commercial lending glossary updated 26 June, 2006 ACH (Automated Clearing House) – a computer-based facility for interchange of electronic funds between financial institutions. Addendum – an agreement or list that is added to a contract or other document, such as a bill of sale or letter of intent. An addendum can be added to a sales contract or appraisal. ARM (Adjustable Rate Mortgage) – a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. It is also known as a re-negotiable rate mortgage or variable rate mortgage. Adjusted Gross Income – A person’s total income, as reported on the IRS 1040 tax return form, after allowable deductions, contributions, and expenses. Adjustment Date – On an ARM, the date that the interest rate changes. Adjustment Interval – On an ARM, the time between changes in the interest rate and/or monthly payment, typically one, three, or five year depending on the index. Adjustment Period – The period elapsing between adjustment dates for an ARM. Affidavit – a sworn statement in writing, usually requiring notarization. Agreement of Sale – A written document in which the purchaser agrees to buy certain estate and the seller agrees to sell under stated conditions. ALTA (American Land Title Association) – A national association of title insurance companies, abstractors, and attorneys specializing in real property laws. The association lobbies for the title insurance and abstracting industry and establishes standard procedures and title policy forms. Amortization – An equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. Amortization schedule – A table displaying the amounts of principal and interest due at regular intervals and the unpaid mortgage balance after each payment is made. APR (Annual Percentage Rate) – Finance charges that include interest, discounts and other costs or processing a loan. It is expressed as a percentage and is stated in a Truth in Lending disclosure. Applicant – a prospective borrower who has completed an application. An application is a series of steps, usually including completion of documents required by a lender. Application Fee – fee charged by a lender, which may include the cost of an appraisal, credit report, lock-in fee or other closing costs, which are incurred during the loan process. The fee may be charged in addition of other costs. Appraisal (Appraised Value) – a written estimate of a property’s current market value based on factors such as: rental income, expenses, and capitalization rate; recent sales information from comparable properties; cash equivalent value; the condition of the property; finally, the neighborhood’s impact on marketability. Appraisals are often subject to internal review by the lender for final determination of value. Appraiser – one qualified to estimate the value of real and personal property. Approaches to Value – valuation methods used in the appraisal of real property. The three common approaches are cost approach, income approach, and market approach (also known as comparable sales approach). Approved Appraiser – Individual or company officially recognized by a lender to valuate real property. Many lenders require that appraisals be performed by those on their approved list. Arms-Length Transaction – a sale between two unrelated parties seeking to maximize each of their financial positions from a transaction. Assignment – the transfer of a mortgage from one person to another. Assumption – the act of taking over (assuming) a previous borrower’s mortgage obligation. Back-End Ratio – relationship between total long-term monthly payments (with over 12 months remaining in term) to gross monthly income. It is calculated by dividing payments by income. Balloon Mortgage – a mortgage with monthly principal and interest payments that do not fully amortize the loan (does not fully pay the loan off). The balance of a balloon mortgage is due in one lump sum usually at the end of the term. Bankruptcy – proclamation by a court of an entity’s insolvency (inability to pay debts). Creditors may petition for an equitable settlement of outstanding debts, and usually result in asset liquidation or foreclosure. A bankruptcy remains on a borrower’s credit record for ten years. Basis Point (bps) – one hundredth of 1 percent; are primarily used to describe changes in yield or price on mortgages and mortgage-backed securities. 250 bps = 0.250%, 500 bps = 0.500%, 1000 bps = 1.000% Base Rent – The minimum fixed guaranteed rent on a commercial property lease. Blanket Mortgage – a mortgage for which two to five properties (with similar uses) serve as collateral for a single loan. Borrower (mortgagor) – an entity applying for and receiving a mortgage loan with the intention of eventually repaying the debt in full. Buy-Down – Process where a mortgage broker reduces the interest rate offered to a borrower; requires an up-front fee for each incremental rate decrease. For example, a borrower may pay 1% up-front for each 50 bps rate decrease to a maximum reduction of 1% from the quoted annual percentage rate. Buy-Up – Process where a broker may charge a premium rate (higher than quoted) and receive a larger commission from a lender. For example, every 50 bps increase to the annual percentage rate will earn a broker 1% on the “back end” by the lender. Caps – consumer safeguards on interest and payments for ARM mortgages which limit the amount charged to a borrower over the term of the loan. CAMS (Common Area Maintenance Expenses) – expenses associated with the maintenance of common areas in a commercial complex. Comparables – properties that have similar characteristics to the subject property; used in the appraisal process to determine market value. Cash Equivalent Value – method of calculating the appraised value of a property that considers sales and financing concessions when evaluating comparables. Cash-Out – a refinance for funds in excess of the balance of the current mortgage. The money paid out reduces the borrower’s equity in the property. Closing – in real estate, the delivery of a deed, signing of the note, and the disbursement of funds necessary to consummate a loan transaction. Closing Costs – expenses incurred when transferring ownership of a property, including the origination fee, property taxes, appraisal fees, escrow costs, etc. CLTV (Combined Loan to Value) – the percentage of a property purchase price borrowed with more than one loan (usually by a first mortgage and seller take-back 2nd or line of credit). Commercial mortgage lenders typically offer combined LTVs up to 90%. Commercial Real Estate – Office buildings, shopping centers, apartments, and other properties used in the production of income rather than residences. Residences with more than four units are considered commercial properties. Conditional Pre-Approval – document issued by a mortgage underwriter offering basic loan terms and conditions subject to receipt of any and all documents necessary to effect a final approval. Conduit – an entity that acts as an intermediary between originating lender and ultimate investor. Correspondent – A specialized type of mortgage banker whose role is limited to the origination of mortgage loans, which are sold to other investment bankers under specific commitment. Cost Approach – A method of property valuation which determines replacement costs, minus depreciation, and added to land value to assess a property’s market worth. Covenant – a legally enforceable promise or restriction in a mortgage, usually to keep a property in good condition and insured against casualty. A breach of covenant usually creates a default and may result in foreclosure. Credit Report – a report documenting the credit history and current status of a borrower’s credit standing. Credit Risk Score (FICO Score) – a statistical summary of the information contained in a consumer’s credit report. The most common measure of credit standing is the Fair, Isaac Co. credit score – a numerical result factoring various information, usually ranging between 300 – 900. Methods to improve a score include establishing/maintaining a payment history on credit accounts, minimize negative public records (such as bankruptcy, judgments, etc.), having no collection accounts, paying down loans, keeping credit cards well below limits, avoiding late payments, and avoid excessive applications for new credit. Custodian – an entity (usually a commercial bank) which holds mortgages and related documents for safekeeping. They may be required to examine and certify documents. DTI (Debt-to-Income Ratio) – a percentage comparing a borrower’s monthly payment obligations on long-term debts versus gross monthly income. Deed – the document by which title to real property is transferred or conveyed from one party to another. Deed of Trust – a document used in place of a mortgage in many states to secure payment of a note. Default – failure to meet legal obligations in a contract; specifically, failure to make minimum monthly payments on a mortgage. Delinquency – failure to make payments on time, usually leading to foreclosure. Depreciation – a decline in value in real estate resulting from age, physical wear and obsolescence, deducted annually from net income. DISSCO – a fraud report used to verify a borrower’s information on a 1003 loan application. Dry Funding – any advance of new funds to a lender for funding or purchasing mortgage loans where the collateral package is in possession of a collateral agent and is free of lien or bailment. DSCR (Debt Service Coverage Ratio) – the ratio of annual net operating income to annual principal/interest payments. Lenders look for ratios greater than one – which means annual income is enough to cover the mortgage payments. Divide the annual NOI by the proposed yearly mortgage payment. Earnest Money – money given by a buyer to seller as part of the purchase price to bind a transaction or assure payment. Easement – a limited right on a piece of land owned by another. This entitles the holder of an easement to some use of the land. Easements are usually held by government agencies for placement of utilities (power lines, wireless towers, etc.) on private property. Egress – a way out; an exit or outlet. Environmental Impairment Insurance – a special insurance that protects against liability and clean-up costs related to pollution. Coverage may be for gradual or sudden pollution, and is always written on a claims-made form. Equity – the net value of an asset. In real estate, it is the difference between the present value and mortgage balance on a property. Escrow – a third party who delivers funds to fulfill terms of a transaction in good faith. In some states, escrows of taxes and insurance premiums are called impounds or reserves. FNMA (Fannie Mae) – nation’s largest mortgage investor, created by an amendment to Title III of the National Housing Act; it supports the secondary mortgage market with mortgage purchase and securitization programs. Fixed Rate Mortgage – mortgage where the interest rate remains the same for the term of the loan. Flipping – the fraudulent act of selling properties among related parties for the sole purpose of inflating the value. FSBO (For Sale By Owner) – when an owner markets and sells a property without using a broker. FHLMC (Freddie Mac) – created by Title III of the Emergency Home Finance Act of 1970, that supports the secondary market in mortgages on residential and multi-family properties with purchase and securitization programs. Gift – money given to borrowers to assist in the purchase of a property, usually granted by relatives or a close friend. Gift Letter – A document certifying a gift to assist in the purchase of a property, to be included in the loan package. GFE (Good Faith Estimate) – a document outlining the approximate costs of a loan on or before settlement. Under RESPA (Real Estate Settlement Procedures Act), the mortgage broker must deliver or mail the estimate to the applicant within three business days after the application is received. Grantee – a person to whom property is transferred by deed or to whom property rights are conferred by a trust or other document. Grantor – a person who transfers property by deed or grants property rights through a trust. Gross Lease – a lease in which in which the lessor (owner) is responsible for all costs and expenses of the property. Hard Money – money given in exchange for an equity position in a transaction for real property. Highest and Best Use – the reasonable, probable, and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria that highest and best use must meet include: legal permissibility, physical possibility, financial feasibility, and maximum profitability. HUD-1 Statement – a document providing an itemized listing of the funds payable at loan’s closing. These items include real estate commissions, loan fees, points, and initial escrow amounts. Each item is represented by a standardized numbering system, and the totals at the bottom of the statement define the seller’s net proceeds and buyer’s net payments at closing. Impounds (reserves) – the portion of a borrower’s monthly payment held by a lender to pay for taxes, insurance, lease payments, etc. as they become due. Income Approach – an appraisal method in which the property is valued according to its ability to produce income. Index – a published interest rate against which lenders measure the difference between the current interest rate on an ARM and that earned by other investments, which is then used to adjust the interest rate on the adjustable mortgage up or down. Indexed Rate – the sum of the published index plus the margin. For example, if the index was 9% and the margin was 2.75%, the indexed rate would be 11.75%. Initial Interest Rate (start rate, teaser rate) – the original interest rate of the mortgage at time of closing. This rate changes for ARMs. Interest – monetary consideration paid for borrowing money, usually expressed as an annual percentage. Also, a right, share, or title in a property. Joint Tenancy – form of co-ownership giving each tenant equal interest and rights in the property, including right of survivorship. Judgment – final determination by a court of the rights and claims of the parties to an action. Judgment Lien – a hold upon the property of a debtor to secure repayment of a loan, resulting from a court decree. Lease – a written document containing the conditions under which the possession and use of property are given by the owner to another for a stated time period and monetary consideration. Leasehold – an estate or interest in real property held by virtue of a lease. Lease-Purchase Mortgage Loan – an alternative financing option that allows buyers to lease a property with option to buy. Each month’s rent payment includes principal, interest, taxes and insurance (PITI) payments on the first mortgage, plus an extra amount that accumulates in a savings account for a down payment. Legal Description – a property description recognized by law that is sufficient to locate and identify the property without oral testimony. Lien – a legal hold or claim of a creditor on the property of another as security for a debt. Limited Appraisal – an appraisal using only one approach to value. LTV Ratio (Loan-To-Value Ratio) – the percentage of the property value borrowed, determined by dividing loan amount by property value. Lot – a distinct piece of land; a piece of land that forms part of a district, community, city block, etc.; a smaller portion into which a city block is subdivided; described by reference to a recorded plat or by definite boundaries; a piece of land in one ownership. Margin – the amount a lender adds to the index on an ARM to establish the adjusted interest rate. Marked-Up Title – document showing all insertions and deletions that will define the final title policy. Market Approach – Estimates property value by comparison to similar properties that have sold in the open market. Market Value – the most probable cash price at a certain date for which the property should sell after reasonable exposure in a competitive market. The value should reflect all conditions requisite to a fair sale, with buyer and seller acting prudently, knowledgeably, in best self-interest and neither is under duress. Mixed-Use – a property type with two or more harmonious uses, such as a building with retail shops on lower floors and apartments on upper floors. Mobile Home Park – a contiguous parcel of privately owned land, which is used for the accommodation of ten or more mobile homes, occupied for year-round residence. Mortgage – a pledge of property a security for a debt. Additionally, it is also the document describing this pledge. This document is known as a deed of trust in many states. MBS (Mortgage-Backed Security) – an investment instrument backed by mortgage loans as security. Ownership is substantiated by an undivided interest in a pool of mortgages or trust deeds. Income from the mortgages is used to pay out interest and principal on the securities. Mortgage Broker – an individual or company that charges a fee to bring borrowers and lenders together for the purpose of loan origination. Multi-Family – apartment properties with five or more units. NOI (Net Operating Income) – the amount remaining after total operating expenses (excluding interest payments) are deducted from effective gross income. Non-Recourse Loan – a security backed only by the real estate being financed; lender is prohibited from recovering against borrower’s personal assets if security value for loan falls below the amount required to repay the mortgage. Note – a general term for any kind of document signed by a borrower that is acknowledgment of a debt and promise to pay. Operating Expenses – all costs associated with operating and maintaining a property with exception of depreciation and debt service. Origination – securing a completed mortgage application from a borrower. Origination Fee – a lender’s fee charged to a borrower to prepare documents, perform credit checks, inspect and appraise a property. Usually stated as a percentage of the face value of a loan. Originator – a person who solicits builders, brokers, and others to obtain applications for mortgage loans; often called a loan officer. Par – a price of 100% of face value. Payment Shock – a scenario in which monthly mortgage payments on an ARM may be so high that the borrower may not be able to afford the payments. Consumer protection guidelines regarding extremely low initial “teaser rates”, lifetime ceilings and annual caps are designed to prevent payment shock. Payoff Letter – a statement detailing the unpaid principal balance, accrued interest, outstanding late charges, legal fees and all other amounts necessary to pay off the lender in full. PITI - Principal Interest Taxes Insurance Points – fees paid to lenders. 1 point = 1% of the loan amount. On a $100,000 loan, 1 point is $1,000. Points may be further classified as origination points and discount points. Pre-App 5 – document accompanying the conditional pre-approval containing title and property detailed information to be completed by the broker. Pre-App 6 – goes with Pre-App 5 reciting the cost of the appraisal report and detailing methods of payment for the report. Prepayment Penalty – money charged by a lender for early repayment of a debt. These penalties are allowed but not always imposed in many states. It ensures a minimum return in interest payments for the lender, typically for three to five years. Prepayment Privilege – the right given to a borrower to pay off a mortgage prior to maturity without penalty. Prequalification – evaluation of a potential borrower’s financial status to determine the size and type of mortgage available. Prime Rate – interest rate that commercial banks charge their most creditworthy customers for short term loans. This rate is a measure for trends, and is often a baseline for establishing interest rates, such as prime + x.xx%. Principal – the outstanding balance of a loan. Purchase Agreement – a written agreement between buyer and seller of real property, setting forth the price and terms of sale. Quitclaim Deed – a form of conveyance in which any interest the grantor possesses in the property, as described in the deed, is conveyed to the grantee without warranty of title. Refinance – the payoff of one loan with proceeds from another mortgage, using the same property as security. It is primarily used to lower the interest rate and cash-out equity. Rent Roll – A list of tenants leasing a property, which details the terms of lease, the area being leased, and the amount of rent paid. REO – real estate owned Retail – property types such as grocery, strip centers, outlets, and small stores. Retail Loan – a loan originated by the lender and not by a broker. SBA Financing – equity capital or long-term financing provided or guaranteed in part by the Small Business Administration; usually requires that the owner occupy at least 51% of the collateral property. SCIPP – environmental questionnaire to be completed by property owner. Seasoned – ownership in a property for twelve months or more. A business is considered seasoned if it is at least two years’ old. Second Mortgage – a subordinate lien, created by a mortgage to cover financing not provided by the first loan. Second loans generally carry a higher interest rate than a first mortgage. Security – the property that will be pledged as collateral for a loan. SIC (Standard Industrial Classification) – a code number that corresponds to a building’s use. Special Purpose Property – a property which is suitable for only one use, and cannot be valued using standard approach with comparable properties. Examples include funeral homes, car washes, and daycare centers. Some lenders may refuse to qualify such properties if local zoning mandates their alternate use as residential. Stated Income / Assets – Don’t provide tax returns, financial statements – file on federal forms subject to fraud. Straw Buyer – one who purchases property for another to conceal the identity of the real purchaser. Unanchored Strip Center – a property type occupied by multiple tenants, of which none are well-known commercial brands. Typical gross building areas range from 50,000 – 100,000 square feet. Subordination – a loan in lower priority. For example, a second mortgage is in subordination to the first mortgage loan. Survey – a measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known geographical markers, its dimensions, and the location/dimension of any buildings. Sweat Equity – equity created by a purchaser performing work on a property being bought. Tax Lien – a claim against property for unpaid taxes. Teaser Rate – a starting rate which is below the fully indexed accrual rate on an ARM. Term – the period of time between the commencement date and termination date of a note, mortgage, legal document, or other contract. Tier – system used to measure the credit risk of property types. Title – a document that gives evidence of an individual’s ownership of property. Title Insurance – a policy insuring a homebuyer against errors in the title search. The cost of the policy is a function of the value of a property and initiated by the seller. Policies are also available to protect the lender’s interests. Title Search – an examination of municipal records to determine legal ownership of property. Trust – a fiduciary (trust) relationship whereby legal title to a property is transferred to a trustee with the intention that such property be administered by a trustee for the beneficiary, who holds equitable title to such property. Underwriting – the process of making the decision to make a loan for a potential borrower based on credit history, employment, assets, and other factors – and correctly matching this risk assessment to an appropriate rate/term and loan amount. Unseasoned – less than twelve months’ ownership in a property, and businesses less than two years’ old. Warehousing – short-term borrowing of funds by a mortgage banker, using permanent mortgage loans as collateral. The money borrowed is used to make additional loans. This interim financing is used until the mortgages are sold to a permanent investor. Wholesale Origination – a loan origination strategy by which loans are purchased from brokers, banks, and other institutions prior to, during, and after loan closing. This method enables lenders to acquire mortgage servicing rights without incurring the fixed costs associated with a retail origination strategy. Wholesale Lender – a lender who specializes in the purchase and servicing of mortgages obtained from other originators. YSP (Yield Spread Premium) – premium pricing that pays a broker who sells an interest rate higher than the quoted rate. Zoning – the creation of districts by local governments in which specific property uses are authorized.