GLOSSARY
IMPORTANT NOTICE REGARDING THESE TERMS AND DEFINITIONS
The terms and definitions that follow are meant to give simple,
informal meanings for words and phrases you may see on our Web site that may not
be familiar to you. The specific meaning of a term or phrase will depend on
where and how it is used, because the relevant documents, including signed
agreements, customer disclosures, internal policy manuals and industry usage,
will control meaning in a particular context. The terms and definitions that
follow have no binding effect for purposes of any contracts or other
transactions with us. We offer them here in the hope they will provide helpful
basic information. The professional team at ACRES Funding Corporation will be
happy to answer any specific questions you may have.
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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