Understanding Terms Most Commonly Used in Hard Money Lending
Do You Know What This Word Means? Understanding Terms Most Commonly Used in Hard Money Lending
There are so many words and acronyms used in lending, and the majority of people have never heard these terms before. Hard money lenders often utilize these words, taking for granted that everyone understands what they mean. Because most people have never worked in finance or lending they are confused by these terms.
As a private money lender, I make an effort to explain the meaning of the most common terms used in lending in order to avoid confusion. Below is a list of words and acronyms that most often make borrowers scratch their heads:
Glossary Of Terms
Gap loan – A loan used to bridge a gap between what one lender is lending a borrower in a first lien position, and what the borrower has in cash on hand. Not the same as a “bridge” loan.
Interest only loan – A loan whereby only payments are made toward interest, no payments are made toward the principal balance of the loan
30 year amortization – A loan whereby payments are calculated over a term of 30 years. Payments are made toward both interest and principal. At the end of the term, the loan is paid in full.
OO – Stands for, “Owner Occupied.” This is a property that is to be occupied by the property owner.
NOO – Stands for, “Non Owner Occupied.” This is a property that is to be occupied by someone else other than the property owner.
LTV – Stands for, “loan to value.” This is a ratio used to calculate the percentage of the loan amount as a percentage of the property value. For example, if a lender’s max loan to value is 80%, the max the lender will lend on a property is 80% of the property value.
ARV – Stands for, “After repair value.” This is the future value of a property after it has been repaired and/or improved.
Loan term – The length of time one has a loan, for example one year, ten years, or 30 years.
Maturity date – The end of the loan term, or the date the loan is due.
Points – Loan fees quoted as a percentage of the loan amount. Example: 1 point = 1% of the loan amount. Basis points – loan fees quoted as a percentage of 1%. Example: 25 basis points = 25% of 1%
Proof of funds – This is an account statement showing a dollar amount to satisfy a seller of a property that a buyer has funds needed to purchase a property. Can also be a letter provided by a lender to show a buyer/borrower has available funds to purchase or refinance a property
Use of Funds – What are the funds being used for?
Exit Strategy – What is the plan for paying the loan off?
Lien – Any claim against the property. A loan against the property is a lien. Other liens include mechanics liens, tax liens, etc. Also, called encumbrance. 1st lien position, 2nd lien position are terms also frequently used.
PPP – Prepayment penalty – This is a penalty charged for paying a loan off before the maturity date.
If you have questions about any of the terms listed above, please comment below.