Becoming a real estate investor will require you to learn a whole new vocabulary not commonly used in day to day life.
In order to ensure you are comfortable with the terminology involved in the real estate investing process, we have created a list of terms you may come across when getting a hard money loan.
Loan to Value (LTV): Commonly used ratio to access risk of a secured loan. The higher the LTV, the higher the amount of risk.
Loan to Cost (LTC): A ratio that is calculated by dividing the loan amount by the cost of the project. The higher the LTC, the higher the amount of risk.
After Repair Value (ARV): A term commonly used by real estate fix and flippers. This is the projected value of a property after estimated repairs have been made. It factors in the total cost of repairs and the assessed value of the home.
Underwriting: A verification process conducted by a lender in which the lender checks a borrower's income, debt, assets, credit history and value of the collateral property among other things. Hard money underwriters and traditional mortgage underwriters examine different criteria. Hard money lenders are more interested in the value of the underlying asset rather than a borrower's credit score.
Private Lender: Hard money lender, bridge lender and private lender are all commonly used interchangeable terms in real estate. These lenders provide short-term loans to commercial and residential real estate investors. It is a way for borrowers with less than stellar credit to secure funding.
Refinance: Refi for short. Replacing an old mortgage with a new one. Often used by property owners to acquire a lower interest rate which results in lower monthly payments.
Amortization: Incrementally paying off the balance of a loan over a set period of time.
Appraisal: A professional market value of how much a property is worth.
Foreclosure: When a lender legally takes possession of and sells the property because the borrower defaults on the loan
Hard Money Loan: A short-term interest only loan secured by commercial or residential real estate. These loans carry higher interest rates however they can be funded in a matter of days. Hard money lenders are primarily concerned with the value of the collateral asset rather than a borrower's credit score or financial history.
Interest Rate: The amount you are charged for borrowing money. It is a percentage of the total amount owed borrowed from the lender.
Draw Schedule: A payment disbursement plan for a construction or renovation project. As progress is made on the project, more and more of the funds are released.
Loan Points: These are fees a borrower pays to a lender. One point is equivalent to one percent of the loan amount.
Proof of Funds (POF): A document showing a buyers ability to pay for a specific transaction, usually a bank statement, custody statement or security statement.
Real Estate Owned (REO): When a property transfers ownership from the borrower to the lender due foreclosure.