Glossary Of Private Money Lending Terms

Many new real estate investors don’t understand terms used in the products and programs of private money, bridge loans and others loan types. We have included a short listing of commonly used lending terms below.

1031 Exchange: The process by which a taxpayer may defer recognition of capital gains and related federal income tax liability on the sale and purchase of investment properties within a limited timeframe.

After Rehab Value (ARV): The amount that the investment property is expected to be worth after all of the planned renovations are completed.

Appraisal: A professional written opinion and analysis of the estimated market value of real estate from a licensed appraiser for both the interior and exterior of the property.

Arrears: The interest paid after it’s accrued. For example, a payment on October 1 pays for interest owed for the entire month of September.

As-is Value: The value of a property as it exists legally and physically, as of the effective date of value.

Assessor’s Parcel Number: The number used by the tax assessor to identify a parcel of land.

Assignee: The person to whom rights to a property, title, or other interest are transferred.

Auction: A place where properties are sold to the highest bidder. Also known as a foreclosure (county) auction or a sheriff’s sale.

Balloon Loan: A loan that calls for a large sum to be paid at the end of the loan term.

Bankruptcy: A proceeding authorized by federal law that provides debtors with various kinds of relief from their debts. Types include Chapter 7, 11, and 13.

Bridge-loan: A bridge loan is a short-term loan used until permanent financing is secured or an existing obligation is removed (property sold and lien satisfied). This type of financing allows the user to meet current obligations by providing immediate cash flow.

Broker Price Opinion (BPO): A property inspection by a licensed real estate broker which results in a written evaluation of the property and the estimated sale price. 

Budget: The detailed financial plan for real estate purchase, flip, construction, and sale.

Commercial Use: Property that is only used as a business – having no residential component.

Cash Flow: An individual’s or entity’s income minus expenses over a particular time period. Typically, monthly.

Closing: The period that marks that a new loan transaction has funded.

Closing Costs: The fees paid at closing for loan origination and processing, including attorneys’ fees, fees for recording a mortgage/deed of trust, fees for title search, taxes, and insurance.

Collateral: Something pledged as security for the repayment of a loan. Types include:

• Real Estate Collateral – The real property used to secure repayment of a real estate loan.
• Cash Collateral – A deposit held by a lender in lieu of a down payment.

Collection: The status given to a loan when the payment on the loan is delinquent and efforts are made to collect the amount due. Collection is typically handled by the loan servicer.

Combined Loan To Value (LTV): The sum of all liens on the property divided by the value of the property. Lenders often use the term LTV synonymously with CLTV. CLTV is typically used when there is more than one lien and LTV is used when there is only one lien.

Corporation: An entity in which individual owners are not directly responsible for any debt incurred by the company. In corporations, independent stockholders own parts of the company, but are not directly related to the actions of the company.

Credit Report: The information collected by credit bureaus about an individual’s credit history, including a list of credit accounts, their balances, and monthly payments, along with collection accounts and public record information such as liens and bankruptcies.

Credit Score: A number based on information in the credit report that is used by most lenders to decide whether to extend credit and at what cost. The most common score used is the FICO score.

Creditor: A person or business from whom one borrows or to whom money is owed.

Cross Collateralize: A lending technique when an asset or assets are used as collateral for a loan on a different property.

Crowdfunding: A group of investors, who don’t necessarily know each other, buy a percentage interest in an asset and/or loan through a single portal.

Debt-To-Income Ratio (DTI): An increased interest rate imposed if there is a breach of the loan terms.

Default: Failure to abide by the terms of a loan (such as payment due or duration of loan), and such failure continues for more than 30 days.

Distressed Properties: Properties that are in poor condition or under siege financially (which may include foreclosure); they usually represent great opportunities for fix and flip investments.

Draws: The funds advanced by a lender to the borrower throughout the construction process for the completion of specific line items, which increase the outstanding balance.

Draw Schedule: A payment plan for construction or renovation projects. This schedule helps lenders determine when they are going to distribute funds to their borrower based on the value of the work completed.

Drive By Appraisal: A written opinion and analysis of the estimated market value of real estate from a licensed professional based solely on the exterior of the property. 

Due Date: The date when a loan payment is due each month.

Entity: Either an LLC, a corporation, a sole proprietorship, or a partnership; not an individual.

Equity: The difference between the fair market value (appraised value) of real property and any outstanding loans, liens, and encumbrances. Most lenders require equity to ensure the borrower has a financially vested interest in the property.

Escrow Account: An account run by a third party in a transaction between a lender and investor. The escrow agent works for both the lender and borrower, by carrying out loan agreement instructions. Money is placed in an escrow account, to cover property taxes and homeowner’s insurance. The disbursement of funds is conditioned on consummation (or termination) of the loan agreement.

Escrow Company: A company that oversees the execution of real estate transactions, including closing documents, disbursement of funds, and the recording of documents at the county offices. Also known as a settlement services company.

Estoppel Certificate: A form used in commercial real estate to verify rents, leases, mortgage balances, monthly payments, etc., on a property.

Evaluation: The method in which the value of a real estate property is determined. Various types of evaluations include:

• Appraisal – A written opinion and analysis of the estimated market value of real estate from a licensed professional for both the interior and exterior of the property.
• Broker Price Opinion (BPO) – A property inspection by a licensed real estate broker which results in a written evaluation of the property and the estimated sale price.
• Drive by Appraisal – A written opinion and analysis of the estimated market value of real estate from a licensed professional based solely on the exterior of the property.
• Fair Market Value – The value of a property based on comparable sales (“comps”) of similar properties within the last six months.

Extension Fee: A fee paid by a borrower to extend an existing loan for an additional term, upon lender approval. Also known as a renewal fee.

Exit Strategy: How the borrower plans to pay off the loan, as well as turn a profit. Having a clear exit strategy is an important part of developing your overall plan for the project which will help determine the best type of financing for the deal.

Fair Market Value: The value of a property based on comparable sales (“comps”) of similar properties within the last six months. 

FEMA Flood Zone: The geographic areas that FEMA has designated as flood zones according to their varying levels of flood risk. These zones are depicted on a community’s flood insurance rate map (FIRM) or flood hazard boundary map. Each zone reflects the severity or type of flooding in that area. 

FICO Score: A credit score developed by Fair Isaac & Co. that assesses the likelihood that credit users will pay their bills. See Credit Score.

Forced Place Insurance: The insurance placed on a property by the lender (lien holder) in the event a borrower allows their own coverage to lapse. The premium is advanced by the lender and billed to the borrower to be paid within 30 days. 

Foreclosure: The process by which a lender legally takes control of a property because the borrower defaults on the loan.

Foreclosure Fees: The costs (legal and other) incurred by a lender to foreclose on a property. These costs are the responsibility of the borrower.

Funding: The process of funds being disbursed to the borrower during the closing of a new loan transaction.

Grace Period: The period between the due date (i.e. 1st of the month) and the date late charges will assess.

Guarantor: A person who agrees to assume responsibility for any remaining owed amounts on a loan should there be any.

Hard Money Loan: A loan typically secured by a hard asset such as residential or commercial real estate. Such loans usually have high interest rates relative to bank loans. Hard money lenders typically look more to asset value rather than at the credit characteristics of the potential borrower as the primary loan underwriting factor. Hard money lending is very useful to those who are in need of quick financing since these loans can be closed in as little as a few days. Hard money loans have higher interest rates due to their higher risk and quick service.

Holdback: Portion of a construction loan amount that is not released until a certain stage (such as completion of the foundation) is reached.

Holding Costs: Costs attributed to owning an investment property for a period of time. This includes interest payments, property taxes, house maintenance, insurance and utilities.

HUD-1: A form created and distributed by the transaction’s settlement agent at the settlement of a real estate purchase that lists all of the transaction cash flows between property buyer, seller and lender.

Interest Rate: The amount expressed as a percentage that a borrower has agreed to pay a lender as the price of borrowing a sum of money. If the interest rate is 10% for one year on a $100,000 loan, the borrower will pay $10,000 for the use of money for one year. ($100,000 * 0.1 = 10,000).

Investment Property: A non-owner occupied property. Can be commercial or residential.

Late Fee: A fee paid by a borrower if a loan payment is not made before the end of the grace period.

Lien: A legal claim on an asset filed with the county clerk. A lien is typically filed by a lender as evidence of its claim upon an asset until such time as the associated loan is repaid.

Lien Position: The position that determines claim priority on a property. The two different types include:

• First Position – This position is the primary mortgagor on the property.
• Junior Lien – A lien against a property not in first position or priority. For example, a second mortgage, or third or fourth position.

Line Item: A specific cost in a construction budget. Multiple line items add up to the total budget.

Liquidity: A measure of the speed that an asset can be sold.

LLC (Limited Liability Company): An entity where individual members are protected from financial liability in excess of the amount a member has invested.

Loan Officer: Loan officers’ help borrowers work out their loan agreement and recommend the best plan of action for completing the loan. Contact a Veristone loan officer.

Loan Points: An origination fee. One point is equal to one percent of the principal loan amount. If the loan is $100,000 with 2 points, then the borrower will pay $2,000 in origination fees.

Loan Term Summary (LTS): Document that helps avoid any hidden costs. The LTS outlines all of the conditions of the loan including amounts, penalties, and deadlines.

Loan to Value (LTV): This is a ratio derived from the formula (Loan Amount) / (Appraisal Value).

Maturity (Loan Term): Maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid.

Maturity Fee: The fee assessed to a loan not paid off by the due date.

MLS (Multiple Listing Service): A database where real estate for sale is listed for a given area or region. Brokers from this area work together to compile this list.

Mortgage: The document that pledges collateral property(ies) as security. Also known as a deed of trust or trust deed.

Note: An abbreviation for promissory note. It discloses the interest rate and terms of the loan and is an obligation of debt.

Payoff: The act of paying off a loan by paying the outstanding principal amount and any additional interest and/or fees due to completely satisfy the loan obligation.

Payoff Statement: A statement that provides information on the amount of money required to pay off a loan through a specific date.

Per Diem: The daily rate of interest as defined in the note.

Personal Guarantee: A guarantee by an individual to a lender for the entire outstanding loan amount plus legal fees, accrued interest, and costs associated with collecting the loan. This type of guarantee entitles the lender to access the individual’s personal assets to repay the loan.

Points: Finance charges paid at closing. Each point equals 1% of the loan amount. For example, one point on a $100,000 loan is equivalent to $1,000. Some lenders charge a flat fee rather than points. Also known as origination fees.

Preliminary Title Policy: A search performed by a title company to determine property ownership and the liens filed on the property. Includes an offer to insure title on a property. Also known as a binder or title commitment.

Prepayment Penalty: The penalty a lender may impose if a loan is paid off before it is due or before a specified time period, as defined in the loan’s note.

Principal Balance: The outstanding balance of the principal on a loan, which does not include interest or other charges.

Private Lending: An individual or group of individuals that lends to real estate investors. They usually lend their own funds.

Proof of Funds: A document provided by a lender that is intended to document that a borrower has the available funds to complete a transaction.

Property Flipping: Buying a property and then renovating the property in order to increase the value of the asset such that it may be sold at a profit.

Real Estate Broker: Person or firm that helps their clients buy and sell their real estate for a fee.

Real Estate Investor: Someone who purchases properties with the intention of making a profit, either through holding for rental income or reselling it at a premium to cost.

Refinance: Replacing an existing loan with a new one. Typically, people refinance to get a lower interest rate on their loan and/or to leverage real estate value for cash.

REO (Real Estate Owned): A process where ownership of a property was transferred from an original owner to the owner’s lender through the foreclosure process.

Return on Investment (ROI): A measure of the amount of return on an investment relative to the investment’s cost. This is a % derived from the formula: (Net Profit / Cost of Investment) x 100 | for example, if your net profit is $100,000 and your investment costs are $300,000, your ROI would (.33) x 100 = 33%.

Scope of Work: This is an outline of all the renovations scheduled to be completed before the house is sold, as well as their anticipated costs. The SOW also gives a timetable of when the service provider expects each component of the rehab to be completed.

Security Interest: An ownership interest that a lender takes in the borrower’s property to ensure repayment of the debt. Typically through a mortgage or deed of trust. 

Servicer: A company that handles all payment-related transactions with borrowers, including accepting monthly payments, issuing monthly statements, providing year-end tax statements, and paying property taxes and insurance when due.

Sheriff’s Certificate: The certificate of sale after a judicial foreclosure.

Short Sale: This occurs when a seller is selling their house for less than they owe on their mortgage. In order for this to happen, the bank or lending company needs to approve of the sale at the lower price. Short sales are a popular way to find investment properties because of their lower purchase costs.

Tax Identification Number (TIN): A number issued by the IRS identifying a taxpayer. Usually a Social Security Number (SSN) for an individual or an Employer Identification Number (EIN) for a business.

Title: Proof of legal ownership of a real estate asset. 

Title Company: A company that searches county and public records for liens and encumbrances against a subject property and the borrower.

Title Insurance: An indemnity policy issued by a title company that insures an owner and/or lender against loss due to title defects, liens, or encumbrances. Also known as a title policy.

Turnaround Time: The amount of time it takes from when the investment property is purchased to when it is sold.

UCC Filing: Also known as uniform commercial code filing. A county or state filing to secure real property and/or fixtures (assets or inventory related to the property). Typically related to commercial property. 

Underwriting: The assessment of risk and reward for a potential investment. Underwriters determine the credibility of the potential investor and determines if their investment is going to be able to make enough money to be profitable for all parties involved. Hard money underwriters are typically more concerned with the profitability of the deal than the credit history of the borrower.

We help clients build a bright financial future through real estate. Let us help you every step of the way. From application to funding, let our full-service team work to bring you the best programs and fund the best deal possible. Let Oncepts Lending be your lending partner. Contact your Oncepts Lending authorized representative to get started today.