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Hard Money Dictionary

Hard Money Dictionary

After Repairs Value (ARV)

The estimated value of a property after specific repairs or renovations are completed.

This value is often used by hard money and private money lenders to determine a maximum loan amount as well as a maximum amount of repairs disbursements available to a borrower

 

Asset

Something that is capable of producing economic value. Assets are classed as either tangible items (cash, buildings, investments, equipment, inventory) or intangible items (patents, trademarks, intellectual property).

 

Collateral

A safety net used by lenders to make sure that they get their money back even if the borrower defaults. For example, a lender may use a car to collateralize a car loan. If the borrower stops making car payments, the lender can seize the car and sell it to cover its losses.

Mortgage lenders secure loans against real estate. If the borrower stops making payments, the lender can repossess the collateral property in a process called foreclosure

 

Effective Borrowing Cost (EBC)

The borrower’s true cost of borrowing funds from the lender. Effective borrowing cost takes into account all loan related costs such as appraisals, origination costs, loan fees, title insurance premiums, and mortgage insurance premiums.

 

Leverage

The amount of debt utilized against a property. For example, assume you have a $100,000 property financed with a mortgage of $75,000 and a $25,000 cash down payment. This property would have a debt to equity ratio of $75,000/$25,000 or 3. Expressed in another way, for every dollar of net worth in the property, there are three dollars of mortgage owed.

Higher leverage increases financial risk. This is because borrowing cash creates an obligation to pay interest that will increase costs. A property with leverage will have to perform better for the same result than the same property without leverage. Another reason is that property owners can become “underwater” easier with changes of property values.

 

Loan to Cost (LTC)

Loan to cost is the ratio of the maximum loanable amount over the cost of a real estate property or project.

For example, assume an investor has the opportunity to purchase a property for $100,000 which will require $20,000 in repairs before occupancy by a tenant. If a lender will lend at a loan to cost ratio of 75%, the investor will be able to borrow up to 75% of the total cost of $120,000 or $90,000. The investor will have to pay for the remaining $30,000 by some other means – usually with cash.

 

Loan to Value (LTV)

Loan to value is the ratio of the maximum loan amount over the collateral property’s value. It represents what percentage of a property’s value the lender is willing to extend as a loan. Higher loan to values represent greater risk for the lender because there is less of a cushion protecting their principal if the borrower defaults. Therefore many lenders create strict loan to value limits

 

Mortgage Banker

A mortgage banker will arrange (originate) and loan funds to borrowers directly (in contrast to a mortgage broker) but will then sell these loans on a secondary market. Not necessarily a bank or depository institution.

 

Mortgage Broker

A mortgage broker connects the true lender of funds and the borrower. The broker’s own funds aren’t lent to the borrower but rather an institution such as a bank makes the disbursement. In exchange for their services, the broker receives some fee (usually origination points – a percentage of the total loan amount)

Many private money or hard money lenders are in actual fact acting as extended brokers. They solicit cash from private investors and use these funds to make mortgage loans to borrowers. In return, they receive compensation in the form of origination fees and/or a small portion of periodic interest payments. They may also act more as a direct conduit between private lender/investors and individual borrowers.

 

Origination Fees

Fees or costs paid by the borrower in order to secure financing from a lender. These may include items such as a fee paid to the broker or originator of the loan (calculated as a percentage of the loan amount and known as origination points) as well as flat costs.

These fees increase the true cost of borrowing above the stated interest rate of the loan.

 

Residential

Regarding a place of residence or a place of living.

In real estate it means property that people live in (as opposed to commercial real estate). Residential real estate may include things like individual houses through to apartment buildings. The term doesn’t extend to places where business is transacted.