Glossary

A

Advance-fee loan scam

A fraud in which a fee is demanded before a promised loan is funded, and the loan never exists. Defeated almost entirely by refusing to send money anywhere except a licensed title or escrow company. See /verify/advance-fee-scams/.

After-repair value (ARV)

What the property will be worth once the renovation is complete. The number your loan is sized against and the number most often wrong.

Amortisation

The gradual repayment of principal through scheduled payments. Hard money loans generally do not amortise - they are interest-only with a balloon.

Appraisal

A licensed appraiser's opinion of value. In this product it usually covers both as-is and as-completed value against your scope of work.

As-is value

What the property is worth today, unrenovated. One of the three caps that size your loan.

B

Balloon payment

The entire principal, due in one payment at maturity. Standard in hard money.

Blanket loan

One loan secured by more than one property. See cross-collateralisation.

Bridge loan

Short-term financing that covers a gap in time - typically buying before selling, or holding while repositioning.

Broker price opinion (BPO)

A licensed agent's valuation. Cheaper and faster than an appraisal, and more variable.

BRRRR

Buy, rehab, rent, refinance, repeat. A hold strategy financed with a bridge loan and taken out by a rental refinance.

Business-purpose loan

A loan whose proceeds are used for business or investment rather than personal, family or household purposes. The classification that keeps most hard money outside consumer mortgage regulation.

C

Carrying costs

Taxes, insurance, utilities and maintenance during the hold. Separate from financing costs and routinely underestimated.

Cash-out refinance

A new loan larger than the existing debt, returning the difference to the owner in cash.

Completion guarantee

A personal undertaking that a construction project will be finished, separate from the guarantee that the loan will be repaid.

Contingency

A reserve within the rehab budget for what you have not found yet. Ten percent is a floor.

Cross-collateralisation

Securing a loan against an additional property you own. Unlocks leverage and links two assets so one failing can take the other.

Cure period

The time you have to fix a default before the lender's remedies become available. Short or absent cure periods are a red flag.

D

Days on market (DOM)

How long comparable finished properties take to sell. The variable most often omitted from flip timelines.

Debt service coverage ratio (DSCR)

Rental income divided by the loan payment plus taxes, insurance and HOA. Most rental lenders require 1.20 or better.

Debt yield

Net operating income divided by loan amount. A value-independent risk measure used in commercial lending.

Deed of trust

The security instrument used instead of a mortgage in many states. Permits non-judicial foreclosure, which is materially faster.

Default interest

The elevated rate that applies after a default, commonly 18-29%, often accruing from the date of default.

Draw

A release of rehab funds against completed work, usually after an inspection.

Draw schedule

The agreed breakdown of the rehab budget into stages, each with a dollar value, against which draws are measured.

E

Entitlements

The zoning, permits and approvals that allow land to be developed. The main driver of land value and land lending risk.

Escrow

A neutral third party holding funds and documents until closing conditions are met. The only place your pre-closing money should go.

Exit fee

A fee charged at payoff, typically 0-2% of the loan. Frequently omitted from headline pricing and often negotiable away.

Exit strategy

How the loan gets repaid: sale, refinance, or other capital. "Extend if needed" is not one.

Extension fee

A fee to lengthen the term, commonly 0.5-2% per extension period. The most frequently triggered fee in the product.

F

Fix and flip loan

A hard money loan structured for buy-renovate-sell: purchase money at closing plus a rehab holdback drawn in stages.

Foreclosure

The lender's process for taking the collateral. Judicial in some states, non-judicial and much faster in others.

G

Guaranteed interest

See minimum interest.

H

Hard money loan

A short-term loan secured by real estate, made by a private lender, and underwritten primarily against the property rather than the borrower.

Holdback

The portion of the loan retained by the lender and released in draws - almost always the rehab or construction budget.

I

Interest reserve

Months of interest funded out of loan proceeds and paid to the lender on your behalf. You are borrowing the interest, and paying points on it.

J

Judicial foreclosure

Foreclosure requiring a court process. Slower, and available to borrowers as time.

L

Lien waiver

A contractor's release of the right to file a mechanic's lien for work paid for. Frequently required before a draw is funded.

Loan to as-is value (LTV)

Loan amount as a percentage of current value. Typically capped at 60-75% in this product.

Loan to after-repair value (LTARV)

Total debt as a percentage of ARV. The 70% cap that binds on most fix-and-flip deals.

Loan to cost (LTC)

Loan amount as a percentage of total project cost - purchase plus rehab.

M

Maximum allowable offer (MAO)

The most you can pay and still hit your target profit. Commonly approximated by the 70% rule and better computed directly.

Mechanic's lien

A claim recorded against the property by an unpaid contractor or supplier. Clouds title and can block a sale.

Minimum interest

A clause requiring you to pay a set number of months of interest regardless of when you pay off. Often the largest hidden cost on a fast project.

N

Net operating income (NOI)

Income after operating expenses but before debt service. The basis of commercial valuation.

NMLS Consumer Access

The free public database of licensed mortgage companies and individuals, maintained on behalf of state regulators. The first place to check a lender.

Non-judicial foreclosure

Foreclosure conducted outside court under a power of sale in a deed of trust. Can conclude in a few months.

Non-recourse

A loan where the collateral is the lender's only remedy. Rare in hard money, and usually subject to bad-boy carve-outs.

O

Origination fee

See points.

P

Personal guarantee

Your personal promise to repay a loan made to your entity. Standard in hard money, and the reason an LLC does not limit your downside to the property.

PITIA

Principal, interest, taxes, insurance and association dues. The denominator in a DSCR calculation.

Points

Origination fee expressed as a percentage of the loan. One point is one percent. Ask whether it is charged on the total facility or the initial funding.

Prepayment penalty

A charge for paying off early. Common on DSCR rental loans, often as a five-year step-down.

Private money

Lending by individuals or small partnerships, often relationship-based. Overlaps with hard money; typically less formal.

Pro forma

Projected financial performance after your plan is executed. Discounted heavily by lenders, and should be by you.

R

Rehab budget

The cost of the renovation. A line-item scope is an underwriting document; a round number is a guess.

Reconsideration of value

A formal request to revisit an appraisal, supported by comparable sales that were missed. Requires new evidence, not disagreement.

Recourse

The lender's ability to pursue you personally beyond the collateral.

S

Schedule of values

A construction budget broken into line items with dollar values, against which draws are measured.

Seasoning

How long you must own a property before a lender will lend against its current appraised value rather than your purchase price. Commonly six months, and the main BRRRR trap.

Servicing

Administration of the loan after closing - payments, draws, payoff statements. Sometimes done by a third party rather than the lender.

Spread

The gap between total cost and resale value. What the whole deal is competing for.

T

Term sheet

The one-page summary of proposed loan terms. Non-binding, incomplete by convention, and the document most people make their decision from.

Title commitment

The title company's undertaking to insure title, listing what must be cleared first.

Transactional funding

Very short-term capital funding the A-to-B leg of a double closing, priced as a flat fee.

U

Usury

Statutory limits on interest rates. Applies differently to business-purpose loans and varies enormously by state.

W

Wholesaling

Contracting to buy a property and assigning the contract to an end buyer for a fee, usually without taking title.

Y

Yield maintenance

A prepayment formula compensating the lender for lost interest. Functionally similar to a minimum-interest clause.