Hard money loans are an alternative form of financing. Some of the terminology used in hard money lending is specific to the hard money programs, while other terminology is similar or the same as what is used for other more conventional loans. We have put together a glossary of common hard money loan terms to help you understand more about hard money.
Appraisal – An appraisal is used to assign a market value to a property. Typically speaking, hard money lenders are most concerned about the market value of the property based on the sales comparison approach. Depending on the loan, we can use scaled down versions of appraisals such as drive by appraisals, BPO’s (broker price opinions) or restricted commercial appraisals.
Balloon Payment – The payment due at the end of a loan term to pay the loan off. Many hard money loans are short term loans, for example a three year loan term would have a balloon payment due at the end of three years where the full principal balance would be due and payable.
Blanket Loan – A loan that encumbers more than one property. If a borrower needs a larger loan amount than a single property will allow, one creative solution is to combine properties and make a single loan, using all the properties as collateral.
Bridge Loan – A bridge loan is basically a loan meant to help bridge a gap. They are typically short term loans and are not meant to be a permanent financing solution. The exit strategy from a bridge loan is typically the sale of a property or a takeout loan that the borrower will qualify for after a certain period of time or after specific actions have occurred (property gets leased up, construction is completed, etc.).
Broker – A broker is an intermediary between a borrower and investor. Most hard money lenders are actually brokers who represent individuals or groups with money to place.
Builders Control – An account where funds are held and disbursed for the purpose of construction, construction completion, rehab or other related work on the property.
Cross Collateralization – The same as a blanket loan, multiple properties are securing a single loan.
Deed of Trust – The security instrument for real estate loans in California.
Fund Control – An account where funds are held and the disbursement is controlled. Typically it is the same as a builders control account, although there are other instances where a fund control account may be used.
Hard Money – A hard money loan is essentially a loan not made through an institutional or conventional lender. Often they are funded by private individuals, fractionalized among many individuals or are made by larger groups or funds.
Interest Only – A loan where no principal is paid, only the interest. At the end of the loan term a balloon payment is due for the full principal amount.
Interest Reserve Account – An account where prepaid interest is held, typically to make payments on the loan for a set amount of time.
LTV – Loan to value. This is the driving factor behind hard money loan approval. The lower the loan to value, the more secure the transaction is for the end investor. Due to this, lower loan to value transactions also will typically come with more advantageous terms than higher LTV loans. LTV is calculated as a percentage based on the value of a property. Divide the loan amount by the value of the property and express that number as a percentage and you will have the LTV. For example, a loan amount of $100,000 on a property worth $200,000 would be 50% (100,000/200,000 = .50 âï¿½ï¿½ expressed as a percentage it is 50%).
Points – A fee paid on a loan, each point is one percent of the loan amount.
Raw Land – Land that is unimproved.
Release Clause – Used in conjunction with a blanket loan, a release clause allows for the release of individual properties for a pre-determined amount of money or a fixed percentage of the sale price.
Seasoning – A term used for the length of time something is held. Usually it applies to funds or property. Seasoned funds can be shown to have been in a bank account for a set period of time. Seasoned property has been held by the same owner for a set period of time.
Subordination – Typically used to reference a document that an existing lender will sign to allow a new loan to take a senior lien position.