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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.
Adjustment Interval: 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.
Amortization: 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.
Apartment Conversion: When a rental apartment building is converted
to individually owned units.
Apartment Rehabilitation: Extensive remodeling of an older apartment
building.
Appraisal: An estimate of the value of a property,
make by a qualified professional called an
appraiser.
ARM: See Adjustable Rate Mortgage.
Assumable Loans: 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.
BC & D Lender or Loan: The term BC & D is a rating of the loan.
We refer to BC & D as "problem or
troubled" credit rather than using these
letters.
Bond Financing: Type of financing that is a promise to repay
the principal along with interest on a specified
date.
Buydown: the process of paying additional points
on the loan to reduce the monthly mortgage.
There are typically two specific types: a
Permanent Buydown, and a Temporary Buydown.
In a Permanent Buydown, a sufficient amount
of interest is prepaid to lower the rate
permanently. In a Temporary Buydown, only
a sufficient interest is paid to lower the
payment for the first three years. The reason
to Temporarily Buydown, a loan is to lower
the current payments thereby more easily
qualifying for the loan. This usually makes
sense because income will usually continue
to increase as the interest does. The most
common Temporary Buydown is called 3-2-1,
meaning three percent lower the first year,
tow percent lower the second year, and one
percent lower the third year.
Bridge Loan: Financing which expected to be paid back
relatively quickly, such as by a subsequent
longer - term loan. Also called a swing loan.
Cap: 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.
Cap Rate: A net yield set by an investor to determine
the value of an income producing property.
Capital Expenditures: 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.
Capitalization Rate: A method used to estimate the value of a
property based on the rate of return on investment.
Closing: The meeting between the buyer, seller and
lender (or their agents) where the property
and funds legally change hands. Also referred
to as "settlement".
Closing Costs: 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.
Commercial Conduit: 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.
Conduit: 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.
Convertible: 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.
Cosigner: 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.
Credit Company: A lending organization that obtains it source
of funds from the commercial market.
Credit Enhancements: A loan to provide improvements to the property.
Credit Report: A search through your existing credit history
by a qualified credit bureau to determine
if, and the number of times, you may have
been delinquent making monthly payments on
previous debts. Even when a credit report
is for the most part positive, many lenders
require written explanation for any negative
comments within the credit report. This type
of report is usually required to obtain a
mortgage loan.
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.
Debt Service: The periodic payments (principal and interest)
made on a loan.
Debt Ratio: 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%.
Discount Rate: 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 5 - 25%.
Due Diligence: The legal definition: a measure of prudence,
activity or assiduity, as is properly to
be expected from, and ordinarily exercised
by, a reasonable and prudent person under
the particular circumstances. In CMBS: due
diligence is the foundation of the process
because of the reliance securities investors
must place on the specific expertise of the
professionals involved in the transaction.
Engineering Report: 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.
Environmental Report: Report generated by an qualified environmental
firm to determine potential environmental
hazards in a building's region or within
the building itself.
Environmental Risk: 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.
Equity: 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
Equity Capital: Capital raised from owners. In a commercial
real estate case, a lender will also provide
equity capital for a percentage of ownership.
Escrow: 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.
Fannie Mae: 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.
FHA: 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.
Foreclosure: 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 half of a lender. A property
usually goes in to the process of foreclosure
if payments are no more than 90 days past
due.
Forward Commitment: 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.
Government Loans: 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.
Gross Income: 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.
Hard Equity: High interest rate financing.
Housing Ratio: One of several financial calculations performed
by your lender when applying for a conventional
loan to determine if you can afford a particular
monthly payment. The housing ratio(also known
as the income ratio) is your total monthly
payment including taxes and insurance divided
by your total monthly income. Typically acceptable
housing ratios for Conventional Loans are
28 - 33% and FHA Loans are 29 - 31%.
HUD: Housing and Urban Development, a federal
government agency.
Index: 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.
Interest: The sum paid for borrowing money, which
pays the lender's costs of doing business.
Interest Rate: 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.
Interest Shortfall: the aggregate amount of interest payments
from borrowers that is less than the accrued
interest on the certificate.
Investment Banker: 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.
Jumbo (Non - Conforming) Loans: A mortgage loan that exceeds the amount
that is acceptable by the government if the
loan were to be resold (on the secondary
market) to Fannie Mae and Freddie Mac. Usually,
loans with a face value greater than $227,150
(as of 1/1/98).
Lease Assignment: An agreement between the commercial property
owner and the lender that assigns lease payments
directly to the lender.
Leasehold Improvements: The cost of improvements for a leased property.
Often paid by the tenant.
Lender Margin: 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.
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.
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.
LTV: Loan to Value: Proposed loan amount divide
by the value of the property.
Margin: The amount that is added to an index rate
to determine the total interest rate.
Maturity: 1. The termination period of a note (e.g.,
a 30 - year mortgage has maturity of 30 years.)
2. In sales law, the date a note becomes
due.
Mezzanine: Late-stage venture capital financing.
Miniperm: Short term permanent financing, usually
3 to 5 years.
Mortgage Banker: An entity that makes loans with its own
money and then sells the loan to other lenders.
Mortgage Broker: An entity that arranges loans for borrowers.
Mortgage Insurance: A type of insurance changed by most lenders
to offset the risk of your loan when your
down payment is less than 20% of the value
of the home.
Mortgage Reduction Programs: A type of Accelerated payment program whereby
payments are made more frequently usually
bi - weekly or weekly rather than the traditional
monthly payment. Making more frequent and
accelerated payments reduces the amount of
principal more quickly which interest accumulation
is based on. The net effect can be a savings
on the total interest paid
Multi - Family Property Class A: Properties are above average in terms of
design, construction and finish; command
the highest rental rates; have a superior
location, in terms of desirability and /
or accessibility; generally are professionally
managed by national or large regional management
companies.
Multi - Family Property Class B: Properties frequently do not possess design
and finish reflective of current standards
and preferences; construction is adequate;
command average rental rates; generally are
well maintained by national or regional management
companies; unit sizes are usually larger
than current standards.
Multi - Family Property Class C: Properties provide functional housing; exhibit
some level of deferred maintenance; command
below average rental rates; usually located
in less desirable areas; generally managed
by smaller, local property management companies;
tenants provide a less stable income stream
to property owners than Class A and B tenants.
Negative Amortization: Occurs when interest accrued during a payment
period is greater that the scheduled payment
and the excess amount is added to the outstanding
loan balance (e.g., if the interest rate
on ARM exceeds the interest rate cap, then
the borrower's payment will be sufficient
to cover the interest accrued during the
billing period - the unpaid interest is then
added to the outstanding loan balance).
Net Effective Rent: Rental rate adjusted for lease concessions.
Net Operating Income (NOI): Total income less operating expenses, adjustments,
etc., but before mortgage payments, tenant
improvements and leasing commissions.
Net - Net Lease (NN): Usually requires the tenant to pay for property
taxes and insurance in addition to the rent.
Notice of Default (NOD): To initiate a non - judicial foreclosure
proceeding involving a public sale of the
real property securing the deed of trust.
The trustee under the deed of trust records
a Notice of Default and Election to Sell
("NOD") the real property collateral
in the public records.
Non - Recourse: A finance term. A mortgage or deed of trust
securing a note without recourse allows the
lender to look only to the security (property)
for repayment in the event of default, and
not personally to the borrower. A loan not
allowing for a deficiency judgment. The lender's
only recourse in the event of default is
the security (property) and the borrower
is not personally liable.
Operating Expense: Periodic expenses necessary to the operation
and maintenance of an enterprise (e.g., taxes,
salaries, insurance, maintenance). Often
used as a basis for rent increases.
Participation: A type of mortgage where the lender receives
a percentage of the gross revenue in addition
to the mortgage payments.
Percentage Lease: Commonly used for large retail stores. Rent
payments include a minimum or "base
rent" plus a percentage of the gross
sales "overage." Percentages generally
vary from 1% to 6% of the gross sales depending
on the type of store and sales volume.
Phase I: An assessment and report prepared by a professional
environmental consultant who reviews the
property - both land and improvements - to
ascertain the presence or potential presence
of environmental hazards at the property,
such as underground water contamination,
PCB's, abandoned disposal of paints and other
chemicals, asbestos and a wide range of other
potentially damaging materials. This Environmental
Site Assessment (ESA) provides a review and
makes a recommendation as to whether further
investigation is warranted (a Phase II Environmental
Site Assessment). This latter report would
confirm or disavow the presence of an mitigation
efforts that should be undertaken.
PITI: Principal, interest, taxes and insurance.
Your calculated estimated of monthly payments.
Points: Loans fee paid by the borrower. One point
is 1% of the loan amount.
Prepayment Penalty: A Change for paying off a loan before it
is due.
Pre - qualification: The process of determining the amount of
money a particular lender will let you borrow.
You should strive to obtain pre-qualification
with at least two or three lenders.
Prime Rate: An artificial rate set by commercial bankers.
Many banks will use the Wall Street Prime
rate. This is a rate set by the top lending
banks in the country.
Principal: 1. The amount of debt, not including interest,
left on a loan. 2. The face amount of the
mortgage.
Property Appraisal: A report showing exactly how much the particular
home
Property Classification: Most lenders will classify a property by
its age and needed maintenance. As an example
many insurance companies will only loan on
properties that are class A, meaning that
the properties age is 10 years old or less
and is not in need of repair.
Property Tax: Taxes based on the market value of a property.
Property taxes vary from state to state.
Rate Index: An index used to adjust the interest rate
of an adjustable mortgage loan (e.g., the
changes in U.S. Treasury securities (T-bill)
with 1-year maturity. The weekly average
yield on said securities, adjustable to a
constant maturity of 1 year, which is the
result of weekly sales, may be obtain weekly
from the Federal Reserve Statistical Release
H.15 (519). This changes in interest rates
is the "index" for the change in
a specific Adjustable Mortgage Loan).
Recourse: A loan for which the borrower is personally
liable for payment is the borrower defaults.
REIT: (Real Estate Investment Trust) Pooled funds
that purchase and hold commercial real estate.
Refinance: The renewal of an existing loan by the some
borrower.
Rent Step - Up: A lease agreement in which the rent increases
every period for a fixed amount of time or
for the life of the lease.
Replacement Reserves: Monthly deposits that a lender may require
a borrower to a reserve in an account, along
with principal and interest payments for
future capital improvements of major building
systems; i.e., HVAC, parking lot, carpets,
roof, etc.
Reserve Funds: A portion of the bond proceeds that are
retained to cover losses on the mortgage
pool. A form of credit enhancement (also
referred to as "reserve accounts").
Residual Income: The amount of money left over after you
have paid all of your ordinary and necessary
debts including the mortgage. This calculation
is typically used with VA loans.
Sale / Lease Back: When a lenders buys a property and leases
it back to the seller for an extended period
of time.
Savings & Loans: A federally or state charted financial institution
that takes deposits from individuals, funds
mortgages, and pays dividends.
SBA: Small Business Administration, a federal
government agency.
Second Mortgage: A mortgage on real estate, which has already
been pledged as collateral for an earlier
mortgage. The second mortgage carries rights,
which are subordinate to those of the first.
Secondary Financing: A loan secured by a mortgage or trust deed,
in which the lien is junior, or secondary,
to another mortgage or trust deed.
Secondary Mortgage Market: The buying and selling of first mortgages
or trust deeds by banks, insurance companies,
government agencies, and other mortgagees.
This enables lenders to keep an adequate
supply of money for new loans. The mortgages
may be sold at full value ("par")
or above, but are usually sold at a discount.
The secondary mortgage market should not
be confused with a "second mortgage."
Spread: Number of basis points over a base rate
index.
Standby Commitment: A formal offer by a lender making explicit
the terms under which it agrees to lend money
to a borrower over a certain period of time.
Structural Report: (see Engineering Report)
Tax & Insurance Impound: Monthly deposits that a lender may require
to be included with principal and interest
payments for the payment of taxes and insurance.
Tenant Improvements (TI): The expense to physically improve the property
to attract new tenants to new or vacated
space which may include new improvements
or remodeling. May be paid by tenant, landlord,
or both. Typically, tenants are provided
with a market rate TI allowance ($/sq. ft.)
that the owner will contribute towards improvements.
The tenant must pay for amounts above the
TI allowance desired by the tenant.
Term: The length of a mortgage.
Title: The actual legal document conferring ownership
of a piece of real estate.
Title Insurance: An insurance policy which insures you against
errors in the title search - essentially
guaranteeing your, and your lender's, financial
interest in the property.
Triple - Net Lease: A lease that requires the tenant to pay
for property taxes, insurance and maintenance
in addition to the rent (also referred to
as " Net Net Net Lease").
Underwriting: The process of deciding whether to make
a loan based on credit, employment, assets
and / or other factors.
Uniform Residential Loan Application (1003): This application, also called a URL - 1003
is the standard loan application used by
all lenders.
Underwriter: The underwriter is the lender or company
who actually provides the money for you loan.
A mortgage broker "brokers" and
represents several different underwriters
and depending on your situation they choose
the "best" underwriter for you
and your lender.
Upfront Fees: Generally refer to fees charges to pay for
third party costs like appraisals.
VA (Veterans Administration) Loan: A type of government loan administered by
the Veterans Administration. Eligibility
for VA loan is restricted and limited to
qualifying veterans, and to certain home
types. You need to check with the VA to determine
if you qualify. The maximum VA Loan is $184,000.
Workouts: Attempts to resolve a problematic situation,
such as a bad loan.
Yield Maintenance: A prepayment premium that allows investors
to attain the same yield as if the borrower
made all scheduled mortgage payments until
maturity. Yield maintenance premiums are
designed to make investors indifferent to
prepayments and to make refinancing unattractive
and uneconomical to borrowers.
Yield To Average Life: Yield calculation used, in lieu of "Yield
to Maturity" or "Yield to Call,"
where books are retired systematically during
the life of the issue, as in the case of
a "Sinking Fund," with contractual
requirements. Because the issuer will buy
its own bonds on the open market to satisfy
its sinking fund requirement if the bonds
are trading below Par, there is, to that
extent, automatic price support for such
bonds; they therefore tend to trade on a
yield - to - average - life basis.
Yield To Maturity (YTM): Concepts used to determine the rate of return
an investor will receive if a long - term,
interest - bearing investment, such as a
bond, is held to its maturity date. It take
into account purchase price, redemption value,
time to maturity, coupon yield and the time
between interest payments. Recognizing time
value of money, it is the discount tare at
which the present value of all future payments
would equal the present price of the bond
(also referred to as "internal rate
of return"). It is implicitly assumed
that coupons are reinvested at the YTM rate.
YTM cam be approximated using a bond value
table (also referred as a "bond yield
table") or can be determined using a
programmable calculator equipped for bond
mathematics calculations.
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