Real Estate Lending Glossary
This glossary is an attempt by Lend Some Money (LSM) to make the lending process more understandable. At times, the terminology can be confusing, but this online glossary should help clarify some of the terms.
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ADDITIONAL PRINCIPAL PAYMENT
A payment made on a loan above the minimum monthly payment to reduce the principal on a loan and the potential future interest accrued. This can be a one-time payment or multiple payments over the life of the loan.
AFTER REPAIR VALUE (ARV)
Generally used for fix and flip loans, the After-Repair Value estimates the future resale value of a property after it’s been repaired.
AMORTIZATION
The reduction of the remaining loan balance over a specified period of time.
AMORTIZATION SCHEDULE
A breakdown of payments over the life of the loan, distributed between principal and interest. The schedule also shows remaining balance after each payment.
ANNUAL PERCENTAGE RATE (APR)
The cost of borrowing represented as a percentage. This comprises of points and fees on a yearly basis.
APPLICATION FEE
A fee charged to a potential borrower for moving forward with a full application on all loans.
APPRAISAL
A written analysis of the estimated market value of a property which will be used for determining viability of a mortgage loan. These include comps of other similar properties that recently sold in the area as a secondary means for justifying the value.
APPRAISAL MANAGEMENT COMPANY (AMC)
An independent 3rd party that conducts the appraisals. Some lenders have partnerships with specific AMCs that follow their forms or underwriting requirements.
ARREARS (OR ARREARAGE)
Past-due debt that accrues from one or more missed payments on a loan. The arrears starts accruing on the date of the first missed payment.
ASSIGNMENT
A physical document that contains a transfer of rights of a property, title or other entity from one party to another.
AUTOMATED CLEARING HOUSE (ACH)
An electronic method for transferring money quickly and securely.
BBAD BOY CLAUSE
Generally refers to an obligation on the guarantor or involved parties to not partake in illegal activities related to the property. In the event that illegal activities occur, the guarantor and co-guarantors would be held personally liable.
BALLOON LOAN
Typically a loan with lower interest and payment compared to a fixed 15/30 year term where the loan. The loan is only partially amortized during its term length, and the full principal balance is due at the end of the term.
BANKRUPTCY
A legal process where an individual or business files a notion and works with the courts to absolve debt and repay creditors.
BASIS POINT (BPS)
Standard unit of measure commonly used for determining changes in interest rates. One basis point equals .01%, or 1/100 of 1%.
BINDER TITLE POLICY
Short-term insurance coverage on a property during the transfer of ownership that takes place during the sale. It covers physical damage and acts of God during the closing.
BROKER PRICE OPINION (BPO)
Price assessment conducted by a real estate broker, generally on a foreclosure or short sale listing.
CCAP
On an adjustable rate loan, this is the max limit on how high the interest rate can climb throughout the loan.
CAPITAL EXPENDITURE (CAPEX)
Funds used by a company to maintain existing assets or purchase new assets. This can be in the form of property, equipment or technology.
CASH FLOW
Often referenced on rental properties, cash flow is the difference between the money coming in from rental revenue against expenses.
CHAPTER 13 BANKRUPTCY
Also known wage earner's plan, individuals that declare chapter 13 repay all or part of their debts with repayment terms from three to five years, set at the debtors' discretion. Eligibility is income based against the state median.
CHAPTER 7 BANKRUPTCY
Debtors clear most of their debts and start over. Property may be need to be given up to be sold for creditors to receive payment and credit score will experience a hit.
CLOSING
Also known as the settlement, all parties sign and execute the final loan documents to complete the transaction.
CLOSE OF ESCROW
When all involved parties involved have fulfilled all their responsibilities within the real estate transaction
CLOSING COSTS
Fees paid when a mortgage or loan is closed. Fees include loan origination and processing charges, including attorneys' fees, preparing and filing a mortgage, fees for title search, taxes and insurance.
CO-SIGNER/CO-BORROWER
Another person alongside the borrower who signs the loan and assumes responsibility for the payments and the liability.
COLLATERAL
Physical property that is used to back the value of a loan.
COLLECTION
The state of a loan when payment is delinquent and efforts are made to collect the past due amount. Lenders will generally begin the foreclosure process. Hard money lenders will be more aggressive than banks at collecting on loans because they are subject to less scrutiny than a traditional lender.
COMBINED LOAN TO VALUE (CLTV)
The total loan amount on the property (if there are multiple loans) divided by the current value of the property. This is generally used instead of LTV If a property has a mortgage and home equity line of credit from a refinance.
CONDITIONAL PERSONAL GUARANTEE
A term within a loan agreement holds the borrower personally responsible for repayment of debt in the event of default.
CREDIT BUREAU
Organization that collects and researches individual credit information to provide to credit card companies, lenders and other financial institution. Major reporting agencies include Equifax, Experian, and TransUnion/
CREDIT REPORT
A report generated and provided by one or more of the credit bureaus providing the credit health of an individual. This contains credit score, open accounts, balances and monthly payments. Histories of liens and bankruptcies are also highlighted.
CREDIT SCORE
Ranging from 300-850, the score represents your borrowing eligibility. A higher score will generally enable borrowers to obtain better rates.
CREDITOR
An individual or organization that is owed money.
DDEBT CONSOLIDATION
Paying off multiple debts of varying interest by taking out a single loan with a lower rate.
DEBT SERVICE COVERAGE RATIO (DSCR)
A ratio that demonstrates how much cash can be generated for every dollar of principal and interest owed.
DEBT-TO-INCOME RATIO
The percentage of your gross monthly income that goes to paying your monthly debt payments.
DEFAULT
When a borrower fails to be able to repay a loan based on terms defined within the loan.
DEFAULT INTEREST RATE
A clause that may exist on some loans if a borrower misses a payment, and is then required to pay back the remainder of the loan with a higher interest rate.
DEPRECIATION
Loss of value in an asset. Factors leading to depreciation include market conditions, physical damage, and age.
DISCLOSURES
Informational documents that provide detailed information on the loan, various costs and consumer rights/regulations on the federal and state level.
DISCOUNT RATE
Refers to the interest rate charged to banks and other institutions for the loans acquired from the Federal Reserve Bank through a discount loan window. This can also refer to the interest rate used in discounted cash flow (DCF) analysis to predict future cash flow value.
EEQUITY
The difference between current appraised market value against the outstanding loan balance and leans. More equity is typically better as it provides more lending options on currently owned properties.
ESCROW
A neutral third party holding account that collects and holds funds during a real estate transaction and releases them to the appropriate parties once all the conditions are met.
ESCROW COMPANY
Sometimes referred to as a Settlement Services Company, acts as a neutral third party that collects and holds funds during a real estate transaction and releases them to the appropriate parties once all the conditions are met.
ESTOPPEL CERTIFICATE
Also known as an Estoppel Letter, this due diligence form is used in real estate to validate terms of a rental agreement or loan.
FFICO SCORE
Ranging from 300-850, the FICO score is created by the Fair Isaac Corporation. It represents your borrowing eligibility. A higher score will generally enable borrowers to obtain better rates.
FAIR MARKET VALUE
The price that a property would likely sell for on the open market.
FINDER'S FEE OR REFERRAL FEE
A fee paid to an individual or company for referring a property to another individual that led to completion of the sale.
FIXED-RATE LOAN
A loan that contains a set interest rate and defined principal and interest payments that do not change through the life of the loan.
FORECLOSURE
Process where the lender repossesses a property to resell in the event the property owner defaults on his/her loan.
FORECLOSURE FEES
Lender-related costs incurred upon repossessing a property from a foreclosure.
FULL RECOURSE LOAN
A type of loan where the lender is able to go after a guarantor's assets not related to the loan if the current property alone is not able to satisfy the debt.
FRACTIONALIZED LOAN
A loan that is funded by more than one guarantor.
GGROSS MARGIN
Revenue generated from the sale of the property minus cost of acquisition and investment in the property.
HHOMEOWNERS ASSOCIATION (HOA)
An organization common in townhome or condominium developments that sets rules and restrictions on the property to uphold a minimum standard. Owners of the property automatically become members and pay monthly or annual dues.
IITIA
Stands for interest, taxes, insurance and association (HOA) dues. This is often used for calculating Debt Service Coverage Ratio (DSCR) on a property .
INTEREST ONLY
A loan that pays only interest during the life of the loan. No principal is paid by the borrower. Generally the remaining principal would need to be paid in one lump sum on a given date, or the loan would need to be refinanced into another loan that contains principal payments built into the terms.
INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER (ITIN)
An Individual Taxpayer Identification Number is issued by the Internal Revenue Service. ITINs are issued to to individuals who are required to have a U.S. taxpayer identification number but are not qualified to apply for a Social Security number.
INTEREST RATE
The cost of borrowing money. A percentage of the amount borrowed accrues and added onto principal during the life of the loan.
JJUNIOR LIEN
Also known as a second mortgage, this is a loan using the existing property as collateral while there is already a secured loan on it. Examples include Home equity loans or lines of credit.
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LENDER
An individual, group or business that provides funds to purchase or rehab a property with specific repayment terms and costs.
LETTER OF INTENT (LOI)
A drafted agreement of terms pertaining to a real estate transactions between participants before entering into a binding contract. The letter of intent is typically non-binding.
LIBOR
London Interbank Offered Rate was a key benchmark for setting the interest rates charged on adjustable-rate loans. This has been put out of use on US loans at the end of 2022 and superseded by the Secured Overnight Financing Rate, SOFR due to its higher perceived accuracy and security.
LIEN
A claim on a property that remains until an active debt has been paid off. In the event of non-payment, the lien can be leverage to repossess a property to satisfy the debt owed.
LIMITED PERSONAL GUARANTEE
An agreement by a borrower that he/she will pay back the loan along with other majority shareholders in the organization in the event that the loan is defaulted on. The lender is entitled to the borrower's personal assets in order to repay the loan.
LIQUIDITY
The ability and level of speed an asset can be converted to cash quickly without impacting market price.
LOAN-TO-VALUE RATIO
A number lenders use to determine how much risk they're taking on with a secured loan. The amount of outstanding debt on real property divided by the fair market property value. A unit of measure utilized during the borrowing process to assess level of risk against the loan. This is determined by dividing amount borrowed over the assessed value of the property. Lower LTV is lesser risk, which has a higher probability of getting funded and also for a better interest rate.
MMORTGAGE LOAN ORIGINATOR
A representative with a lending institution that walks borrowers through the lending journey, from application to processing, to closing. These individuals are trained with the latest regulations, rates and processes in order to get loans funded correctly and quickly.
MORTGAGE (DEED OF TRUST)
A loan issued for the purpose of purchasing a home. A lien is placed against the property by the lender until the borrower repays the total interest and principal over the life of the loan.
NNET OPERATING INCOME (NOI)
A measure of profitability on a real estate investment. It's calculated by revenue collected minus operating costs before taxes.
NOTE
Also known as a promissory note, this is the executed document that includes a written agreement to pay back the loan at an agreed upon rate up until the loan's completion date.
OORIGINATION
The process of establishing an account for funding a loan in order to acquire a new property or refinance an existing property.
PPAYOFF
Paying back the remaining loan principal loan balance and accrued interest to date. Once the loan balance has reached zero, the loan is completed
PAYOFF STATEMENT
A document containing the final payoff figure for completing the loan. The payoff figure includes remaining principal, fees and accrued interest calculated up to the payoff date.
POINTS
A finance charge paid to a lender at the time of closing which can be used as closing fee, or purchased in order to reduce the interest charge. One point is 1% of the loan amount. For every $100,000, 1 point is $1,000.
POWER OF ATTORNEY
A legal document that enables another individual to act on another's behalf for making legal decisions on assets, finances and medical treatment.
PRIVATE MONEY LENDER (PML)
A lender that is backed by private funding and can originate non-owner occupied real-estate investment loans. Lend Some Money is an example of a great private money lender.
PROMISSORY NOTE
This is the executed document that includes a written agreement to pay back the loan at an agreed upon rate up until the loan's completion date.
PRINCIPAL BALANCE
Remaining principal still left on a loan not including accrued interest.
PREPAYMENT STEPDOWN OPTIONS
Also known as a prepayment penalty, these are additional fees when extra principle is paid on a rental or refinance loan product. These are structured in a 3 or 5 year option with a step down, which means the fees reduce for each incremental year within the term. For example, a 5 year step down will have prepayment fees from the first year up to the fifth year for any additional principle. After the sixth year, no prepayment is added if additional principle is paid on the loan.
PRIOR TO DOC (PTD) CONDITIONS
Internal review by an underwriter that determines what documents will be required by a borrower in order to move forward in determining loan qualification.
PRIOR TO FUNDING (PTF) CONDITIONS
The collection of documents are submitted to the underwriter for review to ensure that all the qualification requirements are met before a loan can be funded.
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REFERRAL FEE
A commission or finder's fee that is paid to another individual or firm that led to connecting the parties involved in the transaction.
REFINANCE
The process where an existing loan or mortgage agreement is revised, often with a new lender to pay for the open remaining balance with a new interest rate or payment schedule. This is usually done to achieve a lower interest rate or borrow against the current equity in a property to pay for repairs, upgrades or other uses.
RELIEF OF STAY
If granted by the court, a creditor can proceed with collections or foreclosure on a property that is in a bankruptcy filing.
RIGHT OF RESCISSION
A right as part of US law that a borrower can cancel a refinance loan within 3 days once the promissory note is signed, the truth of lending disclosure is received, and two copies of the right to rescind notice have been provided.
RENEWAL FEE
When a loan term ends and needs to be renewed when remaining principal is unpaid, a borrower would pay a feel to renew the loan for an additional term. Rates very depending on market conditions, and this is not applicable to all loans.
SSECURED LOAN
A loan that is backed by a physical asset such as property. The property is used as collateral in the event of default and can be claimed by the creditor.
SELF-DIRECTED IRA
An individual retirement account in which a custodian handles alternative investments at the direction of the account owner. This arrangement enables private money investors to make hard money loans from their retirement accounts.
SERVICER
A third party company responsible for managing payment-related transactions with borrowers including payment (principal, interest, property taxes and insurance), monthly statements and annual tax statement (1098 form) distribution.
SETTLEMENT SERVICES COMPANY
A third party, typically attorney or escrow company, that is responsible for executing and completing the closing documents and dispersing funds at the end of the loan transaction.
TTIME VALUE OF MONEY
A concept that money today is more valuable than the same amount in the future due to its earning potential from an investment.
TITLE BINDER
Typically lasting 2 years, this is a commitment to issue a title insurance policy. and enables a seller to reuse policy of title to be issued to the buyer for a lower cost. This is not to be mistaken for an actual title insurance policy.
TITLE INSURANCE
Insurance that protects a the borrower and lender against issues found on a title during a real estate transaction.
TRUST DEED OR DEED OF TRUST
An agreement between the borrower and a lender to hold a property deed with an outside third party until the loan is paid off.
TRUTH IN-LENDING ACT
A federal US law that requires borrowers receive written disclosures containing the terms from the lender before they are contractually obligated to repay the loan.
UUNDERWRITING
The due diligence process lenders use to validate eligibility and risk levels pertaining to a loan before funds are issued.
UNLIMITED PERSONAL GUARANTEE
An agreement by a borrower that he/she will pay back the loan along with other majority shareholders in the organization in the event that the loan is defaulted on. The lender is entitled to the borrower's personal assets in order to repay the loan.
USURY
Interest rates on borrowed money that is higher than market rate.
VVARIABLE RATE
Interest rates that fluctuate during the the loan term based on changing market rates. These rates can increase or decrease over time.
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