Glossary of Commercial Lending Terms and Definitions

If this is your first commercial mortgage, you may not be familiar with the terms and conditions of the loan.

That’s why we’ve provided a list of helpful terms and definitions that not only tell you what things are, but more importantly, we do it in language that you can understand.

·         Acceleration Clause – Condition in a mortgage that may require the balance of the loan to become due immediately, if regular mortgage payments are not made or for breach of other conditions of the mortgage.

·         Adjustment Period – This is the length of time for which the interest rate is fixed on an adjustable rate mortgage.  After that period it will be adjusted.  Typically once or twice a year depending on the index.

·         Appraisal Fee – In order to prevent unnecessary costs and to ensure a quality appraisal of your property, we choose the appraisal firm that is used.  The appraisal fee is a third party cost and reflects the level of detailed information and complex analysis required of a commercial appraisal, as opposed to a residential appraisal, which requires much less.  We will order the appraisal once the upfront appraisal process fee is paid.  The sooner you submit payment, the faster you’ll get your money!

·         Assets – Any interest in real or personal property which can, if necessary, be appropriated for the repayment of debt.

·         Automatic Payment Withdrawal – Once your loan closes, your loan payments will be automatically debited from your account on a monthly basis using an automatic payment withdrawal (APW) service.  The APW service is the most hassle-free way to set up your loan, eliminating the possibility of late or missed payments.  If you waive this service, you will be charged a one-time $500 administrative fee at closing.

·         Bad Debt – A debt that is not collectible and is therefore worthless to the creditor.  (See also Write-Off.)

·         Balance Sheet – A financial statement showing measures of the assets, liabilities and owner’s equity or net worth of a business firm or nonprofit organization as of a specific moment in time.

·         Balloon Mortgage – A short-term fixed-rate loan which involves smaller payments for a certain period of time and one large payment for the entire amount of the outstanding principal.  Usually they have terms of 3, 5, and 7 years.

·         Business Plan – A document that describes an organization’s current status and plans for several years into the future.  It generally projects future opportunities and maps the financial, operational and marketing strategies that will enable the organization to achieve its goals.

·         Capital – The money and other property of a corporation or other enterprise used in transacting its business.

·         Cash Flow Financing – A short-term loan which provides additional cash to cover shortfalls in anticipation of future revenue, such as the payment of receivables.

·         Collateral – Assets pledged to secure the repayment of a loan.

·         Current Asset – An asset that will normally be turned into cash within a year.

·         Current Liability – A liability that will normally be repaid within a year.

·         Current Ratio – A measure of liquidity equal to current assets divided by current liabilities.  The higher the ration, the greater the cushion between a company’s current obligations and its ability to meet them.

·         Debt – An amount owed for funds borrowed.  It may be owed to an organization’s own reserves, to private individuals, banks, or other institutions.  Generally, the debt is secured by a note (see Promissory Note), bond, mortgage, or other instrument that states repayment and interest provisions.  The note, in turn, may be secured by a lien against real or personal property or other assets.

·         Debt Service Coverage Ratio – (DSCR) – Property’s ability to pay its debt.  The Formula is : DSCR = Net Operating Income Divided by Principal and Interest Payment.  (PITI)

·         Default – Failure to discharge a covenanted duty.  The term is most often used to describe the occurrence of an event that impedes the rights or remedies of one of the parties to an agreement or legal dispute; for example, the failure to make a monthly loan payment.

·         Delinquent – A debt that has become due and payable but remains overdue and unpaid.

·         Environmental Due Diligence – We perform an environmental due diligence on every commercial property that is being considered as collateral.  This is to ensure that your property is free of any environmental issues that may delay or prevent the funding of your commercial loan.

·         Interest Rate – Since our commercial loan programs do not require any income verification, the interest rate reflects the increased risk associated with this type of loan.  With both fixed and adjustable rate programs available, you’re bound to find a payment to fit your budget.

·         IRS Form 4506 – Many commercial lenders are asking prospective mortgage applicants to sign IRS Form 4506 a “Request for Copy or Transcript of Tax Form” as part of the application process.  Once signed, it serves as the lender’s springboard to receive copies of your tax return directly from the IRS for as far back as 4 years (or beyond).

·         Liabilities – Financial claims against an individual’s or firm’s assets; amounts owed to creditors.

·         Lien – A claim by one person on the property of another as security for money owed.  Such claims may include obligations not met or satisfied, judgments, unpaid taxes, materials, or labor.

·         Liquidity – The quality of being readily convertible into cash.

·         Loan-to-Value Ratio (LTV) – The relationship between the amount of the mortgage loan and the value of the real property expressed as a percentage.  For purchase loans the value of a property is the appraised value or the purchase price, whichever is less.  For refinance loans the value is the appraised value.

A LTV of 90% means that you can borrow a maximum of 90% of the property value.

Down payment is the difference between the purchase price and the mortgage amount.

• Loan Term – Your loan is fully amortizing with a 15, 20, 25 or 30-year term.  The advantage of a fully amortizing loan is that you will not be required to make a balloon payment at any point in the future.  While many vendors structure their loans with balloon provisions, these terms can be very costly to borrowers because it forces them to seek new financing in the near future.

• Prepayment – Payment of mortgage loan, or part of it, before due date.  Mortgage agreements often restrict the right of prepayment either by limiting the amount that can be prepaid in any one year or charging a penalty for prepayment.  Lenders who impose prepayment penalties will charge borrowers a fee if they wish to repay part or all of their loan in advance of the regular schedule.

• PITI – Principal, Interest, Taxes and Insurance.  These components are usually included in the monthly mortgage payment.

• Principal – The amount of a loan from which interest is calculated.

• Promissory Note – Also known as a note; literally, a promise to pay.  A written contract between a borrower and a lender which is signed by the borrower and provides evidence of the borrower’s indebtedness to the lender.

• Security – A pledge made to secure the performance of a contract or the fulfillment of an obligation, such as the repayment of a loan.  Examples of securities include real estate, equipment, stocks or a co-signer.

• Taxes and Insurance Escrows – We require that an escrow account be established to cover the taxes and insurance premiums due for the subject property.

• Term – The maturity or length of time for final repayment of a loan, bond, sale or other contractual obligation.

• Write-Off – Refers to the action of a lender charging the outstanding amount of a defaulted or seriously delinquent and uncollectible loan as a business expense or loss; the bad debt itself.  (See also Bad Debt.)