Words to Know in Private Lending
Not sure what all the industry jargon means? Here’s a quick guide.
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a
- Appraisal - A detailed report that provides an objective assessment by a third-party, of the actual value of a property. An appraisal considers a variety of factors, such as location, comparable sales, finishes in the property, and repairs needed.
c
- Cash-Out Refinance - Refinancing a property that results in a larger loan amount than the existing mortgage, with the cash proceeds going directly to the borrower.
- Collateral - A property or assets that a borrower pledges as security for a loan.
- Cross-Collateralization - The use of multiple properties as collateral for a single loan.
d
- Debt-Service Coverage Ratio (DSCR) - A measure of a borrower’s ability to meet loan payments, calculated as the ratio of the borrower’s net operating income to their debt service obligations.
- Default - Failure by the borrower to repay the loan as per the agreed-upon terms.
- Due Diligence - The process of investigating and evaluating the potential risks and benefits of a loan before making a decision to invest.
f
- Foreclosure - The process by which a lender takes possession of the collateral property in case of borrower default.
h
- Hard Money Loan - A loan provided by a private lender, usually secured by real estate, that is often used for short-term investment purposes
i
- Interest Rate - The percentage rate charged on the loan amount, which is typically higher on a hard money or private money loan than conventional loans due to the increased risk.
l
- Loan Modification - A change made to the loan terms to accommodate a borrower’s financial difficulties.
- Loan Origination - The process of creating a new loan, including underwriting, documentation, and funding.
- Loan Servicing - The process of collecting loan payments, managing the loan account, and maintaining records of payments and balances.
- Loan Term - The length of time the borrower has to repay the loan.
- Loan-to-Value (LTV) Ratio - The ratio of the loan amount to the value of the collateral property.
p
- Points - A one-time fee charged by the lender, usually based on a percentage of the loan amount, to cover the cost of underwriting and other loan-related expenses.
- Prepayment Penalty - A fee charged by the lender if the borrower repays the loan before the end of the loan term.
- Private Money Lender - An individual or organization that provides hard money loans to borrowers.
u
- Underwriting - The process of assessing a borrower’s creditworthiness, financial stability, and ability to repay the loan.
y
- Yield - The total return on an investment, including interest, fees, and other costs, expressed as a percentage of the amount invested.
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