Loan Glossary

A form of business lending where outstanding customer invoices serve as collateral. The lender advances 70%–90% of the invoice value immediately, then collects from the customers.

A mortgage whose interest rate changes periodically based on a benchmark index. Initial rate is usually lower than a fixed-rate loan, but payments can rise after the introductory period ends.

The process of paying off a loan through regular payments over time. Each payment covers both interest and principal, with the interest portion decreasing and the principal portion increasing as the balance declines.

The true yearly cost of borrowing, expressed as a percentage. APR includes the interest rate plus fees (origination, points, mortgage insurance), making it more accurate than the stated interest rate for comparing loan offers.

An independent professional estimate of a property's market value. Lenders require appraisals to ensure the collateral is worth at least the loan amount before approving a mortgage.

Taking over the seller's existing mortgage. VA and FHA loans are often assumable, potentially allowing a buyer to inherit a lower interest rate from a previous owner.

A large lump-sum payment due at the end of a loan term. Common in commercial loans, the borrower makes small payments during the term then pays the remaining balance in one large final payment.

A short-term loan used to bridge a gap between two transactions — typically used when a buyer needs to purchase a new property before selling the current one.

A revolving credit facility allowing a business to borrow up to a set limit, repay, and borrow again. More flexible than a term loan, with interest charged only on amounts drawn.

A lump-sum loan repaid over a fixed period (1–10+ years) with regular payments. Best for specific, one-time capital needs like equipment purchases or expansion.

The ratio of net operating income to property value, used to evaluate commercial real estate investments. Formula: Cap Rate = NOI ÷ Property Value.

Replacing an existing mortgage with a larger loan and receiving the difference in cash. Homeowners use this to access home equity for renovations, debt payoff, or other purposes.

A nonprofit organization that partners with banks on SBA 504 loans to provide long-term, fixed-rate financing for commercial real estate and equipment purchases.

The complete history of all previous ownership transfers and liens on a property. A clear chain of title is required before a lender will approve a mortgage.

The final step in a real estate transaction where all documents are signed, funds are transferred, and ownership of the property changes hands.

Fees and expenses paid at or before closing, typically 2%–5% of the loan amount. Includes origination fees, appraisal, title insurance, escrow deposits, attorney fees, and prepaid interest.

An additional person who applies for and signs a loan alongside the primary borrower. Their income and credit are considered, and they share equal responsibility for repaying the loan.

An asset pledged to secure a loan. If the borrower defaults, the lender can seize the collateral. For mortgages, the property itself serves as collateral.

Property used for business purposes, including office buildings, retail centers, industrial warehouses, multifamily apartment complexes (5+ units), hotels, and mixed-use properties.

A mortgage that meets Fannie Mae and Freddie Mac guidelines, including loan amount limits set annually by the FHFA. Conforming loans typically offer lower interest rates than non-conforming (jumbo) loans.

A mortgage not insured or guaranteed by a government agency (unlike FHA, VA, or USDA loans). Conventional loans follow Fannie Mae/Freddie Mac guidelines and typically require higher credit scores and down payments.

A numerical representation of a borrower's creditworthiness, ranging from 300 to 850. Lenders use credit scores to evaluate loan eligibility, determine interest rates, and set loan terms.

NOI divided by annual debt service (loan payments). A DSCR of 1.25 means the property generates 25% more income than needed to cover the mortgage. Most commercial lenders require DSCR ≥ 1.20–1.25.

The percentage of a borrower's gross monthly income that goes toward paying debts. Lenders use DTI to assess repayment ability. Most conventional loans require a DTI under 43%–50%.

A legal document used in some states instead of a mortgage. It transfers legal title to a neutral trustee until the loan is paid off, at which point the title returns to the borrower.

Failure to meet the legal obligations of a loan, most commonly by missing payments. Default can trigger foreclosure on real estate loans or repossession on other secured loans.

The portion of a property's purchase price paid upfront, not financed by the mortgage. A larger down payment reduces the loan amount, may eliminate PMI, and often results in a lower interest rate.

The process of thoroughly investigating a property, business, or loan before committing to a transaction. For commercial loans, this includes reviewing financials, environmental reports, leases, and physical inspections.

A deposit made by a buyer to show serious intent when making an offer on a property. Typically 1%–3% of the purchase price, it is applied toward the down payment at closing.

A loan or lease specifically to purchase business equipment. The equipment serves as collateral. Terms typically match the useful life of the equipment (3–7 years).

The difference between a property's market value and the outstanding loan balance. Equity grows as the borrower makes payments and/or the property appreciates in value.

A neutral third party that holds funds or documents during a real estate transaction until all conditions are met. Lenders also use escrow accounts to collect and pay property taxes and insurance on behalf of borrowers.

Selling outstanding invoices to a third party (factor) at a discount in exchange for immediate cash. Unlike AR financing, the business sells the receivables rather than using them as collateral.

A mortgage insured by the Federal Housing Administration. FHA loans require as little as 3.5% down and allow credit scores as low as 580, making them popular with first-time buyers.

A mortgage with an interest rate that remains constant for the entire loan term. Monthly principal and interest payments never change, offering predictability and protection from rate increases.

A temporary agreement between a borrower and lender to pause or reduce loan payments during a financial hardship. Interest typically continues to accrue during forbearance.

The legal process by which a lender takes possession of a property after the borrower fails to make payments. The property is then sold to recover the outstanding loan balance.

The percentage of gross monthly income used for housing costs (mortgage principal, interest, taxes, and insurance — PITI). Most conventional loans prefer a front-end ratio under 28%.

A form previously required by RESPA providing an estimate of closing costs. Now replaced by the Loan Estimate (LE) disclosure under TRID (TILA-RESPA Integrated Disclosures).

A short-term, asset-based loan from private investors rather than banks. Hard money loans close quickly but carry high interest rates (8%–15%) and are commonly used by real estate investors for fix-and-flip projects.

A revolving line of credit secured by home equity. Borrowers can draw funds as needed during the draw period (typically 10 years), then repay the balance during the repayment period.

A lump-sum second mortgage secured by home equity, with a fixed interest rate and fixed monthly payments. Often called a "second mortgage" because it is subordinate to the primary mortgage.

A standard form previously used to itemize all charges imposed on a borrower and seller in a real estate transaction. Replaced by the Closing Disclosure (CD) under TRID rules.

Another term for an escrow account used by mortgage servicers to collect and pay property taxes and homeowners insurance. Required for most loans with less than 20% down.

The percentage charged by a lender for the use of money, expressed as an annual rate. The stated interest rate does not include fees — use APR for a more complete cost comparison.

A revolving line of credit or loan secured by a business's inventory. Allows businesses to purchase inventory without depleting cash. Common in retail and manufacturing.

A mortgage that exceeds the conforming loan limits set by the FHFA ($766,550 for most areas in 2024). Jumbo loans typically require stronger credit, larger down payments, and carry slightly higher rates.

A non-binding agreement outlining the basic terms of a commercial real estate purchase or lease before formal contracts are drafted. Sets the framework for negotiation.

A legal claim against a property used as collateral for a debt. Mortgages, home equity loans, and unpaid taxes all create liens. All liens must typically be resolved before a property can be sold.

A condition placed on a commercial loan requiring the borrower to maintain certain financial ratios or operational standards. Violating a covenant can trigger a default even without missed payments.

A standardized disclosure form provided within 3 business days of a mortgage application. It summarizes key loan terms, projected payments, and estimated closing costs.

A fee charged by the lender for processing and underwriting the loan, typically 0.5%–1% of the loan amount. It may be listed as "points" (1 point = 1% of loan amount).

The ratio of the loan amount to the property's appraised value, expressed as a percentage. Higher LTV means more risk for the lender. LTV over 80% typically requires private mortgage insurance (PMI).

A set period during which a lender guarantees a specific interest rate on a mortgage. Rate locks typically range from 30 to 60 days and protect the borrower from rate increases while the loan is processed.

Strategies used by lenders to minimize losses from delinquent loans, including loan modifications, forbearance, short sales, and deed-in-lieu of foreclosure.

The date on which the final loan payment is due and the loan balance must be paid in full. For a 30-year mortgage taken out today, the maturity date is 30 years from now.

An advance against future credit card or debit card sales. Repaid automatically as a percentage of daily sales. Extremely expensive (factor rates of 1.2x–1.5x) — use only as a last resort.

A hybrid of debt and equity financing, often used in commercial real estate to fill the gap between senior debt and equity. Carries higher interest rates (10%–20%) and may convert to equity on default.

Insurance required on FHA loans regardless of down payment. Includes an upfront premium (1.75% of the loan amount) and annual premiums (0.55%–1.05% depending on loan terms) paid monthly.

Annual income generated by an income-producing property after operating expenses but before debt service (mortgage payments) and income taxes. Key metric for commercial real estate valuation.

A mortgage that does not meet Fannie Mae/Freddie Mac guidelines — either because of loan size (jumbo loans) or borrower qualifications. Generally carries higher interest rates.

The stated interest rate on a promissory note, which is the contractual rate the lender charges on the loan balance. Different from APR, which includes fees.

The process of creating a new loan, from the initial application through underwriting, approval, and closing. Loan origination fees compensate lenders for this process.

A legal commitment by a business owner to personally repay a business loan if the business cannot. Required for most SBA loans and many commercial loans. Puts personal assets at risk.

Principal, Interest, Taxes, and Insurance — the four components of a monthly mortgage payment. Lenders use PITI to calculate housing expense ratios for loan qualification.

Insurance required on conventional loans when the LTV exceeds 80%. PMI protects the lender if the borrower defaults. It can be removed when equity reaches 20%.

Prepaid interest paid at closing to reduce the mortgage interest rate. Each point costs 1% of the loan amount and typically reduces the rate by 0.25%. Also called "buying down the rate."

A lender's conditional commitment to lend a specific amount, based on verified income, assets, and credit. Pre-approval (stronger than pre-qualification) shows sellers the buyer is creditworthy.

An informal estimate of how much a borrower may be able to borrow, based on self-reported information without full verification. Less reliable than pre-approval.

A fee charged by some lenders if the borrower pays off the loan early (fully or through large extra payments). More common on commercial loans and hard money loans.

The original amount borrowed on a loan, or the remaining balance owed. Principal decreases as the borrower makes payments. Interest is calculated on the outstanding principal balance.

An individual or non-bank entity that provides loans outside of traditional banking channels. Private lenders typically charge higher rates but can move faster and offer more flexible terms.

A legal document signed by the borrower promising to repay the loan under specific terms including the interest rate, repayment schedule, and consequences of default.

Replacing an existing mortgage with a new one to get a lower interest rate, change the loan term, or both — without taking out additional cash. Different from a cash-out refinance.

Property acquired by a lender through foreclosure after failing to sell at a foreclosure auction. REO properties are sold by the lender's REO department.

A recourse loan allows the lender to pursue a borrower's personal assets if the collateral is insufficient. A non-recourse loan limits the lender's recovery to the collateral only — personal assets are protected.

Replacing an existing loan with a new loan, typically to lower the interest rate, change the loan term, switch from ARM to fixed, or access equity through a cash-out refinance.

A federal law requiring lenders to disclose settlement costs and prohibiting kickbacks between settlement service providers. Ensures borrowers receive fair, transparent loan information.

An SBA loan designed for major fixed assets — commercial real estate and equipment. Structured with a bank (50%), a Certified Development Company (40%), and borrower equity (10%). Max project size: $5.5M+.

The SBA's primary loan program for small businesses. Used for working capital, equipment, real estate, or refinancing. Maximum loan amount: $5 million. Lender is partially guaranteed by the SBA.

A faster SBA loan program with streamlined approval (36-hour turnaround for the SBA response). Max $500,000 for lines of credit or term loans. Carries a higher interest rate than standard 7(a) loans.

The SBA's promise to repay a portion of the loan to the lender if the borrower defaults. The SBA guarantees up to 85% for loans ≤$150K and up to 75% for loans >$150K in the 7(a) program.

SBA loans up to $50,000 for startups and small businesses that need smaller amounts of capital. Provided through nonprofit intermediary lenders, with average loan amounts around $14,000.

Criteria that define whether a business qualifies as "small" for SBA loan eligibility. Based on number of employees or average annual receipts, varying by industry.

A loan secured by a property that already has a primary mortgage. In foreclosure, the first mortgage lender is paid first; the second mortgage is subordinate. Home equity loans are a common type.

Selling a property for less than the outstanding mortgage balance, with the lender's approval. A short sale avoids foreclosure but may result in a deficiency judgment and negatively impact credit.

A commercial property that has reached its expected occupancy level (typically 90%–95%) and generates consistent, predictable income. Stabilized properties qualify for permanent financing.

Financing for businesses with little or no operating history. Options include SBA microloans, business credit cards, CDFI loans, personal loans, or equipment financing. Harder to qualify for without revenue history.

The real estate being purchased or refinanced — the property that serves as collateral for the loan being applied for.

Legal ownership of a property. When you receive a deed at closing, you receive title to the property. Lenders require title insurance to protect against any claims or defects in the title.

Insurance protecting lenders (and optionally buyers) against losses from title defects, liens, or ownership disputes discovered after closing. Usually required by lenders.

An examination of public records to confirm the seller's legal right to sell the property and identify any outstanding liens, easements, or encumbrances on the title.

The process by which a lender evaluates a borrower's application, credit, income, assets, and the property to determine whether to approve the loan and on what terms.

A zero-down-payment mortgage guaranteed by the U.S. Department of Agriculture for eligible rural and suburban properties. Designed to help low-to-moderate income borrowers in qualified areas.

A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses. No down payment required and no PMI.

A commercial property with below-market rents or high vacancy that can be improved through renovation, better management, or lease-up to increase its value and NOI.

The funds used to cover day-to-day operational expenses — payroll, inventory, rent, utilities. Working capital loans help businesses bridge cash flow gaps.

A mortgage or business loan requiring no down payment. VA loans and USDA loans offer zero-down options for eligible borrowers. Some SBA 504 loans require only 10% down.