Real estate loan documents are written in a language most borrowers have never studied. This glossary translates that language into plain English - so you can read any loan document with confidence.
One of the most consistent findings at Coventry Enterprises is that borrowers who understand lending terminology catch problems that borrowers who do not understand it completely miss. You cannot spot a problematic prepayment penalty if you do not know what a prepayment penalty is. You cannot evaluate a DSCR covenant if you have never heard the term.
This glossary covers the terms that matter most - in residential, commercial, and private lending. Some of these terms appear in virtually every loan. Others appear only in specific loan types. All of them are worth knowing before you sit down at any closing table.
Jump to a letter: A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A provision in a loan agreement that allows the lender to demand immediate repayment of the entire remaining loan balance upon the occurrence of specified events - typically default, but sometimes broader triggers like a change in ownership or a decline in property value. An acceleration clause transforms a monthly payment obligation into an immediate lump sum demand, which most borrowers cannot meet without refinancing or selling the property.
A mortgage where the interest rate changes periodically based on a specified index (such as SOFR or the Treasury rate) plus a margin set by the lender. The initial rate is usually lower than a fixed-rate loan but can increase significantly over time. ARM loans specify a start rate, an adjustment period, a rate cap per adjustment, a lifetime cap, and the index used for recalculation. Each of these components affects your long-term cost, and all of them must be understood before signing.
The process of paying down a loan balance through regular payments over time. A fully amortizing loan has payments calculated so that the final scheduled payment retires the entire debt. A partially amortizing loan uses a longer amortization schedule but matures before the loan is paid off, leaving a balloon balance due at maturity. A loan that is interest-only does not amortize at all - the entire principal remains outstanding throughout the loan term.
The total cost of borrowing expressed as a yearly percentage, including the interest rate and certain fees associated with the loan. APR is broader than the note rate and allows borrowers to compare loan offers more meaningfully. On loans with significant upfront fees or points, the APR will be higher than the note rate. Federal law requires lenders to disclose the APR on covered mortgage loans.
A professional opinion of a property's market value, prepared by a licensed appraiser. Lenders use appraisals to determine how much they will lend against a property. Appraisals are not guarantees of value - they are estimates based on comparable sales, property condition, and market conditions at a specific point in time. Borrowers sometimes treat an appraisal as validation of their purchase price, which it is not.
For renovation or construction loans, lenders may appraise a property both at its current condition (as-is) and at its projected value after planned improvements are complete (ARV). Hard money lenders often base their loan amount on a percentage of ARV. If the ARV appraisal is optimistic and the actual sale price is lower, the borrower's projected profit disappears.
A large lump sum payment due at the end of a loan term. Most commercial loans have balloon payments - the monthly payments cover interest and a small amount of principal, but the bulk of the loan balance is due all at once when the loan matures. Borrowers who do not plan for balloon payments often face a crisis: they must either refinance the remaining balance into a new loan or sell the property. If credit conditions or property values have deteriorated, neither option may be easy.
One basis point equals 0.01% of an interest rate or yield. So a rate increase of 25 basis points is a rate increase of 0.25%. Lenders and financial professionals use basis points to describe small rate differences precisely. When a lender quotes you a rate of "prime plus 150 basis points," they mean the prime rate plus 1.50%.
A short-term loan designed to bridge a gap between two financing events. Common examples include buying a new property before your existing property sells, financing a property during renovation before transitioning to permanent financing, or carrying a property while waiting for a more favorable lending environment. Bridge loans carry higher rates than conventional financing and almost always have a clear exit strategy built into the deal.
A clause that allows the lender to demand repayment of the loan before the stated maturity date. Many commercial loans include call provisions that effectively shorten the real loan term regardless of what the stated maturity says. A loan with a 20-year stated term and a 7-year call is really a 7-year loan with a 20-year amortization schedule. See also: commercial loan review.
A measure of a commercial property's investment return calculated as net operating income divided by property value. A property generating $120,000 in NOI valued at $1.5 million has an 8% cap rate. Lenders use cap rates to value commercial properties and assess loan risk. Cap rate compression (falling cap rates) raises property values; cap rate expansion (rising cap rates) lowers them, which affects both loan-to-value ratios and refinancing capacity.
A refinance where the new loan is larger than the existing loan balance, allowing the borrower to receive the difference as cash. Cash-out refinances are useful for accessing equity but increase the loan balance, raise monthly payments, and restart the amortization clock. Lenders place LTV limits on cash-out refinances, typically lower than purchase money loan limits.
The fees and expenses paid at loan closing beyond the property purchase price. Closing costs include origination fees, appraisal, title insurance, recording fees, attorney fees, prepaid interest, escrow deposits, and potentially discount points. Total closing costs on a mortgage commonly range from 2% to 5% of the loan amount. Understanding every line item on the Closing Disclosure is a basic borrower right under federal law.
A promise in a loan agreement to do or not do something. Affirmative covenants require the borrower to take specific actions - maintain insurance, pay taxes, submit financial statements. Negative covenants prohibit the borrower from taking specific actions without lender consent - selling the property, incurring additional debt, changing the ownership structure. Covenant violations can trigger technical default even when payments are current.
A provision that pledges more than one property as security for a single loan, or ties multiple loans together so that all pledged properties secure all loans. If you default on one loan in a cross-collateralized structure, the lender can foreclose on all pledged properties - not just the property the defaulted loan was associated with. Cross-collateralization clauses are sometimes inserted without adequate disclosure and are among the most dangerous provisions in commercial lending.
A clause stating that a default on any other loan - with any lender - constitutes a default on this loan as well. A missed payment on your business line of credit can trigger a cross-default clause in your commercial real estate loan, even if the real estate loan has never been late. Cross-default clauses can sweep in loans held by related entities and even informal credit arrangements.
Net operating income divided by total debt service (annual loan payments). A DSCR of 1.25x means the property generates 25% more income than needed to cover loan payments. Commercial lenders typically require a minimum DSCR of 1.20x to 1.35x. Loan covenants often require the borrower to maintain a minimum DSCR throughout the loan term, and falling below that threshold - even without missing a payment - can trigger default rights. How the lender calculates "net operating income" varies and matters enormously.
Failure to meet the terms of a loan agreement. Payment default is the most familiar type - missing a scheduled payment. But commercial loans typically define dozens of additional events of default including covenant violations, failure to maintain insurance, unauthorized transfers of the property, bankruptcy, and many others. Understanding every event of default in your loan documents before closing is essential.
A prepayment mechanism used in CMBS (commercial mortgage-backed securities) loans that allows borrowers to pay off the loan before maturity by substituting government securities for the real property collateral. The securities must generate cash flows sufficient to replace the original loan payments. Defeasance costs can be very large in low-rate environments and must be modeled before accepting a CMBS loan.
Upfront fees paid to the lender to reduce the interest rate on a loan. One point equals 1% of the loan amount. Paying two points upfront to lower the rate by 0.5% makes financial sense only if you keep the loan long enough for the rate savings to exceed the upfront cost. The break-even period must be calculated for each specific loan amount and rate differential.
In construction and renovation loans, the draw schedule specifies how and when the lender will release funds held in a construction reserve or holdback. Draws are typically triggered by the completion of defined construction milestones, confirmed by inspection. Delays in draw approvals add to project carrying costs and can cause serious cash flow problems for the borrower.
Funds held by a neutral third party to be disbursed upon the satisfaction of specified conditions. In real estate lending, escrow has two common meanings: the closing escrow (where funds and documents are held during the closing process) and the impound escrow (where the lender collects monthly contributions for property taxes and insurance along with the mortgage payment, then pays those obligations when due).
Any circumstance listed in the loan documents that gives the lender the right to declare the loan in default and pursue remedies including acceleration and foreclosure. Borrowers often focus on payment defaults, but commercial loan documents can list 20 or more events of default covering a wide range of situations. Reading and understanding every event of default before closing is an essential part of commercial loan due diligence.
A mortgage where the interest rate does not change over the life of the loan. Monthly payments remain constant (assuming a fully amortizing structure), making budgeting predictable. Fixed-rate loans typically carry higher starting rates than adjustable-rate loans but eliminate rate risk over the loan term.
An agreement between a lender and borrower to temporarily reduce or suspend loan payments during a period of financial hardship. Forbearance does not forgive the missed payments - those amounts become due when the forbearance period ends. The terms of forbearance repayment vary significantly, and borrowers should get the repayment plan in writing before agreeing to any forbearance arrangement.
The legal process through which a lender seizes and sells a property after the borrower fails to meet loan obligations. The foreclosure process varies by state - judicial foreclosure (which requires court action) and non-judicial foreclosure (which follows a statutory notice and sale process) are both common. Michigan uses a non-judicial foreclosure process for most residential properties but judicial foreclosure for certain commercial situations.
A promise by a person or entity to repay a debt if the primary borrower does not. Commercial loans almost always require personal guaranties from the principals of the borrowing entity, which means that even when a loan is made to an LLC or corporation, the individuals behind it are personally liable for repayment. The scope of a guaranty - full recourse, limited recourse, payment guaranty, completion guaranty - varies and should be reviewed carefully before signing.
A short-term, asset-based loan from a private lender where underwriting focuses on the collateral value rather than borrower creditworthiness. Higher rates and fees than conventional financing, but faster closing and more flexible underwriting. See our complete hard money loan guide for a full explanation of terms, red flags, and what to negotiate.
A revolving line of credit secured by the equity in a residential property. The borrower can draw, repay, and redraw up to the credit limit during the draw period. After the draw period ends, the balance converts to an amortizing repayment period. HELOCs typically have variable rates tied to a benchmark index. The combination of variable rates and a large potential balance makes HELOCs a source of payment shock risk for borrowers who draw heavily during the draw period.
See: Escrow. A lender-controlled account funded by monthly borrower contributions, used to pay property taxes and insurance premiums when they come due. Lenders require impound accounts on many loans to protect against tax lien or insurance lapse. The monthly impound contribution is added to the principal and interest payment, increasing total monthly housing costs.
A loan where monthly payments cover only the interest accrued, with no reduction of the principal balance. Interest-only loans result in lower monthly payments during the interest-only period but leave the full principal balance outstanding for the entire term. When the loan matures or converts to an amortizing payment structure, payments can increase dramatically. Interest-only commercial loans are common; interest-only residential loans carry specific regulatory requirements.
The loan amount divided by the property value, expressed as a percentage. An $800,000 loan on a $1,000,000 property has an 80% LTV. Lower LTV means more equity cushion and lower lender risk, which typically results in better loan terms. Lenders set maximum LTV thresholds based on loan type, property type, and borrower profile. LTV can change over time as the property value changes, which affects refinancing capacity at maturity.
A provision allowing the lender to declare default or refuse to fund if there has been a material adverse change in the borrower's financial condition, the property's condition, or general market conditions. MAC clauses are most common in commercial and construction loans. They are intentionally broad, and their scope is often a key negotiation point between borrowers and lenders.
Financing that sits between senior debt and equity in the capital stack. Mezzanine lenders take a security interest in the ownership entity rather than the property itself (unlike a traditional mortgage), which means foreclosure happens at the entity level rather than through a property foreclosure proceeding. Mezzanine rates are higher than senior debt to compensate for the subordinate position. Intercreditor agreements between the senior lender and the mezzanine lender determine rights and priorities in a default situation.
A loan structure where the minimum required payment is less than the interest accrued in that period, causing the unpaid interest to be added to the principal balance. The loan balance grows over time rather than shrinking, even when payments are made on time. Negative amortization was a feature of many predatory loan products before the 2008 financial crisis and is now prohibited in most residential loan categories under federal regulation.
For a commercial property, gross rental income minus operating expenses (not including debt service). NOI is the income figure used to calculate cap rates and DSCR. How NOI is calculated - what expenses are included, whether vacancy is deducted, how management fees are treated - varies by lender, and those definitional differences can significantly affect covenant compliance calculations.
A loan covenant in commercial real estate financing that allows the lender to declare default if the property's occupancy falls below a specified threshold. Common in retail, office, and multifamily loans. For properties with anchor tenants, the departure of one major tenant can breach an occupancy trigger even when payments are current.
A fee charged by the lender for processing and originating the loan, typically expressed as a percentage of the loan amount (points) or as a flat dollar amount. Origination fees are part of the total closing cost calculation and are included in the APR disclosure. Some lenders bury origination compensation in the interest rate or yield spread premium rather than disclosing it as a separate fee.
Upfront fees equal to 1% of the loan amount each. Origination points compensate the lender for making the loan. Discount points buy down the interest rate. Some loan offers include both. Understanding the all-in cost of points versus the ongoing rate savings they purchase requires calculating the break-even period at your expected loan payoff date.
Insurance that protects the lender (not the borrower) against loss if the borrower defaults on a residential mortgage. PMI is typically required on conventional loans with LTV above 80%. The borrower pays the PMI premium but receives no direct benefit from the coverage. PMI can be canceled once the LTV drops below 80% through principal paydown or property appreciation, but cancellation requirements vary and must be followed precisely.
A fee charged when a borrower pays off a loan before the agreed maturity date. Commercial prepayment penalties take several forms: step-down penalties (a declining percentage over time), yield maintenance (compensating the lender for lost interest income), and defeasance (substituting government securities for the collateral). In residential lending, prepayment penalties are restricted or prohibited under federal law for most loan types. Always calculate the total prepayment penalty cost at your likely payoff date before accepting a loan with this provision.
Recourse loans allow the lender to pursue the borrower's personal assets (beyond the collateral property) if the property sale in foreclosure does not fully repay the loan. Non-recourse loans limit the lender's remedy to the collateral. Most commercial non-recourse loans include "bad boy carve-outs" that convert the loan to full recourse upon certain borrower actions. Borrowers who assume non-recourse protection applies broadly often discover the carve-outs have swallowed the protection.
Federal law governing the fees and services associated with residential real estate closings. RESPA prohibits kickbacks between settlement service providers, requires disclosure of all fees, and mandates the Loan Estimate and Closing Disclosure forms. RESPA violations can result in borrower remedies, lender penalties, and referral to federal regulators.
The process of placing one lien in a junior position relative to another. A subordination agreement ranks one lender's claim below another's in the event of default and sale. Second mortgages are subordinate to first mortgages. Junior lienholders receive proceeds from a foreclosure sale only after senior lienholders are paid in full. When a second mortgage holder agrees to subordinate to a new first mortgage, it allows the borrower to refinance without paying off the second.
An arrangement where all property income is directed to a lender-controlled account before being disbursed to the borrower. Cash management structures are sometimes triggered by covenant breaches rather than actual payment default - a DSCR dip can activate a cash sweep before any formal default proceeding. Once active, the lender controls all property cash flow until the triggering condition is cured.
Federal law requiring lenders to disclose the true cost of credit, including the APR, total finance charge, amount financed, and total payments. TILA disclosures appear on the Loan Estimate and Closing Disclosure for residential mortgages. Violations can create borrower rescission rights and monetary damages. TILA is implemented through Regulation Z.
Insurance protecting against losses arising from defects in the property's title - undisclosed liens, ownership disputes, recording errors, or fraud in the chain of title. Lenders require lender's title insurance as a condition of closing. Borrower's title insurance is separate and optional, but recommended. A one-time premium paid at closing covers the insured against future title claims for as long as the insured holds an interest in the property.
A review of the public record for a property to identify all recorded liens, encumbrances, easements, and ownership interests. The title company or attorney conducting the search looks for prior mortgages, tax liens, judgment liens, mechanic's liens, and restrictions on use. The title search forms the basis for issuing title insurance.
The process by which a lender evaluates the risk of making a loan. Underwriting for conventional residential loans examines borrower credit, income, assets, and the property value. Commercial underwriting also evaluates the property's income history, tenant quality, lease terms, market conditions, and the borrower's real estate experience. The rigor of underwriting varies significantly between lender types and loan programs.
A commercial loan prepayment penalty formula that requires the borrower to pay enough to compensate the lender for the interest income it would have received if the loan had remained outstanding to maturity. Yield maintenance calculations can produce very large prepayment costs when interest rates are low or when the loan is paid off early in its term. Always model yield maintenance at your expected payoff date before accepting this type of prepayment structure.
Compensation paid by a lender to a mortgage broker for delivering a loan with an above-market interest rate. The broker receives a payment from the lender (the yield spread premium) in addition to any borrower-paid fees. YSP is disclosed in settlement documents but is often not fully explained to borrowers. The net effect is that the borrower pays a higher rate for the convenience of working with a broker - which may or may not be worth it depending on the value the broker provides.
The loan documents you sign are legally binding the moment you execute them. The fact that you did not understand a provision does not generally provide a remedy after closing. Courts enforce what the documents say, not what borrowers assumed they meant.
Coventry Enterprises believes borrower education is the most durable protection available. When borrowers understand the terminology, they ask better questions, spot problems earlier, and are harder to mislead. This glossary is a starting point - not a substitute for having someone who knows commercial lending review your specific loan documents before you sign.