Tracking Discount Earned on Purchased Loans
Q: How can I keep track of the discount earned along with the interest and principal on a loan with your loan servicing software?
A: By way of an example...
Start by clicking "Loan from Template" in the toolbar. Click Mortgage. Enter "Discount Earned" for the account number. Set the dates as you see fit, enter $100,000 for the principal, and 10% for the interest rate. Click the Regular payment. Pick a borrower and a lender and hit finish.
Select the new "Discount Earned" and then click Loan > Lender > Multiple Lenders. Click new and pick a lender. Adjust the percent interest in loan to 100% (complete ownership). Set the price paid to $60,000 and click Save. (So the lender bought a $100,000 balance for $60,000.) Click Done in the Multiple Lenders dialog.
Double-click the loan and click "Save" to record a payment on the loan. Do this a couple more times to add a few payments to the loan.
Once you've created a few payment records, click Reports > Multiple Lenders > Summary of Loans. Hit Preview to see the totals for the "Discount Earned" group (Adjust the date setting if you're doing this in November or December). Note the column Net Principle is less than the principal shown on the regular reports. The rest of the "principal" is listed in the Discount Earned column. If you want to check it, you can see that the ratio of Discount earned to Principal is the expected 40%/60% since the lender got a discount of 40% when purchasing the loan.
Thanks for using Moneylender Professional from TrailsWeb LLC
Josh Whitman
A: By way of an example...
Start by clicking "Loan from Template" in the toolbar. Click Mortgage. Enter "Discount Earned" for the account number. Set the dates as you see fit, enter $100,000 for the principal, and 10% for the interest rate. Click the Regular payment. Pick a borrower and a lender and hit finish.
Select the new "Discount Earned" and then click Loan > Lender > Multiple Lenders. Click new and pick a lender. Adjust the percent interest in loan to 100% (complete ownership). Set the price paid to $60,000 and click Save. (So the lender bought a $100,000 balance for $60,000.) Click Done in the Multiple Lenders dialog.
Double-click the loan and click "Save" to record a payment on the loan. Do this a couple more times to add a few payments to the loan.
Once you've created a few payment records, click Reports > Multiple Lenders > Summary of Loans. Hit Preview to see the totals for the "Discount Earned" group (Adjust the date setting if you're doing this in November or December). Note the column Net Principle is less than the principal shown on the regular reports. The rest of the "principal" is listed in the Discount Earned column. If you want to check it, you can see that the ratio of Discount earned to Principal is the expected 40%/60% since the lender got a discount of 40% when purchasing the loan.
Thanks for using Moneylender Professional from TrailsWeb LLC
Josh Whitman
Labels: lending, loan servicing software
posted by TrailsWeb LLC at
June 10, 2008
2 Comments:
The ratio of cost to face value isn't how discount is earned on a discounted mortgage. The proper way to do it is to run an amortization schedule at cost (rather than face value) and subtract. This is also what the IRS expects for tax reporting.
Just for fun I ran the math... It's exactly the same either way.
With a test loan of $5000 at 12% over 12 months and a payment of 446.59 bought at $1000 discount, 20% of the principal portion of the payments comes out to $79.32, 80.11, 80.91, 81.72, etc.
Running an amortization with the same terms as the real loan, but a $4000 balance and a $357.27 payment and then subtracting the principal part of the smaller loan from the principal part of the larger loan you get $79.32, 80.11, 80.91, 81.72, etc.
This is also what all involved parties expect for tax reporting.
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