loans: one of the financing options available to homeowners. Homeowners will receive the loan amount upfront and pay it back over monthly payments. Some personal loans are secured and others are unsecured.

  • Secured personal loans: loans that require collateral to “secure” the loan in case the loan applicant defaults.

  • Unsecured personal loans: loans that don’t require the loan applicant to put up any collateral to secure the loan. Because lending partners have nothing to seize if the applicant defaults on the loan, the interest rates they offer account for any risk of default.

  • Collateral: Assets (such as property, a car, or another thing of value) that is used to secure a secured loan. If the homeowner defaults, the lending partner acquire the collateral instead and use its value to pay off the remaining loan amount.

  • Default: the failure to repay a loan in time or in full. Lending partners may use collateral (if the loan is a secured personal loan) or interest rates (if the loan is an unsecured personal loan) to protect themselves against any risk that the homeowner defaults.

Homeowners who go through a pre-qualification process should know these terms:

  • A hard credit pull (also known as a “hard inquiry”): when a lending partner checks a homeowner’s credit score in order to evaluate their loan application. A hard credit pull can have a negative impact on the homeowner’s credit score.

  • A soft credit pull (also known as a “soft inquiry”): when a person or lending partner checks a homeowner’s credit report but doesn’t affect the homeowner’s credit score in any way. (For example, someone who checks their own credit score is doing a soft pull. Hearth’s lending partners also do a soft pull.)

  • Loan request form: the set of questions a homeowner will answer to get prequalified. A loan request form normally contains questions about the loan applicant’s name, annual income, estimated FICO score, loan amount, employment status, and Social Security number.  

  • Prequalification: the set of loan options from lending partners offer homeowners based on the soft credit pull. Homeowners can then apply for these options. Note: if a homeowner doesn’t see any options, the lending partner did not want to extend any offers.

  • Pre-approval: The step that follows pre-qualification. During pre-approval, the homeowner will have to submit a formal loan application to receive the final loan amount, terms, and interest rate.

Homeowners who are comparing different loan offers should know how these terms apply to each offer:

  • Origination Fee: a fee that some lenders charge for processing your loan application.  Origination fees are paid upfront and are based on a percent of the loan amount.  

  • Annual Percentage Rates (“APRs” or “rates”): the yearly cost of getting a loan. A homeowner’s APR includes both interest and fees (such as origination fees, if the lending partner charges any).

    • Fixed Interest Rates: Interest rates that won’t change over the loan term.

    • Variable Interest Rates: Interest rates change over time because they are based on the economy’s average current interest rate (also known as the “current market rate” or “prevailing interest rate.”)

    • Note: to learn more about what rates your client might see and why, check out this e-book.

  • Loan term*: the period of time that the loan recipient has to pay back the loan.

  • Prepayment penalties: fees that homeowners are charged when they pay off a loan before the end of the term.Since lenders make their profit on the loan’s interest, they may charge prepayment penalty fees to regain some of the interest they lose because the homeowner paid the loan off early.)  Prepayment penalties vary by loan type, lender, and state but are usually a percentage of the remaining balance. Bonus! Hearth’s lending partners do not charge prepayment penalties.

If you or your homeowners have any questions about financing terms or Hearth in general, feel free to give our Customer Success team a call at 512-566-3595. We’re happy to help!

*For example, a loan in the amount of $10,000 for a term of 5 years with an APR of 6.00% would be repaid over 60 monthly payments in the amount of $193.33.

Hearth is a technology company, which is licensed as a broker as may be required by state law. Hearth does not accept applications for credit, does not make loans, and does not make credit decisions. Hearth works with various lending partners to show customers available financing options; all loans subject to credit approval. Hearth is available nationwide, other than in Maryland, Nevada, North Dakota and Vermont.

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