Hard Money Lending Definitions and Terms
As with all fields, the hard money lending industry has it’s own quirky vernacular.
Fulford Lending is here to make the lending process as simple and straight forward and
simple as possible. If you’re thinking about working with us, or if you already do work
with us, you will likely run into a few of these terms, so here is a little definition guide we
compiled to clear up any confusion.
Adjustable Rate Loan:
Adjustable Rate Loan: Also called a floating rate loan or a variable rate loan, refers to
a loan that does not have a fixed rate of interest over the life of the loan. Such a loan
typically uses an index and some base rate for establishing the interest rate for each
relevant period.
Balloon Payment Mortgage:
A mortgage which does not fully amortize over the term of the loan, thus leaving a balance due at maturity.
Boilerplate:
These are standard contract clauses which are usually found at the end of a contract. Boilerplate clauses
include insurance terms, arbitration clauses, notice provisions, jurisdictional and governing law clauses and force majeure clauses. In loan documents these terms are
often ignored but may be important in the event of a property casualty, loan default or
other issue concerning the property.
Bridge Loans:
A short-term hard money loan used until a borrower can secure permanent financing. It “bridges” the gap until long-term financing is available. Bridge financing allows the a borrower to meet immediate needs without the lengthy application process and delays associated with obtaining bank
financing.
Buy & Hold Loan:
A loan for investors looking to purchase or refinance properties to be
held as rentals.
Clear Title:
That the owner of a parcel of real property owns it fee and clear of
encumbrances or defects.
Closing Costs:
Fees charged to a borrower for services related to closing a loan. Closings costs can include such items, as title search fees, title insurance premiums, document preparation fees, underwriting fees, recording taxes, etc.
Cross Collateralize:
Using a combination of multiple assets to secure a loan.
Deed of Trust:
A security instrument similar to a mortgage that secures the repayment of a loan with real estate. A deed of trust involves three parties: a lender, a borrower and a trustee. The lender gives the borrower money. In exchange, the borrower gives the lender a promissory note. As security for the promissory note, the borrower transfers real property to a trustee. Should the borrower default on the terms of the loan, the trustee may foreclose on the property to correct the borrower’s default.
Default:
Default: Failure to abide by the terms of a loan (such as making payment(s) when due
or providing property insurance coverage), and such failure continues beyond any
applicable cure period.
Direct Lending:
Direct lending is a form of corporate debt provision in which lenders other than banks make loans to companies without intermediaries such as an
investment bank, a broker or a private equity firm. In direct lending, the borrowers are usually smaller or mid-sized companies, also called small and medium enterprises,
rather than large, listed companies, and the lenders may be wealthy individuals or asset management firms.
Distressed Properties:
Distressed Properties: Properties that are in poor condition or under siege financially
(which may include foreclosure); they usually represent great opportunities for fix and
flip investments.
Draws:
Draws: On some construction projects, there will be a portion of the loan that is “held
back.” The borrower can take or “draw” on these held back funds once they’ve done a
specified amount of work to the property.
Draw Schedule:
Draw Schedule: A detailed payment plan for a construction or
renovation project. The draw schedule determines when the lender will disburse funds
to the borrower and/or contractor. The goal is to make progress payments as work is
completed.
Entity:
Entity: Either an LLC, a corporation, or a partnership. Not an individual.
Exit Strategy:
Exit Strategy: How the borrower plans to pay off the loan on or before the loans maturity date. Having a clear exit strategy will help develop your overall plan for the project and determine
the best type of financing for the deal.
First Trust Deed:
First Trust Deed: A lien on real property which is superior to any other lien of record.
Fix & Flip Loans:
Fix & Flip Loans: Loans that are given to borrowers to purchase properties to be rehabbed and then resold for profit.
Guarantor:
The person who guarantees payment of a borrower’s debt.
Hard money:
Hard money: A type of asset-based financing where a borrower receives funds secured by real property. Hard Money loans are typically issued by private investors or their companies.
HUD-1:
HUD-1: A form created prepared and distributed by the transaction’s settlement agent
at the settlement of a real estate purchase or refinancing that lists all of the transaction
cash flows between property buyer, seller and lenderitemizes and reconciles all the
charges between buyer, seller and lender.
Interest Rate:
Interest Rate: The proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage.This is the cost for borrowed money. Our interest rates tend to be between 10-14%. For example, a 12% interest rate on a $100,000 loan would mean monthly interest payments of $1,000. The math for this goes: $100,000*0.12= $12,000/12 months =
$1,000
Late Charge:
Late Charge: An additional amount due to a lender when a payment is not paid by the borrower within the agreed upon grace period. Typically, the late charge amount will be a percentage of the late payment amount and will become due after a certain grace period has passed.
Lien:
Lien: A claim against real estate. A lien is typically filed by a lender as evidence of its claim upon an asset until such time as the associated loan is repaid.
LLC (Limited Liability Company):
LLC (Limited Liability Company): An entity where individual members are protected from financial liability in excess of the amount a member has invested.
LTV:
LTV: Stands for Loan-To-Value; it is the ratio of the loan divided by the market value of the property. Here at Fulford Lending, we tend to cap out at 65% of the LTV.
Market Value:
Market Value: The price at which the property would sell for between a willing buyer
and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.
New Construction Loans:
New Construction Loans: A loan for investors who are purchasing a lot, or tearing
down an existing home, to build a new construction.
Points:
Points: This is the fee payable at closing, expressed as a percentage of the loan. 1-
point equals 1%. We generally charge between 2-4 points. For example, if your is for a $100,000 loan with has a 3-point fee then you would pay $3,000 in points at closing.
Prepayment Penalty:
Prepayment Penalty: A fee charged by some lenders if the borrower pays back principal at any time before it is due. the loan back early. Fulford Lending does not charge repayment penalties; we never want to punish our borrowers for repaying early.
Private Lender:
Private Lender: A non-institutional company or individual that loans money for the purpose of funding real estate transactions. They usually lend their own funds (we do).
Term: Refers
Term: Refers to the length of a loan and the amortization period. Most of our loans are 1-3 year loans with interest only payments (no amortization). At the end of the loan term (the maturity date) the borrower will have to pay in full any outstanding loan balance.
Title Insurance:
Title Insurance: A type of indemnity insurance
that protects the holder from financial loss or damage resulting from defects in title to a property.
