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 Financial Terminology

          Following are over 190 terms used in the credit finance profession.  There are other terms used in the money field outside of credit finance.  Many of those terms are found in banking and investment finance. 

ABSTRACT 
A real estate document giving the history of a parcel of real estate-beginning with the original transaction or grant and detailing each succeeding transaction as pertains to the title.  The abstract will include the present title holder-together with any leins appearing against the subject property.  Most buyers and sellers of real estate go one step further than bringing the abstract up to date.  Today title insurance is the popular device to insure the title.

ACCELERATION CLAUSE
 A clause in the loan document allowing the lender to call the entire note due upon default.  Regardless of the original term of the loan, the lender may choose to accelerate all the installments due if payments have not been made in a timely manner or some other default has occurred.

ACCOUNTS RECEIVABLE
  Funds owed to a business for a purchase of merchandise or services made on open account without the benefit of a note or other security document.

ACRE
  A parcel of land with 43,560 square feet.  Used as a unit of measurement quite often in located in rural areas.

ADJUSTABLE RATE
  An interest rate governing the loan transaction that may be adjusted up or down.  Most adjustable rates are pegged to something that is common knowledge to both the lender and the borrower such as U.S. Treasury bill or the Prime interest rate.  The adjustable rate generally has a one year and a lifetime cap on it so the borrower may know the maximum increase within a short period or for the lifetime of the loan

ADD-ON INTEREST
  A lump sum total of interest added on to the principle amount of the loan at the beginning.  This sum together with the principle is the total payback of the loan.

ADVERSE ACTION
  An action that can be taken by the lender or creditor.  The action can be translated in the creditors refusal to grant an increase in credit line or refusal to grant credit under the terms requested, or the outright termination or cancellation of a credit account.

AFFIDAVIT
  A written document that must be dated and sworn to pertaining to a subject, transaction or happening.  The document must show the name and address of the party making the statement and bear the signature of the attesting official.

ANNUAL PERCENTAGE RATE
An annual percentage rate of interest charged on a loan in accordance with federal regulation Z.

APPRAISAL
An estimate of value on personal or real property and the process of preparing the estimate.

AMORTIZATION

 The reduction of a debt over a period of time in  equal payments sufficient to liquidate both principle and interest upon maturity of the loan.

APPRECIATION
 The increase in the value of an asset in addition to the value of the improvements made upon the asset.

ARBITRAGE LOAN
  A loan designed to reduce the principle amount with  an amount set aside to earn interest and concurrently reduce the interest charged on the principle retiring both principle and interest at maturity. 

ASSET
  Anything of value owned by an individual or business which would be suitable for sale or exchange.  Can be real or personal property.

ASSET BASED LOAN
 A loan made where the borrower pledges as collateral for the loan any assets of a business used in the conduct of that business.

ASSIGNEE 
A party to whom an interest in or property rights has been assigned to.

ASSIGNOR 
A party who assigns an interest in or property rights to another party.

ATTORNEY IN FACT 
A party who is legally designated to transact business either specific or general for another party through the issuance of a power of attorney document.

BALANCE SHEET 
Sometime referred to as a financial statement giving  a detailed summary of all assets and liabilities of an individual or business at a given time.  This statement will portray the net worth of the preparer.

BALLOON PAYMENT 
A final payment on a loan which is larger than the regularly scheduled payment-a lump sum.

BILL OF SALE 
A legal document which conveys title to personal property from the seller to the buyer.

BLUE SKY 
An amount of value inserted into a statement which covers nothing of physical value.

BOND 
There are many types of bonds-generally an interest bearing certificate of debt which may be issued in bearer or registered form.

BOOK VALUE 
The amount of an asset as reflected on the books and records of a business.

BORROWER  
Any legal entity, individual or business who undertakes to acquire funds from a lending source for a period of time and for a consideration.

BROKER 
An agent who brings together two or more parties for a common interest for a fee or a commission.  An example is a real estate broker, mortgage broker or loan broker.

BUY-DOWN RATE 
A rate of interest secured from a lending source through the prepayment of funds to that lender to entice the lender to offer a lower rate for a loan.

CALL LOAN 
A loan which may be terminated at the choice of the lender or the borrower at any time.

CAPITAL 
A term that describes all assets of an individual or business which have a value in sale or exchange.

CASH FLOW 
A term that describes the actual cash that flows through a business.  Usually the net cash remaining after operational expense is paid to show the ability of a business to service debt created by the business.

CASH OUT 
Refers to a loan-generally a refinance loan in real estate where the borrower secures sufficient amount to pay off the existing loans plus receive an amount in cash for some other purpose.

CERTIFIED 
A document calling for certification by signature which attests to the truth or genuineness of something.

CHATTEL 
A mortgage or security agreement on personal property or goods that are movable.

CLOSING STATEMENT 
A summary of debits and credits prepared by a closing agent for lender and borrower or seller and buyer showing the mathematical details of the transaction.

CLOUD ON TITLE 
A legal document such as a lein, deed, notice of litigation pending, judgement or other item recorded which would  effectively impair the title to real estate.

COLLATERAL 
Anything of value such as stocks, bonds, personal or real property or other securities which a borrower may pledge to a lender in a loan transaction.

CONFORMING LOAN 
A loan which conforms to the underwriting guidelines set out by a lender when making a certain type of loan.

COMMITMENT 
Generally referred to as a promise by a lender to make a certain type of loan subject to certain conditions and requirements.

COMMERCIAL LOAN 
A loan where proceeds are to be used for commercial or business purposes and not for personal use.

COMPOUND INTEREST 
An interest computation wherein interest is frequently added to the whole sum with the cycle being continuously repeated.

COMPENSATING BALANCE 
A calculated daily balance on deposit over a period of time.  Sometime required by a lending bank of a borrower to keep a daily compensating balance on deposit equal to a fixed percentage of the loan amount.

CONSTRUCTION LOAN 
A short term loan used for the specific purpose of construction and paid off generally by a permanent or long term loan upon completion of construction.

CONVENTIONAL LOAN 
A loan where the entire proceeds come from private sources without the use of any government funds or guarantees.

CONSUMER LOAN 
A loan made to an individual for personal use and not for business use.

CO-SIGNER 
Someone who signs with a borrower and guarantees to share the repayment in the event the borrower is unable to pay.

CREATIVE FINANCING 
Used frequently in real estate financing.  A loan or financing which requires the use of the imagination in order to satisfy the terms of the buyer and seller.

CREDIT REPORT 
A consolidated summary of paying and credit habits compiled on an individual or business in report form and offered to members by a credit reporting agency such as the credit bureau.

DEALER FINANCE 
A financing service offered a consumer by a dealer of products and services.  A service which the dealer provides for his customers in handling the details of financing a sale.  The actual financing may be done by a bank or other institution but is handled by the dealer.

DEBT CONSOLIDATION 
A consolidation of debt in a financing or loan  transaction where all the debt is paid off and merges into one loan by the lender.

DEBT RATIO 
The percentage of debt to income for purposes of determining if a borrower can service the debt on a loan request.

DEBT SERVICE 
The payment which is required to be made on a loan. A term generally referred to in commercial borrowing.

DEED 
A legal instrument duly executed and delivered used to convey title of real property from  seller to buyer.  There are two different types of deeds.  A warranty deed which effects a title transfer and some guarantee and the quitclaim deed which only effects transfer of interest in the title.

DEED OF TRUST 
A title to real property which is conveyed to a third party as a trustee.  Power is vested in the trustee to reconvey the title or sell the property depending upon the terms  of the trust.  

DEED RESTRICTIONS 
Certain restrictions and limitations placed upon the deed in the use of the real estate.

DEFAULT 
A term used to describe the failure to meet an obligation in the case of a borrower to meet the requirements of a loan transaction.

DEPRECIATION 
The mark down of value of a property due to normal wear and use or extraordinary conditions causing a devaluation of the property.

DUE ON SALE CLAUSE  
A clause that can be included in a loan document that requires the entire loan to come due and payable upon the sale of the collateral-usually real estate.

DISCLAIMER  
A statement made to disclaim responsibility.  Frequently used in loan documents or agreements of sale.

EARNEST DEPOSIT 
A sum required to be paid by a buyer or borrower to guarantee good faith in a purchase or loan.

ENHANCEMENT 
A term used by groups who furnish additional security to borrowers to enhance their chances of a lender making a loan.  Examples of enhancement would be a co-signer, time deposit, savings  deposit and other like securities. 

ESCROW 
Security documents deposited by two or more persons with a third party to be delivered and executed subject to certain instructions of the two or more depositors.  The third person becomes the escrow agent.

EQUITY 
An ownership value that can be sold, exchanged or pledged.  The difference in the value of a home and the amount owed on the home.

FACTORING 
A process of borrowing on accounts receivable from a factoring lender to free up capital for a business.

FEDERAL HOUSING ADMINISTRATION 
An arm of the federal government who provides loan funds for mortgages in the purchase and refinance of homes.

FARM HOME ADMINISTRATION 
An arm of the federal government who provides funds for farmers and mortgages for rural area homes.

FDIC 
An instrument of the federal government which insures the deposits of commercial banks.

FSLIC 
An instrument of the federal government which insures the deposits of savings and loan organizations.

FEDERAL RESERVE SYSTEM 
The central banking system of the federal government of the United States.  Established to regulate the money supply in the USA.

FEE 
A charge for services rendered.  Generally a percentage of a loan amount or a flat amount for professional services.

FINANCING 
The procedure of making funds available so a buyer may acquire  property or services or a borrower may secure a loan.

FINDERS FEE 
A fee paid to someone who provides a client for a service, sale or loan.

FIRST POSITION 
The first lein that is recorded on a chattel or real property such as a first mortgage.

FIXED ASSETS 
Those assets of a business which are used in production and required to carry on the business such as furniture, fixtures and equipment.

FIXED RATE 
A rate of interest which remains fixed for the entire life of a loan such as a fixed rate mortgage.

FLOATING RATE 
A rate of interest which can be adjusted and generally pegged to a common denominator such as the prime rate of interest.  A loan rate could float at l point above prime.

FLOORPLAN FINANCING 
Financing provided for a merchant or business on his inventory or products with the loan being retired as the items are sold.

FORECLOSURE 
The act of repossessing a real property from a buyer or borrower.  The lender or mortgage holder will take possession of the property in the event of default on the loan.

GARNISHMENT 
A legal process whereby assets are attached which are in the hands of a third party.

GRANTEE 
The person to whom a grant is made.

GRANTOR 
The person by and from whom a grant is made.  An example would be the seller of real property who passes title to another. 

GROSS PROFIT 
Total gross sales minus cost of inventory and cost of sales.

GUARANTOR 
One who guarantees an obligation and has a legal duty to the fulfillment of that obligation.

INCOME APPROACH 
A term used in the appraisal process in arriving at the most suitable approach to value.  A similar term is market approach.

INCOME PROPERTY 
Real estate property which produces an income to the owner.

INDUSTRIAL PROPERTY 
Real property that is used for commercial or industrial use.

IN HOUSE
 A term referred to in completion or action of a process within an organization.  A house organ is the term used by business for a newsletter produced and published within the business.  Some lending organizations will have their own "in house" appraiser.  

INSTITUTIONAL FINANCING 
Financing or funding provided by an institution rather than by a private person or individual. 

INSTALLMENT FINANCING 
A type of financing provided to borrower or buyer whereby payments may be made or loan funds repaid over a period of time generally in equal installments.

 INVESTMENT BANKER 
A financial entity or individual who deals in investments such as one who has the capability to float a bond issue to raise funds for a loan. One who buys and sells securities.

INTEREST RATE 
A percentage charged for the use of money in return and for profit from the use of that money.

INTERIM FUNDS 
Short term funds generally used by individual or business pending the execution of a permanent or long term loan or funds used for a short term purpose.

HARD EQUITY LOAN 
A loan made based almost solely upon the equity or collateral without regard to other borrower guidelines.  Generally associated with real estate loans.

HIGH RISK LOAN
A loan where normal underwriting guidelines may not prevail causing a higher risk in repayment of the loan.

JOINT VENTURE 
 A venture or business enterprises entered into by two or more parties who will share in profits or losses.  The enterprise is specific and normally for a specified period of time.

JUNIOR LIEN 
A contract or mortgage which comes after the claims of a prior recorded document.

LAND CONTRACT 
A financing instrument which is used frequently by a seller of unimproved real estate.  The title to the property will remain with the seller until the contract is paid. 

LIEN
  A recorded security hold or claim which one party has upon the real estate of another party to ensure payment such as a mortgage or labor lien.

LEASE 
A legal document used between two or more parties in a specified time use of real or personal property.

LEGAL DESCRIPTION 
The exact description in legal terms that identifies a property-most commonly in real estate.

LENDER 
A private, public or institutional entity who makes funds available to another party form his purposes and use.

LESSEE 
A tenant or occupant of a property who becomes the user or  holder of the property under a lease agreement.

LESSOR
 One who makes available a property to another party under a lease agreement.

LETTER OF COMMITMENT 
A written instrument of promise to perform certain acts subject to certain requirements and conditions.

LETTER OF CREDIT 
A written document from a lender of funds that may be presented by a borrower to a third party who may rely upon the letter for payment.      

LETTER OF INTENT 
Similar to a letter of commitment relating to intent rather than actual commitment.  Certain requirements and conditions will still govern the intent.

LEVERAGE 
The act of using equity in property or assets for the purpose of borrowing or buying.

LIABILITIES 
The long and short term debts of an individual or business representing all debt owing.

LIQUID ASSETS 
Assets of an individual or business which may be quickly converted to cash.  Liquidity is a similar term.

LOAN CORRESPONDENT 
A lender who has a working relationship with another lender in the funding of loans. 

LOAN PACKAGE  
The packaged documentation of a loan project request.  The package details the borrower and collateral profile together with documentation showing ability to service the debt.

LOAN PORTFOLIO 
The total of all loans held in house by a lender exclusive of any loans sold.

LOAN PROCESSING 
The act of assembling documents of a loan request, verifications and completion of a loan package for underwriting.

LOAN PROJECT 
The complete profile of the loan request which details use of funds, borrower and collateral profile and other details pertaining to the project for funding.

LOAN REQUEST 
The borrowers request for funds detailing the purpose, use of funds and terms of repayment.

LOAN SOURCES 
Private, public or institutional sources of money available for funding of loans.

LOAN TO VALUE 
The percentage of loan amount to the value of the collateral.  A term most commonly used in real estate loans.

LOWER LIMIT 
|Generally a term used by a lender who describes the smallest loan amount available to a borrower.

MAI APPRAISAL 
One of the most professional forms of an appraisal  requiring the highest certification of the appraiser.  Frequently  used in the lending process for commercial property.

MARKET APPROACH 
A term used in the appraisal process to describe one of the methods of arrival at an estimate of value.  Other approaches are the income approach and the replacement approach. 

MARKET VALUE 
One of the factors in determining the value of a property.  Normally set by the law of supply and demand.

MORTGAGE 
A legal document in the lending process involving real property whereby it inures the performance of an act by a buyer or borrower.

MORTGAGEE
 The party lending the money under the terms of the mortgage.

MORTGAGOR 
The party borrowing the money and pledging the property under the terms of the mortgage.

MORTGAGE BANKER 
A financial entity who banks funds through investors for the purpose of mortgage investment.

MORTGAGE BROKER
 A financial professional who initiates mortgage loan packages and brokers those loans to direct lending sources.

MORTGAGE INSURANCE 
An insurance policy guaranteeing payment of a mortgage loan in event of default of the borrower and subsequent foreclosure. 

NET PROFIT
The remainder of income from a business after cost of sales, operational expense and extraordinary expense has been deducted.

NET WORTH 
The net equity an individual or business has in their total assets after all liabilities have been deducted.

NON CONFORMING LOAN
 A loan which does not conform to the regular underwriting guidelines of a lender.  Debt ratio, credit, etc., may  cause the loan to be non-conforming.

NON OWNER OCCUPIED PROPERTY
 A real estate property where the owner of the property is not in occupancy.  Property may be rented or leased.

NOTE 
A legal negotiable instrument which may be transferred from one party to another which entitles the holder to collect according to the terms on the face of the note.  

NOTE RECEIVABLE 
A specific amount of money due the holder secured by a note.

NOTE PAYABLE
 A specific amount of money owing and secured by a note.

OFFSHORE LENDER 
A lending entity outside of the continental United States either private or institutional.

ON SITE INSPECTION 
The inspection of a real estate site for the purpose of verification by a lender.

OPTION 
The right of the holder obtained through a consideration  to sell or buy a property at a predetermined price for a specified period of time.

ORIGINATION FEE 
A fee charged by a lender for the cost of originating a loan, normally 1% of the total loan amount.

OWNER OCCUPIED PROPERTY 
A property where the owner and the occupant are one and the same.

PERSONAL PROPERTY
 Property which is not real property which primarily consists of items which are movable.  Generally described as chattels.

POINTS 
A term used by persons in the credit finance field pertaining to loan costs.  Typical in the mortgage loan area is from one to six points or percentage points charged on the total loan amount.  Two points is equal to 2%.

PREPAYMENT PENALTY 
A clause inserted in a lending document which penalizes the borrower for early payment before the maturity of the debt.

PRINCIPLE BALANCE 
The balance of a debt owing totally separate and apart from any interest earned on the debt.

PRIVATE FUNDS 
Funds available in the private sector without government support, guarantee or involvement.

PRIME RATE 
The rate of interest charged by the larger banks to their best corporate borrowers.

PROCESSING FEE 
A fee charged by a lender for the processing of a loan where excessive documentation or work is required before the loan can be made.  The lender will charge a fee for those costs.

PROFIT AND LOSS STATEMENT 
A statement summarizing income and expense for a given period of time.  If income exceeds expense a profit is claimed.  If expense exceeds income, a loss is claimed.

PRO-FORMA STATEMENT 
A statement of expectation summarizing income and expense for a specified period of time.  A business term.

PURCHASE AGREEMENT 
A legal agreement between seller and buyer detailing property to be sold, the price and terms.

PURCHASE MONEY MORTGAGE 
A mortgage obtained for the purchase of a resale property...not a refinance.

QUITCLAIM DEED 
The transfer of interest, right and title in a real property.  This type of deed does not offer guarantee of title.

REAL ESTATE CONTRACT 
Similar to a land contract.  A legal document used by a seller wherein title to the property remains with the seller until the buyer or borrower has paid the debt in full.

REAL PROPERTY 
Any real estate including improvements attached thereto and not movable.

RESIDUAL VALUE 
A predetermined value based upon certain factors at a future point in time.  A term used in leasing loans.

REPLACEMENT VALUE 
An approach commonly used in real estate appraisal and also with insurance companies to determine the value of an existing property according to the cost of replacement.

REVOLVING LOAN 
A loan which does not have a fixed term where interest accrues according to the time of the open debt.  Commonly used in department stores and similar sales.

REFINANCE MORTGAGE 
A loan obtained by an owner of a property where the owner is already in title.  Not a purchase money mortgage.

REPURCHASE AGREEMENT 
An agreement commonly used between dealer and lender.  Also known as recourse financing.  The dealer agrees to repurchase the debt subject to certain predetermined conditions with the lender.

REPOSSESSION 
The reclaiming or retaking of a property by a lender or seller.  Usually coming about because of default of the borrower or the buyer.

RIGHT OF RECESSION 
A right of a buyer or borrower under certain conditions to rescind his purchase or loan according to federal regulation Z.

RIGHT OF REDEMPTION 
The right of a property owner to redeem his property from foreclosure or tax sale within a specified period of time through the payment of default.

ROLL OVER LOAN 
A type of loan wherein the borrower has the option to renew or roll over the loan again upon maturity.  Generally subject to the payment of accrued interest and a possible small principle reduction.

SALE LEASE BACK 
A financing device used by a property owner who is in occupancy and owns the property.  The owner will sell the property to someone and lease the property back-normally with an option to repurchase at the maturity of the lease.  This is a tax and funding maneuver.

SECONDARY MARKET
That market which is largely provided by the federal government for private lenders to market their loans to in order to keep funds available for new loans in the private sector. 

SECURITY AGREEMENT 
A legal instrument securing certain chattels by the lender in a loan transaction which is given by the borrower. Chattels can be furniture, fixtures, equipment, etc..

SECOND MORTGAGE 
A mortgage made to a borrower where a prior mortgage is in existence and remains in existence even with the new mortgage.  This places the new mortgage in second position.

SECURITY
 Some form of collateral which has a value to sell, exchange or pledge.  Real or personal property, stocks, bonds, etc. are examples.

SECURED LOAN 
A loan secured by some form of collateral such as in the case of real estate which secures a mortgage.

SEED MONEY
 Funds used for initial investment in a project to get it off the ground.

SMALL BUSINESS ADMINISTRATION 
An arm of the federal government who  makes direct loans and participating loans with private lenders.

SPECIAL USE PROPERTY 
An income producing property which is designed for a specific use not common to other business activities.  An example would be a bowling alley.

STANDBY COMMITMENT 
A commitment issued by a lender to a borrower to be used in the event the commitment is needed.

TAKE OUT LOAN 
A loan which is generally a permanent type loan designed to take out a construction or interim short term loan.

TAX SHELTER 
A type of investment where tax laws are favorable to that type of investment.  Income producing real estate offer some tax shelter in expense and depreciation.

TIME DEPOSIT 
A deposit earning interest based upon a specified period of time the funds remain on deposit with the financial institution.

TITLE SEARCH 
A search of title on real property or chattel property to determine the existing liens against that property.

TITLE BINDER 
A temporary insurance binder covering a certain property pending a closing and the issuance of a permanent title policy.

TITLE POLICY 
An insurance policy guaranteeing the clear title of a real property.

TREASURY CERTIFICATE OR NOTE 
A U.S. government security issued for debt ranging from one to five years.  

UNDERWRITER
A financial person who has the ability and skill to review a loan package to determine if the lender guidelines are met.

UNSECURED LOAN 
Loan that is made on basis of signature alone.  Normally this type of loan will be made on the face of a strong credited reputation, income or financial statement.

 UPPER LIMIT 
The highest limit of loan amount which a lender will consider for a loan.

VENTURE CAPITAL 
Capital available for a business venture which offers a high profit motive and reason for success.

VETERANS ADMINISTRATION 
A department of the federal government which oversees and controls benefits due the nations veterans and their surviving relatives.

WAIVER 
The giving up of a right by a party and the refusal to accept a right.

WARRANTY DEED 
A deed which warrants and guarantees the title from seller to buyer.

WORKING CAPITAL
 That part of business capital which is maintained to meet payables, payroll and other current expense of operation.

WRAPAROUND LOAN 
A loan which is made to include and wrap around an existing loan.  Payment will be made to the wraparound lender and that lender will in turn pay the original loan.

YIELD 
A return on investment after all charges and costs have been deducted.

ZONING 
A process of law wherein certain restrictions are placed upon the use of real property.