Lending Glossary

LoanBack.com on 03/09/2011

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A

  • Accrued Interest
    The interest that has accumulated on a loan since the last payment.
  • Adjustable Rate Mortgage (ARM)

    A real estate loan with an interest rate that adjusts on a regular schedule based on a related financial index. The initial interest rate for an ARM is commonly referred to as the ‘teaser rate’. After the initial interest rate period, the rate will adjust on a regular schedule, usually monthly. The new interest rate is a premium on top of some underlying financial index such as:

    • London Interbank Offered Rate (LIBOR)
    • 1-year constant-maturity Treasury (CMT)
    • Cost of Funds Index (COFI)
  • Amortization
    The gradual elimination of an obligation, like a loan, in regular installments over a period of time. As a debtor makes payments on a loan, a portion of the payment is allocated to interest and a portion to the principal. As the loan ages the majority of a payment is allocated to reducing the principal until the loan has been completely paid off or "amortized".
  • Amortization Table
    A table showing the repayment schedule over the lifetime of a loan. The amortization table takes into account the initial principal of the loan, term, interest rate and any special conditions (negative amortization, balloon payment, etc.). A complete amortization table will show both the interest and principal components of each payment.
  • Annual Mortgage Statement (Form 1098)

    Also known as a Form 1098, this is a document sent by the mortgage servicer to the mortgagor (borrower). The document details the total amount of interest and points paid during the previous tax year as well as the remaining loan balance.

  • Annual Percentage Rate (APR)
    The annual rate of interest on a loan that includes any fees and compounding of interest. The nominal interest rate, commonly presented as the interest rate for a loan, does not include the cost of compound interest.

    For example, the APR for the loan displayed below would be 5.992%

    • Loan Amount: $10,000
    • Fees (Closing Costs, etc.): $100
    • Nominal Interest Rate: 5.00%
    • Term: 2 years
  • Applicable Federal Rate (AFR)

    Interest rates published by the Internal Revenue Service (IRS) that are used to calculate imputed interest charges. In order for a loan not to be considered a gift by the IRS, and thus be a taxable event, the interest rate on the loan should be no less than the AFR.

  • Appraisal
    When a property is purchased or refinanced, the lender will typically require a professional appraisal to determine the expected value of the property. To determine the value of a property appraisers typically look at comparable transactions in the area, the replacement cost of the property and any recent improvements to the property.

B

  • Balloon Loan
    A loan where the final installment is significantly larger than the previous, regular installment payments. For example, a borrower borrows $1,000 for a year and pays $10 a month for the first 11 months and makes a balloon payment of $1,000 in the twelfth month to complete the loan.
  • Balloon Payment
    The final installment payment on a loan that is larger than the previous, regular installment payments. For example, a borrower borrows $1,000 for a year and pays $10 a month for the first 11 months and makes a balloon payment of $1,000 in the twelfth month to complete the loan.
  • Base Price (Auto)
    Also known as the “sticker price” or MSRP, the Base Price is the price of a car without any options included.
  • Basis Point
    One hundredth of a percentage point or 0.01%
  • Bi-Monthly Mortgage
    A mortgage with payments made twice a month (26 per year) instead of monthly. A bi-monthly mortgage can result in accelerated repayment of the loan.
  • Bi-Weekly Mortgage
    A mortgage with payments made every other week instead of monthly. A bi-weekly mortgage can result in accelerated repayment of the loan.
  • Breach
    The breaking of a contract or obligation. In a lending situation a loan can enter breach due to the breaking of a loan covenant or failure to make payments in a timely manner.
  • Bullet Loan
    A type of balloon loan where payments during the term of the loan are interest only and the complete principal amount is repaid at the end of the loan.

C

  • Car Title Loan

    Also known simply as a "title loan", these a short term loans, typically less than 30 days, where the borrower secures the loan with the title of the car. If the borrower is unable to pay back the loan the car becomes the property of the lender.

  • Co-Borrower
    An additional borrower that is included loan documents and who is also liable for the repayment of the loan. Co-borrowers are typically used when the primary borrower’s income and credit history are insufficient to secure the loan.
  • Co-Lender
    A co-lender is a second lending party in a loan agreement. For example, in a personal loan where a child is borrowing money for college, the co-lenders could be the child’s mother and father.
  • Collateral
    An asset used to secure a loan. The collateral is pledged to the lending party if the loan defaults.
  • Compound Interest
    Interest calculated on the underlying principal and any accrued interest.
  • Conforming Loan
    A home loan that fits the conforming loan limits according to Fannie Mae and Freddie Mac. The current conforming limit is $625,000 in select high cost metropolitan areas and $417,000 in the rest of the United States. A home loan above the conforming limits is considered a "jumbo loan".
  • Conforming Mortgage

    A home loan that fits the conforming loan limits according to Fannie Mae and Freddie Mac. The current conforming limit is $625,000 in select high cost metropolitan areas and $417,000 in the rest of the United States. A home loan above the conforming limits is considered a "jumbo loan".

  • Co-signer
    An additional borrower that is included loan documents and who is also liable for the repayment of the loan. Co-borrowers are typically used when the primary borrower’s income and credit history are insufficient to secure the loan.
  • Covenants

    A clause included in a loan agreement that requires a party to do something or restricts a party from doing something. Typically the covenant covers the actions of the borrowing party.

  • Credit Report
    A report detailing an individual’s credit and employment history, Credit history details can include past bankruptcies, credit accounts, late payments and other credit report requests.
  • Credit Risk
    The risk that a borrower will not be able to repay principal and interest according to the terms of a loan agreement.
  • Credit Score

    A numeric rating system used by credit agencies such as Transunion, Experian and Equifax to evaluate the credit history of an individual. A credit score is used by a lender to determine the credit risk of a borrower and the interest rate for a loan. Also known as a FICO Score.

D

  • Dealer Invoice

    The price a dealer pays the manufacturer for a vehicle. The dealer invoice does not include any incentives or rebates the dealer can receive from the manufacturer that would make the actual cost to the dealer lower than the dealer invoice price.

  • Debt
    Money borrowed by an individual or corporate entity. The borrowed money is typically repaid with interest on a repayment schedule detailed in the loan agreement.
  • Debt Consolidation
    The act of replacing multiple loans with a single loan with the goal of reducing the total monthly loan payment.
  • Debt Service

    The interest and principal payments made over the course of a loan.

  • Debt Service Coverage Ratio
    A ratio used to help determine a property’s ability to generate enough cash flow to service debt on the property. The ratio is calculated by dividing the net operating income by the total debt service. Lenders typically require the ration to be greater than 1.
  • Default
    When a borrower cannot repay interest and principal as per the loan agreement. A default can also occur when one or more loan covenants are violated.
  • Delinquent

    When a borrower is not able to make timely interest and principal payments on a loan according to the repayment schedule in the loan agreement. A loan can be delinquent without being in default.

  • Demand Loan
    A loan that allows the lender can call for repayment at any time instead of a specific date.
  • Doing Business As (DBA)
    A term used in contracts where the lending or borrowing party conducts business under a different name.
  • Down Payment

    The portion of a purchase paid for up front in cash in order to reduce the amount of debt required to complete the purchase.

  • Due on Sale Clause
    A clause in a mortgage agreement requiring the borrower to fully repay the loan upon sale of the property.

E

  • Equity
    In real estate, equity is the difference between the market value of a property less any debt owed on the property.
  • Event of Default

    Events set out in a loan agreement that if triggered allow the lender to require immediate repayment of the loan.

F

  • FICO Score
    A numeric rating system used by credit agencies such as Transunion, Experian and Equifax to evaluate the credit history of an individual. A credit score is used by a lender to determine the credit risk of a borrower and the interest rate for a loan. Also known as a Credit Score.
  • Five Cs Of Credit
    The Five C’s of Credit are five criteria that lenders use when evaluating a potential borrower. The Five C’s are:

    • Character of the borrower
    • Capacity – ability of the borrower to generate cash to service debt
    • Capital – the capital reserves of the borrower
    • Collateral – the security behind the loan
    • Conditions – the current state of the economy
  • Fixed Interest Rate
    An interest rate that does not change over the term of the loan.
  • Form 1098
    Also known as an Annual Mortgage Statement, this is a document sent by the mortgage servicer to the mortgagor (borrower). The document details the total amount of interest and points paid during the previous tax year as well as the remaining loan balance.
  • Form 1099

    An IRS form that reports the annual dividend and interest payments made to an investor.

  • Funding Date
    The date when funds are delivered from a lender to a borrower.

G

  • Gift Tax
    A graduated tax applied to gifts of money that exceed limits set by the IRS. For personal loans the gift tax can apply if the loan amount exceeds $13,000 and the interest rate is not equal to or greater than the Applicable Federal Rate (AFR).
  • Growing Equity Mortgage

    A mortgage with a fixed interest rate where the monthly payments increase based on a set scheduled. The increased payment amount goes directly towards the principal of the loan, reducing the time of repayment.

I

  • Interest Only Mortgage

    A loan where the borrower pays only interest on the principal for a period of time before the loan converts to a regular amortizing loan.

  • Interest Rate
    The rate charged a borrower for the use of money.
  • Investment Property

    A property that is not the primary residence of the owner. An investment property can be real estate used to generate rental income, a vacation home or a speculative land investment.

J

  • Jumbo Loan

    A home loan that exceeds the conforming loan limits according to Fannie Mae and Freddie Mac. The current conforming limit is $625,000 in select high cost metropolitan areas and $417,000 in the rest of the United States. A home loan below the conforming limits is considered a "conforming loan".

L

  • Late Charge
    A charge assessed to a borrower for a late payment or non-payment. The conditions for a late charge should be detailed in the loan agreement.
  • Libor

    This is the interest rate that banks charge each other for short-term international loans. The LIBOR rate is commonly used in lending as the underlying index for adjustable rate loans. Libor is an acronym for the London Inter-Bank Offer Rate.

  • Loan Agreement

    This is the document that set out the terms for a loan. A loan agreement should include the repayment schedule, interest rate and any other covenants or special conditions for the loan.

  • Loan Payoff Amount
    The amount of principal remaining on a loan including prepayment penalties, if applicable.
  • Loan to Value Ratio (LTV)

    A ratio used to assess the viability of a real estate loan. The LTV ration is calculated by dividing the loan amount by market or appraised value of the property. The higher the LTV ration the riskier the loan.

M

  • Mortgage
    A loan used to finance the purchase of a property. In a mortgage the loan is secured by the underlying property.

N

  • Negative Amortization

    An increase in the underlying principal of a loan when the regular payments are not large enough to cover the current interest. The accrued interest that is not covered by the regular payments is added to the loan principal.

  • Negative Covenant
    A loan agreement covenant that restricts the borrower from specific actions unless the lender agrees.

P

  • Parent PLUS Loan
    A Federally insured education loan made to parents for the benefit of their undergraduate children.
  • Payment Date
    The date on which a loan or mortgage payment is scheduled to be made.
  • Perkins Loan
    Low interest loans for students made directly to the student based on their needs while taking in to account the contribution from their family. Repayment of the loan does not begin until graduation and the student typically has 10 years to repay the loan.
  • Personal Loan
    A loan made between friends or relatives.
  • Prime Rate
    The interest rate used by commercial banks when lending to their most creditworthy clients. The Prime Rate is commonly used in lending as the underlying index for adjustable rate loans.
  • Principal
    The loan amount borrowed or remaining amount to be repaid.
  • Promissory Note
    A loan agreement signed by a lender and borrower that details the terms of the loan.

R

  • Reference Rate
    The underlying rate used to determine the interest rate for adjustable rate mortgages. Libor and the Prime Rate are commonly used reference rates.
  • Repossession
    When a lender takes control of property or assets secured by a loan when the loan enters default.
  • Restructure
    A modification to a loan agreement agreed to by the lender and the borrower.

S

  • Secured Loan
    A loan where the principal is backed by an asset. If the borrower is not able to repay the loan based on the terms of the loan agreement, the lender will take possession of the collateral.
  • Security Agreement
    The section of a loan agreement that details the assets or security that the borrower will claim if the borrower is unable to meet the terms of the loan agreement.
  • Sub-prime
    Loans made to less creditworthy borrowers. Sub-prime loans carry higher interest rates than traditional loans.

T

  • Teaser Rate
    A low introductory interest rate on a mortgage or credit card that resets to a higher rate after some period of time.
  • Term
    The period of time it takes for a loan to be repaid.
  • Term Note
    A loan with a detailed repayment schedule and floating interest rate.

U

  • Uniform Commercial Code (UCC)
    A set of uniform business laws adopted by most states that regulate commercial transactions, contracts and loan agreements.
  • Unsecured Loan
    A loan that is not backed by any security or collateral.
  • Upside-down
    A condition where a borrower’s mortgage amount is greater than the market value of their property.

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