A Comprehensive Glossary of Hard Money Loan Terms
Below are commonly used terms when it comes to hard money lending and real estate investing.
After Repair Value (ARV) – The estimated value of a property once repairs or renovations are completed.
As-Is Value – The value of a property in its current condition.
Balloon Payment – A large loan payment that pays the debt off in full. The final payment is called a balloon payment because of its large size.
BPO – A Broker’s Price Opinion is the process a real estate agent utilizes to determine the selling price of a real estate property.
Capitalization Rate – The ratio of net annua; operating income a property produces and the current market value or the original cost. Capitalization rates are typically used to measure the projected value of a real estate investment.
Capital Stack - A project’s capital stack shows the layers of capital invested in it. This includes debt and equity, as well as hybrid instruments that share features of both. The layers represent levels of seniority, that is, in terms of who gets paid back first. The stack shows the riskiest positions at the top and safest at the bottom. Investors in the upper levels expect higher returns to compensate for that higher risk. Because the project has to pay back debt holders first, their risk is lower and thus they accept lower returns on their investments.
Carrying Costs - These are costs that are associated with the property while an investor owns it. A few examples are insurance, HOA fees, interest, landscaping, and utilities.
Closing – The final step in executing a real estate transaction where the buyer and seller transfer ownership of a property.
Closing Costs – Fees paid at the closing of a real estate transaction. Closing costs can include title fees, recording fees, appraisals, legal fees, etc.
Cross-Collateralization – The act of using property with an existing loan as collateral for another loan.
Default – The failure to repay a loan according to the terms agreed in the loan documents. The term is also used to signify a loan that is 30 days past due.
Draw Schedule – A detailed schedule given to hard money lenders that shows payment plans used for construction projects. This helps lenders understand when money will need to be issued and how it will be used.
Earnest Money – A deposit made by a potential buyer to secure their right to put the property under agreement.
Equity – The amount of ownership a person or company holds over a property. Equity is based on how much a borrower owes on a loan or mortgage subtracted from the current value of a home.
Escrow Account – An account used to hold money reserved for a financial transaction. Financial institutions use escrow accounts to hold cash and disburse payments for property purchases.
Exit Strategy – Is simply the borrower’s plan to pay the loan back. Sometimes, there may be multiple exit strategies.
Fix & Flip – Is the strategy of purchasing a property, renovating it, then selling it at a profit.
Foreclosure – Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan
Guarantor – An individual who promises to pay the debt in the event of a default on a loan obligation.
Hard Costs – Costs associated with the physical construction of a project.
Holdback – Funds from a hard money loan held onto by the lender until a real estate investment reaches a particular milestone.
Holding Costs –These are costs that are associated with the property while an investor owns it. A few examples are insurance, HOA fees, landscaping, and utilities.
HUD-1 – In most states, the HUD-1 serves as the closing statement for a real estate transaction. It’s a form issued by the Department of Urban Housing and Development which lists transactions that happen between the buyer, seller, and lender of a property.
Joint Venture – An agreement taken by two or more entities that will undergo a single project together. Joint Ventures are often used when bringing on partners or guarantors as a one-time event or for a single real estate property.
Lien Position – Lien position, also called lien priority, is the order of seniority in which the law recognizes lenders’ claims against a property. It determines the sequence of who gets paid in the event of a foreclosure.
Liquidity – The amount of available cash or cash equivalents.
Loan Points – The fee associated with the execution of a loan. Each point equals a percentage of the loan’s principal.
Loan to Cost (LTC) – A ratio that compares the amount of a loan for a real estate property divided by the total cost of a project.
Loan to Value (LTV) – A ratio that compares a loan amount against the appraised value of a property.
Maturity – The date on which a borrower’s final loan payment is due.
Mixed-Use – Properties that have multiple zoning uses available. Typically, this is for properties that are both commercial and residential, like an apartment building that has a retail storefront on the street level.
MLS – An acronym that stands for Multiple Listing Service. The central database utilized by buyers and sellers to see all homes currently for sale by real estate brokers.
Mortgage – A loan issued by a financial institution to secure the purchase of a property.
Multi-Family – The category for a property that can house more than one family unit.
Non-Conforming Loan – Loans that don’t meet conventional financing guidelines used by traditional lenders.
Origination Fee – A fee charged by a lender to facilitate the approval and disbursement of a loan.
Position – Relating to the Title, an order of claims against the ownership of a property. Lenders will hold the First Position before the owner until the loan is paid in full. If there are multiple lenders, there will be multiple positions that go in order (First, Second, Third, etc.)
Prepayment Penalty – The percentage charged by a lender for a loan that will be paid in full before the maturity date.
Private Lender – Lenders that are not associated with banks or other large financial institutions. Private lenders can be hard money lenders, friends, family, or other companies not connected to banks.
Proof of Funds – A bank statement showing an investor has the financial ability to follow through on a financial transaction.
Revolving Loan Facility – Is a line of credit where a borrower can draw from and pay back multiple times. These are sometimes used for larger residential construction projects.
Scope of Work – The itemized list of work and costs related to a real estate project.
Seasoning – Generally, how long lenders prefer you to wait before you can get a loan.
Short Sale – A real estate transaction where the seller attempts to prevent foreclosure by having a buyer purchase the property for less than what’s due on the current mortgage. The lender of the original mortgage must approve a short sale.
Soft Costs – Costs associated with a project like legal or financial fees.
Sponsor - In the real estate industry, borrowers and developers are known as “Sponsors.” A Sponsor can be a developer, a rehabilitator or any other property owner looking for funding.
Term – The duration of a loan.
Vacancy Rate – The ratio of unoccupied units of a multi-family, commercial, or industrial property against the total number of units.
Value-add Project - A property that has gone through or is planned to go through a renovation to add value.
Waterfall – A provisional agreement that lists the order of priorities concerning the distribution of cash for a property.
Wholesaling – Real estate wholesaling is a strategy in which a wholesaler obtains a contract on a property with its seller, and in turn sells the contract to another real estate investor.
Zoning – The categorization of land made by a governing body for how it can be used. There are typically four standard zone categories: Residential, Commercial, Industrial, and Mixed-Use.