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Words to Know in Private Lending

Not sure what all the industry jargon means? Here’s a quick guide.

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  • 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.
  • 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.
  • 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.
  • Foreclosure - The process by which a lender takes possession of the collateral property in case of borrower default.
  • Hard Money Loan - A loan provided by a private lender, usually secured by real estate, that is often used for short-term investment purposes
  • 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.
  • 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.
  • 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.
  • Underwriting - The process of assessing a borrower’s creditworthiness, financial stability, and ability to repay the loan.
  • 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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