Glossary
The following terms are common in commercial real estate financing industry.
Acceleration
A lender's demand for full and immediate repayment of a loan. Loans are accelerated upon default or maturity.
Amortization
The gradual repayment of a mortgage through monthly installments of principal and interest based on a multiyear schedule. Bridge loan products are usually interest only, and thus include no amortization.
Balloon
A lump sum payment due at the end of a mortgage term. Bridge mortgage loans usually require payments of interest only, and a balloon payment by maturity.
Bridge Loan
A short-term mortgage that is placed temporarily on a property until permanent financing can be put in place. If a bridge loan involves a difficult situation it is also referred to as a hard money loan. Bridge loans and hard money loans are usually made for a year or less.
Cash Out
Cash proceeds in refinance that a borrower receives after any existing mortgage(s), lien(s), etc. are paid off and after closing costs are covered.
Commercial Bridge Loan and Hard Money Commercial Loan
Loans that are made on commercial - as opposed to owner-occupied residential - properties. A commercial bridge loan is acquired when time constraints are involved. A hard money commercial loan is acquired when poor quality of credit or collateral is at issue.
Commercial Hard Money Lender
A lender who makes loans on commercial properties where either the borrower has credit problems or the property is difficult to finance, or both. A commercial hard money lender typically charges interest rates that are commensurate with the risk involved, that is, rates that are higher than those of a conventional bank.
Commitment
An official letter from a lender to a borrower, constituting an offer to lend and specifying the terms of the loan.
Construction Loan
A loan on new construction, involving submission of permits, plans, budgets, and more. Funding for construction is usually in installments, and is done after each stage has been inspected and certified by a lender\'s agent.
Commercial Bridge Loan and Hard Money Commercial Loan
Loans that are made on commercial - as opposed to owner-occupied residential - properties. A commercial bridge loan is acquired when time constraints are involved. A hard money commercial loan is acquired when poor quality of credit or collateral is at issue
Commercial Hard Money Lender
A lender who makes loans on commercial properties where either the borrower has credit problems or the property is difficult to finance, or both. A commercial hard money lender typically charges interest rates that are commensurate with the risk involved, that is, rates that are higher than those of a conventional bank.
Default
Borrower's breach under the mortgage documents, usually due to failure to make payments on the loan or to pay off. Upon borrower's default, the default interest specified in the note becomes effective.
Due-on-Sale Provision
A clause in the mortgage documents that requires the borrower to repay the mortgage in full prior to selling the property.
Equity
The difference between the market value of a property and the total balance(s) of the loan(s) and lien(s) encumbering the property. Equity constitutes an owner's interest in the property, and represents the net amount of cash an owner would receive if the property were sold at present. Saying that a property has "plenty of equity" is tantamount to saying that the ratio between a loan and a property value is low (see LTV).
Escrow
Money held in trust by a third party such as an attorney or a title company. The funds are held until the payer of the escrow performs as agreed. Escrow funds can also be held by a lender for payment of insurance, taxes, repairs, etc. A holder of escrow moneys by definition has no rights to the moneys.
First Mortgage
A senior lien on a property. Even though a first mortgage is a senior lien it is still junior to taxes.
Foreclosure
The process a lender starts subsequent to default or maturity. If a property is not sold or refinanced during foreclosure, the process will culminate in a foreclosure sale of the property. During foreclosure the default interest specified in the mortgage documents is in effect.
Hard Money
The term used to describe loans with increased risk. Borrowers obtain hard money for real estate properties that are not easily bankable or for other needs when they are personally in financial distress.
Hard Money for real estate situations that are difficult, e.g., poor credit, distressed properties, etc. Hard money real estate loans encompass hard money construction loans, foreclosure bailouts, debt consolidation loans, various bad credit mortgages, hard money land loans, and more.
Lien
A claim on a property, e.g., a mortgage, a tax lien, a mechanics lien, etc.
Lock-In Period
A period of time after origination during which a borrower is prohibited from repaying a loan. If a loan is paid off before a lock-in date, a borrower will incur a prepayment penalty. Some lenders completely prohibit prepayment during lock-in, not even with a prepayment penalty.
LTV
Loan-to-Value ratio. The ratio between the balance of a loan and a Market Value of a property. For example, if a loan is $60,000 and the value of a property is $100,000, then the loan-to-value ratio is 60%. Hard money financing is often available at higher LTVs than financing from bridge loan companies or conventional banks.
Maturity
The date on which a loan is due. If a loan is not paid off on or before maturity, it is accelerated and foreclosure is commenced.
Mezzanine Financing
A loan to a corporation that owns a property. This is not a mortgage loan. The security available to a mezzanine lender is a UCC lien. Commercial hard money financing can come in the form of a mezzanine loan.
Mortgage
The pledge of real property as security to a lender. Mortgages are filed to secure promissory notes for residential or commercial hard money, bridge loans, and conventional loans. Some hard money financing may not require a mortgage but only a UCC lien (see Mezzanine Financing).
Mortgage Note
A document which serves as an IOU in mortgage transactions. It is also called Promissory Note, or simply Note. The note specifies the terms of a loan. The note, mortgage and other closing documents are produced by lenders' attorneys.
Non-Recourse Loan
A loan in which a lender's security is limited to the collateral. In the event of deficiency, a lender with a non-recourse loan cannot collect from the personal assets of a company's principal, because there is no personal guarantee. While some conventional commercial loans may not require a personal guarantee, commercial hard money financing tends to include it in every transaction. Thus, it can be said that commercial hard money financing for the most part involves a Full-Recourse Loan.
Personal Guarantee
A contractual personal assurance provided by a principal of a borrowing entity that a loan taken by the entity will be repaid. In the event that the sale of collateral is insufficient to repay a loan, a personal guarantor has to personally come up with the funds to repay the deficiency. A loan with a personal guarantee is called a Full-Recourse Loan. A loan without it is called a Non-Recourse Loan.
Points
One point is 1% of the amount of a mortgage. It is usually a fee paid to a lender upon origination. A payment to a broker is also denominated in points. Hard money loans tend to involve more points than conventional loans or bridge loans where the risk is lower.
Prepayment Penalty
A fee charged by a lender if a loan is paid off before maturity or before a predetermined lock-in period. Hard money lenders include prepayment penalties as a means to deter payoffs and thus hold onto their high-yielding loans. Conventional banks include prepayment penalties because they securitize their loans and need to maintain the future cash flows mandated by the loan documents.
Principal
1.The outstanding capital amount owed on a loan.
2. A chief officer of a company, often an owner.
Private Hard Money Lenders
Providers of hard money loans, also known as direct mortgage lenders, commercial hard money lenders, real estate private lenders, and private bad credit lenders. Private hard money lenders tend to incur higher risks and charge higher rates than conventional banks.
Promissory Note
A legal document in which a borrower contractually undertakes to repay a loan to a lender. In the case of a mortgage, it is called Mortgage Note.
Seller Financing
A loan provided by a seller to a buyer. Conventional banks prohibit such financing behind their loans. Bridge loan companies and hard money lenders may allow it, depending on the circumstances.
Servicing
The collection of payments on a mortgage and the handling of other mortgage-related issues, such as taxes, insurance, etc.
Term
1. The duration of a loan. The time between origination and maturity – when a loan is active.
2. Terms (in plural) refer to loan conditions in their entirety, i.e., the interest rate, points, term, etc.
UCC Lien
A lien filed on movable objects that are attached to or come with real property. A UCC (Uniform Commercial Code) lien appears on title and can thus provide a mezzanine lender with publicly searchable security.
2809 Cliff Rd E, Burnsville, MN 55337. Phone: (952) 746-9301 Fax: (952) 746-9307 E-Mail
4111 Central Ave NE, Columbia Heights, MN 55423. Phone: (763) 746-9480 E-Mail
1810 Crestview Drive, Hudson, WI 54016. Phone: (715) 386-6088 Fax: (715) 220-4200 E-Mail