Glossary of Terms

Accredited Investor

A term defined by the SEC. Check out the Code of Federal Regulations site for updated qualifications.

Additional Principal Payment

A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan.

After Repair Value (ARV)

Estimated future value of a distressed property after it's been repaired. ARV is not a property's current value when purchased but rather the estimated value of the property once improvements are made. It is a best-guess number. It’s an important number to know as it impacts profitability and ultimately risk of the project.

Annual Percentage Rate (APR)

This is the annual percentage rate we charge the borrower. Our rates typically range from 8-12%

Appraisal

A written professional opinion and analysis of the estimated market value of real estate which will be used as collateral for the private money loan.

As-is Value

This is the value of the property in its current condition. Typically this is set by the value of the purchase price. Sometimes a borrower will buy a house below “as-is” value.

Assignee

Person, company or entity to whom rights to a property, title or other interest are transferred.

Assignment

Document transferring rights to a property, title or other interest from one person to another.

Assignor

Person, company or entity who transfers rights they hold to another entity. The assignor transfers to the assignee.

Automated Valuation Model (AVM)

A method of evaluating real property using a mathematical formula.

Bankruptcy

A proceeding authorized by federal law which provides debtors with various kinds of relief from their debts.

Chapter 13 Bankruptcy

A reorganization bankruptcy process (as opposed to a chapter 7 which is a liquidation). Chapter 13 of the Title 11, United States Code allows individuals to undergo a financial reorganization and is frequently given three to five years to repay their obligations.

Chapter 7 Bankruptcy

A bankruptcy which is a court appointed trustee managed liquidation (as opposed to Chapters 11 and 13 which is the process of reorganization of a debtor in bankruptcy). It is Chapter 7 of the Title 11 of the United States code (Bankruptcy Code) and governs the process of liquidation under the bankruptcy laws of the US.

Binder Title Policy

An offer to insure title on a property which will be resold in a short period of time (e.g. a few years). Binder policies are typically a small percentage over the original policy price and is substantially less expensive than purchasing a policy when a property is purchased and later resold.

Borrower Deposit

We collect a deposit from the borrower upon agreeing to terms and signing our term sheet. This shows us that the borrower is serious about working with us as well as covers our initial underwriting expenses.

Borrower

This is the term we use internally when talking about our customers who borrower from us. Externally, they may also be referred to as Real Estate Investors, Developers, Operators or Sponsors. To keep terminology simple internally, we always refer to them as a Borrower.

Bridge Loan

Short term financing which bridges the gap of other financing and is typically for a term of less than one year. This is sometimes called a swing loan or bridge financing.

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.

Cash-Out Refinance

A cash-out refinance is a mortgage refinancing option in which an old mortgage is replaced for a new one with a larger amount than owed on the previously existing loan, helping borrowers use their home mortgage to get some cash.

Cash Settlement Statement (Distribution of Proceeds)

This is the document we provide to the closing company (attorney) that outlines how much capital we’ll be funding and line-items all additions and subtractions. It may also be called a Distribution of Proceeds Statement.

Certificate of Occupancy

A document issued by a local government agency or building department certifying a building's compliance with applicable building codes and other laws, and indicating it to be in a condition suitable for occupancy.

Closing

The “closing” is the period that marks that a loan transaction is final. Also called Origination Date.

Closing Costs

Fees paid at closing for loan origination and processing, including attorneys’ fees, fees for preparing and filing a mortgage, fees for title search, taxes and insurance.

Co-signer/Co-Borrower

Another person who signs the loan and assumes responsibility for the payments and the liability.

Collateral

For real estate loans, the collateral is the real property used to secure repayment of a loan.

Collection

A loan goes into collection when payment on a loan is delinquent and efforts are made to collect the amount due. This is also the stage at which the lender files the papers necessary to prepare to proceed with foreclosure. Collection is typically handled by the loan servicer. Hard money lenders will be more aggressive than banks at collecting on loans because their private money investor clients keep a more watchful eye on the loans than do government sponsored agencies and/or banks. In addition, the banks do not want to make “headlines” by foreclosing too quickly.

Construction Draw

We hold-back funds in escrow to be used for construction. Funds are dispersed via Construction Draws. Typically there will be between 2-5 draws per project. These are used to manage risk on a project to make sure our loan outstanding isn’t greater than the value of the home. As a sales person, you will negotiate how many Draws we will include in the loan.

Credit Bureau

An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit. Hard money loans usually involve a credit report from a bureau, but generally do not rely on it as much as banks do. Private money lenders are typically more interested in the nature of the loan, the amount of equity in the collateral than a credit score.

Credit Report

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 your credit report that is used by most lenders to decide whether to extend credit and at what cost. The most common score used is called a FICO score.

Creditor

A person or business from whom you borrow or to whom you owe money.

Cross Collateralization

The act of using an asset currently used as collateral for an initial loan as collateral for a second loan. If the debtor was unable to make either loan's scheduled repayments on time, the affected lenders can eventually force the liquidation of the asset and use the proceeds for repayment.

Deal Analysis Tool

This is the internal tool that is within the admin section of our website that we use to analyze the ratios of each project.

Default

Default on a loan is when a borrower fails to comply with any of the terms of an agreed-upon loan, including timely repayment.

Default Interest Rate

An increased interest rate imposed if there is a breach of the loan terms.

Depreciation

Loss of value in real property brought about by age, physical deterioration, or functional/economical obsolescence.

Disclosures

Information that must be given to borrowers to make them aware of acts and laws that affect their financial dealings.

Distribution of Proceeds Statement

This is the document we provide to the closing company (attorney) that outlines how much capital we’ll be funding and line-items all additions and subtractions. It may also be called a Cash Settlement Statement.

Equity

The difference between the fair market value (appraised value) of real property and any outstanding loans, liens and encumbrances. Hard money lenders require substantially more equity than banks on their loans because their private money investors are not insured by the government and therefore require more protection.

Escrow

A separate account where money and/or documents are held by a third party until agreed upon terms and conditions are met. Escrows serve as a neutral third party upon which lenders, borrowers, investors and loan originators may rely.

Escrow Company

Oversees the execution of real estate transactions to include closing documents, disbursement of funds, and the recording of documents at the county offices. Also know as a Settlement Services Company.

Extension Fee

If we offer the Borrower an extension, we charge a fee for the extension. It is typically a 1% fee of the loan amount.

Extension Term

Our loans have a built in a loan extension, typically 3 months but can be more. This allows us to extend the Loan Term if the borrower needs more time to complete the project. The extension is up to our discretion, and is typically granted as long as the loan remains current on payments and the project is progressing as expected.

Fair Market Value

The value of a property, which is typically based on comparable sales (“comps”) of similar properties within the last six months. Often times, hard money lenders will drive the “comps” themselves, or, they may even have their private investor in the real estate loan drive the comps to personally determine value on a privately funded loan.

FICO Score

A credit score developed by Fair Isaac & Co. that determines the likelihood that credit users will pay their bills. Scoring is widely accepted by lenders as a reliable means of credit evaluation. It is not used by private money lenders as much as it is used by banks.

First Distribution Amount

This is the amount that we disperse at closing. It is the total loan amount less construction draws, prepaid interest and any other fees we collect.

Fixed-Rate Loan

A fixed-rate loan is one in which the interest rate or scheduled principal and interest payment amount does not change during the course of the loan.

Forced Place Insurance

Insurance placed on a property by the private money investor (lien holder) in the event that a borrower allows coverage to lapse. The cost is advanced by the investor and added to the balance of the lien.

Foreclosure

The legal process by which an owner’s right to real property is terminated; typically due to a default. Each state has their own foreclosure process. In states where deeds of trust are used in place of mortgages, the foreclosure begins when the lender records the Notice of Default. In mortgage states, the lender must file a lawsuit with the court. Hard money lenders generally foreclose faster than banks because their private money investors want to put their funds to additional use.

Foreclosure Fees

Costs incurred by a lender to foreclose on a property. These costs are typically added to the balance of the loan.

Guarantor

A guarantor is a person, company or entity who guarantees to pay a borrower's debt in the event the borrower defaults on a loan obligation. A guarantor acts as co-signer because they pledge their own assets or services in case the original debtor cannot perform their obligations.

Hard Money

This is a term used to describe a short-term loan secured by a hard asset, in our case real estate. It may also have a negative connotation associated with it as “hard money lenders” can be perceived as “hard” to work with or having “hard” terms. Many borrowers will consider us to be a “hard money lender”.

Institutional Lenders

In addition to the Retail Lenders that invest on our platform, we also have Institutional Lenders. The difference being that they are investing other people’s money and earning a fee for managing the investment. They typically have much more capital to invest. They may invest via the online platform or they may buy whole loans after we’ve originated them. They tend to be more sophisticated and require additional data or documentation.

Interest Rate

The percentage rate that lenders charge for use of their money.

Investor

Per previous definitions, investor can be used to reference Borrowers or Lenders. Internally, we use this term when talking about investors in our business. This is not to be confused with “borrowers” who also refer to themselves as “investors” or Lenders which are making investments in our loans. Generally speaking, we try to avoid using this term “investor” internally to avoid confusion.

Its successors and or assigns (ISAOA)

This simply means the rights of the mortgagee can be transferred to any entity and “assign” the rights of financial indemnity (in the event of a loss) to that other entity.

Junior Lien

A lien against a property not in first priority or position.

Late Fee

Paid by a borrower if a loan payment is not made on time.

Legal Closing Fee

This is the fee we charge the borrower to cover our legal costs to close a loan. This includes document preparation, title review and other legal due diligence performed to close a loan.

Lender

This is what we use internally when talking about our customers who lend or “invest” on the platform. Externally, they may refer to themselves as investors, lenders or accredited investors.

Lien

A legal claim on real property generally for the payment of a debt or obligation. This can be on the person or the property.

Liquidity

The measure of an individual or entity to convert assets to cash without significant loss or time delay.

Loan Service Fee

We charge the borrower a flat fee for services rendered throughout the life of the loan. This includes the appraisal fee and a certain number of agreed upon construction draws. This flat fee gives the borrower certainty around their costs so there are no surprises after the loan closes.

Loan Term

This is the length of the loan, typically 6-12 months for our loans. This represents when the borrower must repay the principal of the loan.

Loan-to-Cost (LTC)

A ratio used in real estate construction to compare the amount of the loan used to finance a project to the cost to build the project. If the project costs $1 million to complete and the borrower borrows $700,000, the loan-to-cost (LTC) ratio would be 70%.

Loan-to-Value Ratio (LTV)

The amount of outstanding debt on real property divided by the fair market property value. There are different LTVs depending on the status of the project (value) and the loan disbursed.

Mortgage (Deed of Trust)

A pledge of collateral as security. In some states, the term mortgage also describes the document signed to show that the lender is granted a lien on a property. See our article to learn the difference between a mortgage and a trust deed.

Mortgagee

The Lender (i.e. Fund That Flip)

Mortgagee Clause

A property insurance provision granting special protection for a mortgagee (e.g. Fund That Flip) named in the policy that, in effect, sets up a separate contract between the insurer and the mortgagee.

Mortgagor

The Borrower

Liquidity

The measure of an individual or entity to convert assets to cash without significant loss or time delay.

Loan Service Fee

We charge the borrower a flat fee for services rendered throughout the life of the loan. This includes the appraisal fee and a certain number of agreed upon construction draws. This flat fee gives the borrower certainty around their costs so there are no surprises after the loan closes.

Loan Term

This is the length of the loan, typically 6-12 months for our loans. This represents when the borrower must repay the principal of the loan.

Loan-to-Cost (LTC)

A ratio used in real estate construction to compare the amount of the loan used to finance a project to the cost to build the project. If the project costs $1 million to complete and the borrower borrows $700,000, the loan-to-cost (LTC) ratio would be 70%.

Loan-to-Value Ratio (LTV)

The amount of outstanding debt on real property divided by the fair market property value. There are different LTVs depending on the status of the project (value) and the loan disbursed.

Note

An abbreviation for “promissory note”. The document obligates a borrower to pay a debt at agreed upon terms. It discloses the interest rate and terms of the loan.

Payoff

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

Payoff Statement

A statement which provides information on the amount of money required to pay off a loan.

Personal Guarantee

We make loans to entities (LLC or S-Corp). These entities are typically single purpose and have no assets other than the property. We therefore require the principals of the entity to guarantee the performance of the entity. This is done via a PG. A loan with a PG is called a “Recourse Loan”. A borrower may ask if we offer non-recourse loans, meaning that they want a loan without a PG. We typically do not offer non-recourse loans.

Points

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

Prepaid Interest Period

We typically hold back 3-6 months of interest from the loan proceeds. This helps the borrower manage cash flow the first few months and also works as a risk management tool for us.

Private Money

Many borrowers will refer to the fact that they have private money, which usually means friends, family or business associates that will lend them their money. The difference between Private Money and Hard Money, is that PM comes from individual investors while HM is typically more institutional. Private Money tends to be perceived as more “friendly”, with better terms and pricing.

Project

This is our internal terminology for a loan and associated property. It may also be referred to as a Deal.

Promissory Note

The document which obligates a borrower to pay a debt at agreed upon terms. It discloses the interest rate and terms of the loan.

Real Estate Investor

This is how our borrowers’ refer to themselves. When communicating with them, it may resonate more to refer to them as investors, operators, developers or sponsors.

Refinance

A refinance, or "refi" for short, refers to the process of revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage.

Relief of Stay

Court granted relief from the automatic stay of collection actions against a debtor in a bankruptcy filing. This allows a creditor to proceed with collection and/or foreclosure actions.

Retail Lenders

These are the lenders that lend on our platform using their personal capital. They typically invest in increments of $5,000 per project and are doing so to diversify while earning monthly income from the investment.

Second Mortgage

Second priority (or second position) lien against a property. Also referred to as a junior lien.

Security Interest

An interest that a lender takes in the borrower’s property to ensure repayment of the debt. The promissory note spells out the terms (the interest rate, the duration, etc.) and the security instrument (e.g. mortgage or deed of trust) secures the note to the property and is recorded to put the public on notice.

Self-directed IRA

An individual retirement account in which a custodian handles alternative investments at the direction of the account owner. This arrangement enables private money investors to make hard money loans from their retirement accounts.

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.

Settlement Services Company

Oversees the execution of real estate transactions to include closing documents, disbursement of funds, and the recording of documents at the county offices. Also known as an Escrow Company.

SOW (Scope of Work)

This is provided by the borrower and represents a comprehensive line-item of work to be done on the project. These are needed to properly understand how the value of the home is being improved and how much it will cost to do so.

Stay

The automatic prohibition of collection actions against a debtor in a bankruptcy filing.

Stub Payment

This is the partial month interest due when we originate a loan mid-month or the partial interest payment due when a loan pays off mid-month. It may also be referred to as “Balance of current month’s interest”.

Takeout Loan

A long term loan replacing a short term or interim loan (e.g. a construction loan)

Title

The evidence of the right to ownership of real property.

Title Agency

Who we work with and order title from. They search county and public records for liens and encumbrances against a subject property and the borrower. Provides a preliminary title report and an offer of title insurance based on the report. Issues title insurance at transaction settlement.

Title Insurer

This is the actual Title Insurer providing the insurance. This is who we would file a claim with, and who would pay us on an awarded claim.

Title Search

A title search is an examination of public records to determine and confirm a property's legal ownership, and find out what claims or liens are on the property. A clean title is required for any real estate transaction to go through properly.

Title Examination

Title insurance is a form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in a title to a property. The most common type of title insurance is lender's title insurance, which the borrower purchases to protect the lender.

Title Insurance

An indemnity policy that insures an owner and/or lender against loss due to title defects, liens, or other matters.

Trust Deed

A security instrument which secures the promissory note to real property, and is recorded in the county as evidence of the debt.

Underwriting

The process lenders use to determine the risks involved in any given loan.