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Loan Glossary

Loan Glossary contain 85 commonly used terms in commercial real estate loans, You may browse the glossary by selecting the letter.

Acceleration clause: A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a monthly payment is missed.
Adjustable rate mortgage (ARM): A mortgage whose interest rate changes over time based on an index.
Amortization: The gradual repayment of a mortgage by installments.
Amortization schedule: A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance.
Annual percentage rate (APR): The total yearly cost of a mortgage stated as a percentage of the loan amount; includes the base interest rate, primary mortgage insurance, and loan origination fee (points).
Appraisal: A professional opinion of the market value of a property.
Appreciation: An increase in the value of a property due to changes in market conditions or other causes.
Assessed value: The valuation placed upon property by a public tax assessor for purposes of taxation.
Assumable mortgage: A mortgage that can be taken over (assumed) by the buyer when a property is sold.
Assumption: The transfer of the seller's existing mortgage to the buyer.

Binder: A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.

Cap: A provision of an ARM limiting how much the interest rate or mortgage payments may increase.
Cash reserve: A requirement of some lenders that buyers have cash remaining after closing. Traditionally lenders have required borrowers to have reserves equal to two mortgage payments.
Clear title: A title that is free of liens and legal questions as to ownership of the property.
Closing: The occasion where a sale is finalized; the buyer signs the mortgage, and closing costs are paid. Also called settlement.
Closing costs: Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called settlement costs.
Commitment letter: A formal offer by a lender stating the terms under which it agrees to lend money to a buyer.
Contingency: A condition that must be met before a contract is legally binding.
Conventional mortgage: Any mortgage that is not insured or guaranteed by the federal government.
Convertible ARM: An adjustable rate mortgage that can be converted to a fixed rate mortgage under specified conditions.
Covenant: A clause in a mortgage that obligates or restricts the borrower and which, if violated, can result in foreclosure.

Deed: The legal document conveying title to a property.
Deed of trust: The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.
Default: Failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.
Delinquency: A loan in which a payment is overdue.
Deposit: Cash paid to the seller when a formal sales contract is signed.
Depreciation: A decline in the value of property; the opposite of appreciation.
Downpayment: The part of the purchase price which the buyer pays and does not finance with a mortgage.
Due-on-sale clause: A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

Easement: A right of way giving persons other than the owner access to or over a property.
Equal Credit Opportunity Act (ECOA): A federal law that prohibits lenders from denying mortgages on the basis of the borrower's race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
Equity: The difference between the market value of a property and the property owner's outstanding mortgage balance.
Equity loan: A loan based on the borrower's equity in his or her property.
Escrow: The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a property owner pays money for taxes and insurance.

First mortgage: The mortgage that has first claim in the event of default.
Fixed rate mortgage: A mortgage in which the interest rate does not change during the entire term of the loan.
Flood insurance: Insurance required for properties in federally designated flood areas.
Forbearance: The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.
Foreclosure: The process by which a mortgaged property may be sold when a mortgage is in default.

Graduated payment mortgage: A mortgage that starts with low monthly payments that increase at a predetermined rate.

Hazard insurance: Insurance to protect the property owner and the lender against physical damage to a property from fire, wind, vandalism, or other hazards.

Impound account: Also called Tax and Insurance Reserve (TIR). Accounts required if lender will pay the property taxes, mortgage insurance, and hazard insurance.
Interest: The fee charged for borrowing money.
Interest rate cap: A provision of an ARM limiting how much interest rates may increase per adjustment period.

Late charge: The penalty a borrower must pay when a payment is made after the due date.
Lien: A legal claim against a property that must be paid when the property is sold.
Lifetime cap: A provision of an ARM that limits the total increase in interest rates over the life of the loan.
Loan-to-value ratio (LTV): The relationship between the amount of a mortgage and the total value of the property.

Margin: The set percentage the lender adds to the index rate to determine the interest rate of an ARM.
Mortgage: A legal document that pledges a property to the lender as security for A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage banker: A company that originates mortgages exclusively for resale in the secondary market.
Mortgage broker: A company that for a fee matches borrowers with lenders.
Mortgage insurance premium (MIP): The fee paid by a borrower to a private insurer for mortgage insurance.
Mortgage note: A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the agreement is secured by a mortgage.
Mortgagee: The lender in a mortgage agreement.
Mortgagor: The borrower in a mortgage agreement.

Negative amortization: Payment terms under which the borrower's monthly payments do not cover the interest due; as a result, the loan balance increases.
Notice of default: A formal written notice to a borrower that a default has occurred and that legal action may be taken.

Origination fee: A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount, or points.
Owner financing: A purchase in which the seller provides all or part of the financing.

Payment cap: A provision of some ARMs limiting how much a borrower's payments may increase regardless of how much the interest rate increases; may result in negative amortization.
PITI: Stands for principal, interest, taxes, and insurance -- the components of a monthly mortgage payment.
Points: A one-time charge by the lender to increase the yield of the loan; a point is one percent of the amount of the mortgage.
Prepayment penalty: A fee charged to a borrower who pays off a loan before it is due.
Prequalification: The process of determining how much money a prospective buyer will be eligible to borrow before a loan is applied for.
Principal: The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.
Private mortgage insurance (PMI): Insurance provided by nongovernment insurers that protects lenders against loss if a borrower defaults.
Purchase and sale agreement: A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Qualifying ratios: Guidelines applied by lenders to determine how large a loan to grant a buyer.

Radon: A radioactive gas found in some properties that in sufficient concentrations can cause health problems.
Real estate agent: A person licensed to negotiate and transact the sale of real estate on behalf of the owner.
Refinancing: The process of paying off one loan with the proceeds from a new loan secured by the same property.

Second mortgage: A mortgage that has rights that are subordinate to the rights of the first mortgage holder.
Secondary mortgage market: The buying and selling of existing mortgages.
Seller carryback: An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.
Settlement sheet: The computation of costs payable at closing which determines the seller's net proceeds and the buyer's net payment.
Survey: A drawing showing the legal boundaries of a property.

Title: A legal document establishing the right of ownership.
Title company: A company that specialized in insuring title to property.
Title insurance: Insurance to protect the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.
Title search: A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.
Transfer tax: State or local tax payable when title passes from one owner to another.
Truth-in-Lending Act: A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges

Underwriting: The process of evaluating a loan application to determine the risk involved for the lender.