Borrower: He who is suppose to follow the rules.
Correspondent/Mortgage Banker: Morgan, Cox & Slater, Ltd. the mediator between lender and the borrower.
Loan Quote: A preliminary indication of the lending program the lender can provide on a given project. The quote is based on the information that was provided on the back of a napkin that went through the wash and was given to the Mortgage Banker.
Loan Application: The preliminary deal. An application is usually not issued until would-be loan terms and conditions, and previously provided information, are verified. Applications vary between lenders; some are one page in length and other are over thirty pages. The longer the application, the better and we believe, it provides the borrower more detailed information on the actual lending program.
Loan Commitment: The document that the lender issues to set forth all terms and conditions that have been agreed to by the parties. The loan documents are based on this document. The commitment usually comes after the lender has done their due diligence on the property and is satisfied that there will be no surprises.
Loan Term: The period of time the borrower gets to rent the money from the lender. As with all rental agreements, the borrower must return the money (and then some) at the end of the term.
Loan Amortization: A schedule that allows some return of the original principal amounts back to the lender. The longer the amortization schedule, the lower the payment.
Interest Rate Spread: The yield the lender charges over a specific index that is commensurate with the risk of a given transaction. Usually, the "spread" is quoted in the terms of basis points.
Basis Points: Terms used by most lenders in quoting a spread for calculating the interest rate above the particular interest rate index being used. A "basis point" is 1/100th of a percent therefore a 200-basis point spread is the same as two percent (2%.) Lenders use the term "basis points" more often that using "percentage" because it is a generally accepted term of Wall Street, and allows for more information.
Interest rate Index: Typically, the US Treasury note of a corresponding maturity. For example, if the loan is for 10-year term, the lender will pick the US Treasury that matures 10 years from the anticipated closing date. The lender would use October 2010 if the loan were closed in October 2000. Sometimes a lender will use other indexes such as Primate Rate, LIBOR, 11th District Cost of Funds, or the lender's cost of funds. Usually these other indexes relate to variable rate loans and not fixed-rate loans.
Interest Rate Lock: The time when the lender fixes the interest rate. This will be the rate for the entire term of the loan. Some lenders do this at application, some at commitment, and some at or just prior to closing. Depending on a borrower's perspective of the market, the time of the interest rate lock can be very important.
Earn Out: A provision in the loan documents that allows the borrower to increase the loan proceeds based on the specific performance of the subject property. Usually, an earn-out is for a short period of time, typically no longer than six to twelve months. An earn out is used if the lender is relatively confident that an increase in the income stream will occur based on a lease roll over, a scheduled lease bump, or some other determinable event.
Holdback: Usually, this relates to the lender holding back a portion of the loan proceeds until a specific event occurs. This happens when repairs need to be done such as replacing a roof or other major items, or if an estoppel is outstanding from a major tenant. The lender holds back some of the loan proceeds to be sure the borrower gets the estoppel in the timely manner, fixes the roof or whatever is being secured by the holdback. Holdbacks are used to give the borrower an incentive to get something done.
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Links to:
Underwriting Guidelines
Preliminary Package Requirements
