Hard Money Lending Terms Defined

 Ever wish there was a dictionary for real estate hard money terms? Don’t fret, we’re here to help. We’ve consolidated a list of the most commonly used terms in hard money lending to help you better understand and communicate with your hard money lender. 

While these are general definitions, it is important to remember that sometimes lenders will have specific definitions within loan agreements, so you’ll want to be sure to review the agreement and consult legal counsel if necessary.

After Repair Value (ARV) - The value of the home after all the repairs have been completed. This is the “Sell” part of the Buy-Fix-Sell project. It is important to calculate the anticipated ARV before purchasing an investment property because often times the amount put in towards the repairs and renovations does not translate to the overall value of the property. Also, hard money lenders tend to use the ARV to help determine the maximum loan amount.

Acquisition Loan - Financing for the purchase, or acquisition, of property. The targeted property may be intended for resale by a wholesaler, for a fix and flip project, or for a condominium conversion, but as long as the loan is earmarked for the purchase only, it is considered to be an acquisition loan.

As-Is Value - The value of the property in its current condition. This may be different than the purchase price of the property. Sometimes the purchase price may be less than the appraised As-Is value and sometimes it may be more.

Bridge Loan  - Sometimes referred to as a “swing loan,” “gap financing,” or “interim financing,” a bridge loan is a short-term loan that “bridges the gap” or gets a borrower from point ‘A’ to ‘B’ by leveraging the equity in a property they already own. Real estate bridge loans are temporary in nature and can be used for a variety of business opportunities in addition to buying real estate investment properties.

Buy-Fix-Sell - refers to buying a property to fix, or renovate, and then selling the property for profit.

Cash Out Refinance - replacement of an existing mortgage loan for more than the original amount. The difference between the original and cash-out refinance loans result in cash.

Closing Costs - the fees and expenses required to finalize a mortgage, mostly paid by the buyer but with some responsibility falling on the seller as well. Average closing costs fall between 2% and 5% of the loan amount. For example, a $300,000 home purchase would mean estimated closing costs would be anywhere between $6,000 to $15,000.

Comps - Comparable sales of homes located in the same area with similar size, condition, and features that sold within a recent timeframe as the home you are looking to sell or buy. Comps are used to help determine the After Repair Value (ARV) and if the acquisition cost makes sense.

Construction Loan - Fix of the Buy-Fix-Sell - is frequently used to finance residential or commercial new construction projects. Typical construction loans run for six months to two years, requires interest-only payments (that may sometimes be bundled into the loan itself), and are funded in installments that follow a predetermined schedule of milestones.

Construction Draws - While acquisition funds are disbursed on day one, reserve funds are held until needed and paid out in construction draws. When money is needed for construction costs, you’ll make a draw request to be reimbursed for work completed and/or materials on site. A third-party inspector is employed to assess a project and provide us with a comprehensive report outlining the percentage complete for each line item in a borrower’s budget. 

Equity - The difference between market value and the amount you owe on a property. Your equity can increase over time if property value increases or your loan balance is paid down.

Fix and Flip - Purchasing a distressed property to renovate and sell for profit.

Ground Up Construction - Building a structure completely from scratch to completion on a piece of land.

Guarantors - Individuals legally responsible for the loan. Since most hard money lenders, like Walnut Street Finance, only lend to LLCs, each borrower is considered a guarantor on the loan.

Hard Money Loan - Money borrowed for your real estate purchase through a private lender instead of a bank. The reason it is called a “hard” money loan is that the real estate property serves as the “hard” asset to back the loan.

Interest Rate - The percentage lenders charge for the use of their money. Hard money lenders obtain financing from private investors; therefore each lender dictates the terms of their rates which are dependent on the property, project, borrower experience and credit score.

Interest Only Payments -Aa loan that only requires the borrower to only pay the interest for a certain period of time and not have to pay down principal or make additional payments other than interest.

Limited Liability Company (LLC)  - A corporate structure in the United States whereby the owners are not personally liable for the company's debts or liabilities. For many hard money lenders in Washinton DC, LLCs are required to acquire a loan. 

Loan Term - The duration of the loan; hard money loans are typically short-term loans and range anywhere from 6-24 months. Walnut Street Finance works with borrowers to put together a financing solution that best meets the needs of the borrower. Terms can be flexible are dependent on the deal and borrower experience. 

Loan to Cost (LTC) - A metric used in commercial real estate construction used to compare the financing of a project as offered by a loan to the cost of acquiring the property and rehab budget of the project. Knowing the LTC ratio allows lenders to determine the risk of offering a loan.

Loan to Value (LTV) - A lending risk assessment ratio that lenders examine before approving a mortgage. It is calculated by dividing the loan amount by the after repair value (ARV) of the property.

Mobilization Funds - The money you need to get started on a construction project.

Multi-Family Residential – A building or several buildings within one complex that contains multiple separate housing units for residential inhabitants. For example, an apartment building, condominiums, or duplex houses.

Origination Fees - A fee charged by hard money lenders on entering a loan agreement to cover the origination and processing of the loan.

Owner Occupied – A residential property in which the owner of that property lives.

Points - A fee charged to help administrative, origination, and processing costs of the loan. One point equals one percent of the loan amount.

Proof of Funds  - A document that proves a property buyer has enough liquid cash to purchase a house which can be provided by your bank or lender.

Purchase Price - Buy of the Buy-Fix-Sell - the amount paid for the investment 

Refinance - To replace an existing loan with a new loan, usually with better terms and interest rate.

Rehab - In the world of real estate, rehab is simply another word for renovation. You are fixing, or rehabbing, a property to rent or to sell.

Rehab to Rent - Renovating a property with the intentions of renting it out. Rental properties are considered long-term investments.

Term Sheet - a document that outlines the terms and conditions of the hard money loan agreement.