Seasoned Loan

Definition

A Seasoned Loan is a loan on which several payments have been collected, demonstrating a consistent payment history. This record of payments increases the attractiveness of the loan to potential investors, as it implies stability and lower risk of default by the borrower. In essence, a loan is considered “seasoned” when it has aged and shown evidence of regular, timely payments over a specific period—typically at least 12 months.

Examples

1. Home Mortgage Loan

   • A homeowner secures a mortgage from a bank to purchase their house. After making consistent monthly payments for 24 months, the loan becomes seasoned. This seasoned mortgage can now be sold more easily on the secondary market, perhaps to a mortgage-backed securities investor.

2. Second Mortgage

   • The seller of a property accepts a second mortgage (a subordinate loan to the first mortgage) on the property being sold. After 12 months of collecting regular payments from the buyer, the second mortgage is considered seasoned. This makes it easier for the seller to sell the mortgage to a second mortgage investor.

Frequently Asked Questions

What does it mean for a loan to be seasoned?

A loan is considered seasoned when the borrower has made a consistent number of timely payments, indicating stability and reducing perceived risk for potential investors.

How long does it take for a loan to become seasoned?

Typically, a loan becomes seasoned after 12 months of regular, on-time payments, although this duration might vary depending on lender policies and loan agreements.

Are seasoned loans less risky for investors?

Yes, seasoned loans are deemed less risky because the payment history indicates the borrower’s reliability and ability to manage their financial obligations.

Can any type of loan become seasoned?

Yes, any loan with installment payments can become seasoned, including mortgages, car loans, personal loans, and more, as long as the borrower shows consistent and timely payment history.

Related Terms

• Mortgage-Backed Security (MBS)

  • Mortgage-Backed Security is an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them.

• Secondary Mortgage Market

  • The secondary mortgage market is where mortgage loans and servicing rights are bought and sold between lenders and investors.

• Second Mortgage

  • A second mortgage is a loan taken out on a property that already has a mortgage. It is usually of lesser priority compared to the initial mortgage.

• Loan-to-Value Ratio (LTV)

  • Loan-to-Value Ratio is a financial term used by lenders to express the ratio of a loan to the value of the asset purchased.

• Underwriting

  • Underwriting is the process by which a lender evaluates the risk of lending money to a particular borrower.

Online Resources

1. Investopedia - Seasoned Loans
2. Mortgage Calculator - Understanding Seasoned Mortgages
3. Federal Reserve - Glossary
4. Consumer Financial Protection Bureau - Provides educational resources and tools for mortgage borrowers.

References

• Investopedia Staff. (2020, October 17). Seasoned Loan. Investopedia.
• Federal Reserve Board. (n.d.). Frequently Asked Questions.
• Consumer Financial Protection Bureau. (n.d.). Glossary.

Suggested Books for Further Studies

1. “The Mortgage Professional’s Handbook” by Jess Lederman and Andrew Weinberg
2. “Principles of Real Estate Practice” by David C. Ling and Wayne R. Archer
3. “Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
4. “The Real Estate Investor’s Handbook” by Steven D. Fisher
5. “Investing in Mortgage-Backed and Asset-Backed Securities” by Glenn L. Schultz

Real Estate Basics: Seasoned Loan Fundamentals Quiz