Glossary of Industry Terms
Adjustable Rate Mortgage
Mortgage where the interest rate adjusts periodically up or down through a set index. Also called a floating rate mortgage.
Adjusted Gross Income
Gross income of a building if fully rented, less an allowance for estimated vacancies.
The period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are one year, three and five years.
The process of paying the principal and interest on a loan through regularly scheduled installments.
Annual Percentage Rate (APR)
This is the actual rate of interest your loan would be if you included all of the other associated costs such as closing costs and points.
Extensive remodeling of an older apartment building.
An estimate of the value of a property, make by a qualified professional called an appraiser.
See Adjustable Rate Mortgage.
Loans that can be transferred to a new owner if a home is sold.
Balloon (Payment) Mortgage
Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract.
Basis Points (BP)
1/100th of 1% expressed as margin over index rate.
the process of paying additional points on the loan to reduce the monthly mortgage. There are typically two specific types
Financing which expected to be paid back relatively quickly, such as by a subsequent longer – term loan. Also called a swing loan.
The maximum which an adjustable-rate mortgage may increase, regardless of index changes. An interest rate cap limits the amount the interest can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
A net yield set by an investor to determine the value of an income producing property.
Line items on a profit and loss statement that would not be expensed on an annual basis. This category would include replacement of major building systems, such as roofs, driveways, etc.
A method used to estimate the value of a property based on the rate of return on investment.
The meeting between the buyer, seller and lender (or their agents) where the property and funds legally change hands. Also referred to as “settlement”.
The cost and fees associated with the official change in ownership of the property and with obtaining the mortgage, that are assessed at the closing or settlement.
Direct link to an institutional lending source.
Comparative Market Analysis
An estimate of the value of a property based on an analysis of sales of properties with similar characteristics.
The financial intermediary that sponsors the conduit between the lender(s) originating loans and he ultimate investor. The conduit makes or purchases loans from third party correspondents under standardized terms, underwriting and documents and then, when sufficient volume has been obtained, pools the loans for sale to investors in the CBMS markets.
A short term loan to pay for the construction of commercial buildings. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed a take-out or permanent loan is used to pay off the construction loan.
An option available on some adjustable rate mortgages (ARM’s) that allows the loan to be converted to fixed rate mortgage. Conversion usually involves paying a one-time fee and conversion may be limited to within a certain time – frame.
Someone who is willing to sign mortgage loan obligation with you in case you default on your monthly payments. Normally, the cosigner is required to go through the same application and approval process as the original signer of the loan.
A lending organization that obtains it source of funds from the commercial market.
A loan to provide improvements to the property.
Debt Service Coverage Ratio (DSC)
A 1.0 means breakeven. The ratio is calculated by taking the net operating income and dividing it by the mortgage payments. Most lenders look for a ratio of 1.25 or higher.
The periodic payments (principal and interest) made on a loan.
One of several financial calculations performed by your lender to determine if you can afford a particular monthly payment. The debt ratio (also known as the obligations ratio) is the sum of all your monthly debt payments including your total monthly mortgage payment divided by your total monthly income. Typically acceptable debt ratios for Conventional Loan are 36 – 38%, FHA Loans are 41 – 43%, and VA Loans Are 41%.
Many lenders may offer you a lower “teaser” rate on an adjustable rate mortgage for the first adjustment period. After this period is over, the lender will adjust your loan according to the normal lenders margin rate.
Down – Payment
The amount of money you put down, normally anywhere from 15% – 35%.
The legal definition
Effective Gross Income
gross income of a building if fully rented, less an allowance for estimated vacancies
Report generated by an architect or engineer describing the current physical condition of the property and its major building systems, i.e., HVAC, parking lot, roof, etc. The report also determines an amount for calculating replacement reserves, if needed.
Report generated by an qualified environmental firm to determine potential environmental hazards in a building’s region or within the building itself.
Risk of loss of collateral value and of lender liability due to the presence of hazardous materials, such as asbestos, PCB’s, radon or leaking underground storage tanks (LUSTS) on a property.
1.The difference between the fair market value and current indebtedness, also referred to as “owner’s interest”.
2. The difference between the amount owed on the loan and the current purchase price of the home or property
Capital raised from owners. In a commercial real estate case, a lender will also provide equity capital for a percentage of ownership.
1. A special account set up by the lender in which money is held to pay for taxes and insurance.
2. A third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.
Fair Market Value
An appraisal term for the price which a property would bring in a competitive market, given a willing seller and willing buyer, each having a reasonable knowledge of all pertinent facts, with neither being under any compulsion to buy and sell.
A congressionally chartered corporation which buys mortgages on the secondary market from Banks, Savings & Loans, Etc; pools them and sells them as mortgage-backed securities to investors on the open market. Monthly principal and interest payments are guaranteed by FNMA but not by the U.S. Government.
Federal Housing Administration, a government agency.
Fixed Rate Mortgage
A mortgage with an interest rate that remains constant for the life of the loan. The most common fixed-rate mortgage is repaid over a period of 30 years; 15-year fixed-rate mortgage are also available.
Floating Rate Mortgage
See Adjustable Rate Mortgage.
Floor – To – Area Ratio (FAR)
The relationship between the total amount of floor space in a multi – story building and the base of that building. FAR’s are dictated by zoning laws and vary from one neighborhood to another, in effect stipulating the maximum number of stories a building may have.
The process by which a lender takes back a property on which the mortgagee had defaulted. A servicer may take over a property from a borrower on behalf of a lender. A property usually goes in to the process of foreclosure if payments are no more than 90 days past due.
A written promise from a lender to provide a loan at a future time.
Freddie Mac (Federal Home Loan Mortgage Corporation)
Entity buys loans from conventional lenders and packages them for sale to investors as securities.
A building which contains only one retail business. Fast-food franchises and retail stores are often freestanding buildings.
One of two loan types called FHA or VA loan. These loans are partially backed by the government and can help veterans and low-to-moderate income families afford homes. The advantages of these types of loans in that they often have a lower interest rate, are easier to qualify for, have lower down-payment requirements, and can be assumed by someone else if the home is sold. Many mortgage bankers can obtain these type of loans for you.
Graduated Payment Mortgages
A type of mortgage where the monthly payments start low but increases by a fixed amount each year for the first five years. The payment shortfall or negative amortization is added to the principal balance due on the loan. The advantages if this type of loan is a lower monthly payment at the beginning of the loan term. This disadvantages are typically a slightly higher rate than traditional fixed rate mortgage loan and lenders usually require a larger down payment. In addition, the negative amortized amount increases the balance due on the total loan which can be a problem if the value of the home declines.
Total income, before deducting taxes and expenses. The scheduled (total) income, either actual or estimated, derived from a business or property.
Growing Equity Mortgage
A type of mortgage where the monthly payments start low but increase by a fixed amount each year for the entire life of the loan as compared to five years with a Graduate Payment Mortgage. The advantage of this type of loan is that the loan can usually be paid off in a short duration than a traditional fixed rate loan. This disadvantage of this loan is that the payment continues to go up irrelevant of the income of the borrower.
High interest rate financing.
Housing and Urban Development, a federal government agency.
An economic indicator, usually a published interest rate, that determines changes in the interest rate of an adjustable – rate mortgage. ARM rates are adjusted to reflect changes in the index. The margin is the amount a lender adds to the index to establish the actual interest rate on an ARM.
The sum paid for borrowing money, which pays the lender’s costs of doing business.
The sum charged for borrowing money, expressed as a percentage.
Interest Rate Cap
Limits the interest rate or the interest rate adjustment to a specified maximum. This protects the borrower from increasing rates.
the aggregate amount of interest payments from borrowers that is less than the accrued interest on the certificate.
An individual or institution which, acts as an underwriter or agent for corporations and municipalities issuing securities, but which does not accept deposits or make loans. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors also called investment banker. See also bank, commercial bank, and originator, syndicate.
An agreement by two or more individuals or entities to engage in a single project or undertaking. Joint ventures are used in real estate development as a means of raising capital and spreading risk. For all practical purposes a joint venture is similar to a general partnership. However, once the purpose of the joint venture has been accomplished, the entity ceases to exist.
An agreement between the commercial property owner and the lender that assigns lease payments directly to the lender.
The cost of improvements for a leased property. Often paid by the tenant.
This is simply the profit the lender expects to receive from the loan. You can ask your lender what the margin is on an adjustable rate mortgage. Typically, lenders use a discount rate initially as a “teaser” rate. You must be sure to get the normal margin after the discount period is over.
Lines of Credit
An arrangement in which a bank or vendor extends a specified amount of unsecured credit to a specified borrower for a specified time period.
Loan origination Fee
The fee charged by a lender, to prepare all the documents associated with your mortgage.
Loan Processing Fee
the fee charged by a lender, to prepare all the documents associated with your mortgage.
The ratio between the principal amount of the mortgage balance, at origination or thereafter, to the current value of the underlying real estate collateral. The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is dynamic, and varies by lending institution, property type, geographic location, property size, etc.
Lock – In
The process of fixing the interest rate for a specific period of time irrelevant of future or impending economical changes to the interest rate. This process may require a fee or premium as it reduces your risk that the monthly payments will change while the loan paperwork is filed.
Lock – Out Period
A period of time after loan origination during which a borrower cannot prepay the mortgage loan without paying the full amount of interest due for the prescribed time period.
London Interbank Offered Rate (LIBOR)
The short – term rate (1year or less) at which banks will lend to each other in London. Commonly used as a benchmark for adjustable – rate financing.
Low Doc (or Low Document) loans are loans for individuals that cannot provide the traditional required paperwork such as tax returns. This is mostly for Self-Employed borrowers or investors without normal pay period income.