Glossary of Loan Terms
In any loan transaction there are at least two parties. A “Borrower” applies for a loan. If determined eligible, a “Lender” provides a loan. There are many types of Lenders including banks, savings and loans, nonprofit organizations, public agencies and even relatives. In some cases, a third party, the “Guarantor” will also be included in the transaction (see Guarantee).
The period of time on which the repayment of loan principal and interest is based. Sometimes loans may have different amortization schedules and terms. There are three basic ways to repay a loan: (a) in equal installments, each containing a blend of principal and interest; (b) in varying but regular payments which result from paying off principal plus interest on the amount actually borrowed; and (c) in very irregular principal payments often incorporating a larger final payment (see Balloon Payment).
The final payment of a loan that has a longer amortization period than term. For example, if a monthly payment is based on a period of 10 years, but the actual term is 5 years, a large payment (roughly half of the loan amount) is due with the final payment at the end of 5 years.
Short-term loan made in anticipation of long-term funding or financing.
Building and Real Estate Costs:
a. Soft Costs –
Expenses, other than hard costs, incurred in developing a real estate project,
including legal and lending fees, architectural and design fees, permits, etc.
A capital improvement reserve fund. Money set aside to pay for facilities upkeep: where the amounts can be large, the ultimate need a certainty, but where the exact timing is uncertain. These are often big-ticket items, like replacing the roof, which are difficult to accommodate in a single year’s budget.
The property a borrower pledges to a Lender to secure repayment of the loan. Collateral could include: a lien on your house, equipment from your business, or a bank account . If the borrower defaults, the lender has the legal right to seize the collateral and sell it to pay off the loan.
Money, goods or services that one party is obligated to pay another in accordance with an expressed or implied agreement.
Debt Service Coverage or Debt Coverage Ratio
A calculation a Lender uses to determine ability to repay a loan. This calculation is typically expressed as a ratio. Most Lenders have minimum debt service coverage requirements ranging from 1.05: 1.00 (i.e. the net income must be projected to be 5% in excess of the loan payment) to 1.25: 1.00 (i.e. the net income must be projected to be 25% in excess of the loan payment). DSC or DCR = Net Income (after all expenses excluding debt service) = 1.10 : 1.00 Total Loan Payment
Failure to pay a debt or meet an obligation.
Represents the difference between an asset’s market value and the amount of debt or other liabilities. In terms of a child care equity that is provided through internal assets, savings, grants, individual donors, collaborative resources and other sources can be used to assist in funding some of the facilities development costs. It is best to use equity funding for the planning and predevelopment stages of developing child care facilities, while debt (loan financing) is more fitting for the real estate acquisition and construction costs incurred during the development stage.
Charges by a Lender for making the loan. Fees can include a range of costs.
A loan made with the understanding that if the borrower meets certain requirements, repayment of the loan will not be required.
A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract. Loan guarantee, or loan insurance programs are designed to make certain loans less risky for lenders, such as loans for community economic development projects and for small businesses like child care.
The cost of using loaned money, usually expressed as an annual percentage, that a lender charges a borrower for the use of the principal over time.
Interest Rate or Loan
The amount a Lender will charge for the use of their funds. Interest rates vary greatly from loan to loan and are frequently tied to industry measures such as Prime Rate. For example, if Prime Rate is 4.75%, then a “Prime Plus Two Percent” rate would mean a loan with a 6.75% interest rate.
Renovations to leased space to suit the renter’s needs. These may be paid for either by the landlord or the tenant.
A claim a Lender may place on property in return for making a loan. If a borrower is unable to make loan payments as agreed, it gives the Lender the right to try and collect repayment of the loan through selling the borrower’s property. If the lien is placed on real property such as a house, this lien is often referred to a “Mortgage” or a “Trust Deed.”
Line of Credit
A set amount of money available for the Borrower to borrow as needed. The borrowed amounts are then paid back in installments determined by the Lender. A line of credit is distinct from a loan because after the money is paid back a borrower can access it and use it again, which makes it similar to a credit card.
Transaction wherein a Lender allows a Borrower the use of a sum of money for a specified period of time at a specified rate of interest.
The amount of a loan is determined by how much the Borrower needs to complete the project and the Lender’s assessment of the Borrower’s ability to repay. Some Lenders may have minimum and maximum loan amounts.
Loan-to-Value Ratio (LTV)
The ratio of money a Lender is willing to loan relative to the appraised value of the property or other security.
Min. DSCR - Minimum debt service coverage ratio. The minimum ratio of effective annual net operating income to annual principal and/or interest payments. Also called "debt service coverage (DSC)" and typically written as 1.25x, where x represents the number of times the annual debt service must be exceeded to achieve the target DSCR; a constraint to maximum loan amount. Both Lenders and Investors calculate this ratio to assist them in determining the likelihood of the property generating enough income to pay the mortgage payments. From the lender's viewpoint, the higher the ratio, the better.
Security instrument by which the Borrower (mortgagor) gives the Lender (mortgagee) a lien on property as security for the repayment of a loan.
Non-recourse Loan - A type of mortgage loan in which the lender cannot hold you personally liable if you fail to repay the debt as promised. He can, using a legal procedure, take the property you've pledged as security for your loan, but he cannot claim any other assets or money from you if you default.
Funds set aside annually to be used to offset possible operating losses due to unexpectedly low revenues or unusually high expenses.
Operating Expense Ratio - The ratio of total operating expenses, excluding debt service, to effective gross income. Also, a comparison of the operating expenses to potential gross income. This ratio can be compared over time and with that of other properties to determine the relative operating efficiency of the property considered.
Personal Liability - When you pledge all of your own assets and property as a security for your mortgage debt, you agree to personal liability. It is your unconditional and absolute promise to pay the debt using all your assets. It occurs in addition to the primary security of the real estate you pledge to the lender. (compare with Non-recourse Loan)
An up front fee a Lender may charge for a loan, expressed as a percentage of the loan amount. “One point” equals one percentage of the loan amount. Thus, one point on a $10,000 loan is $100 ($10,000 X .01).
The rate, as announced from time to time by commercial banks, as the prime rate. (See Interest Rate).
The original amount of money borrowed, and the amount that the Borrower must pay back, not including interest.
Recourse Loan - A type of loan in which a lender can hold you, the borrower, personally liable if you fail to meet all the requirements of the mortgage. By signing a recourse note you pledge all of your assets to repay the note. Through legal action, the lender can force the sale of any of your assets to pay off the loan. Examples of possible actions include a lawsuit and wage garnishing to collect the judgment. (compare with Non-recourse Loan)
The agreed upon period of time for which a loan is made. A loan provided for 10 years has “a 10 year term.”