Your complete guide to hard money lending terminology. Understanding these terms will help you navigate real estate financing with confidence.
The estimated market value of a property after all renovations and repairs have been completed. Lenders use ARV to determine maximum loan amounts for fix-and-flip projects. ARV is calculated by analyzing comparable sales of similar renovated properties in the same area.
The process of spreading loan payments over time so that each payment includes both principal and interest. Hard money loans typically do NOT amortize—they feature interest-only payments with principal due at term end (balloon payment).
A professional assessment of a property's market value conducted by a licensed appraiser. Many hard money lenders use internal valuations or BPOs rather than full appraisals to speed up the lending process.
A large lump sum payment due at the end of a loan term. Hard money loans typically require balloon payments where the entire principal balance must be repaid at maturity, usually through property sale or refinance.
An estimate of property value provided by a real estate broker, typically less expensive and faster than a full appraisal. Many hard money lenders accept BPOs for loan underwriting.
Short-term financing used to 'bridge' the gap between transactions—such as buying a new property before selling an existing one. Bridge loans are a type of hard money loan providing temporary financing until permanent financing or sale can be arranged.
Buy, Rehab, Rent, Refinance, Repeat—a real estate investment strategy where investors purchase distressed properties with hard money, renovate them, rent them out, refinance to conventional financing, and use recaptured capital to repeat the process.
A loan where the primary purpose is business or investment-related rather than personal use. Business purpose loans are exempt from consumer lending regulations, allowing more flexibility in terms and faster closing. All hard money loans from Trinity Mortgage Fund are business purpose loans.
Fees and expenses associated with finalizing a real estate transaction or loan, including title insurance, escrow fees, recording fees, and lender fees (points, document fees, etc.).
Property or asset pledged as security for a loan. In hard money lending, the real estate being financed serves as collateral—if the borrower defaults, the lender can foreclose on the property to recover their investment.
Recent sales of similar properties in the same area used to determine market value. Comps are essential for calculating both current value and ARV in hard money lending.
A disbursement of renovation or construction funds as work is completed. Rather than providing all funds upfront, lenders release money in stages after verifying work completion through inspections.
Financing for building new structures or major renovations. Funds are typically disbursed in draws as construction progresses. Hard money construction loans offer faster approval and more flexibility than bank construction loans.
A legal document that secures a loan against real property. In states like California, a deed of trust involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee). It gives the lender the right to foreclose if the borrower defaults.
Failure to meet the terms of a loan agreement, such as missing payments or violating loan covenants. Default can trigger foreclosure proceedings where the lender takes possession of the collateral property.
A metric comparing property income to debt payments. DSCR = Net Operating Income ÷ Annual Debt Service. DSCR loans qualify borrowers based on property cash flow rather than personal income. A DSCR of 1.0 means income exactly covers payments; higher is better.
The investigation and analysis performed before committing to a transaction. In hard money lending, this includes property inspection, title search, value analysis, and borrower verification.
The difference between a property's market value and outstanding debt. Equity represents the owner's ownership stake. Hard money lenders require borrowers to have equity in the deal for protection.
A neutral third party that holds funds and documents during a real estate transaction, ensuring all conditions are met before transferring money and property. Escrow also refers to accounts holding funds for taxes and insurance.
The plan for how a borrower will repay a hard money loan. Common exits include selling the property, refinancing to conventional financing, or paying off with other funds. A clear exit strategy is required for loan approval.
An investment strategy involving purchasing a property below market value, renovating it, and selling for profit. Hard money loans are the most common financing method for fix-and-flip investments.
The legal process by which a lender takes possession of property after a borrower defaults on their loan. In California, this is typically a non-judicial process taking approximately 120 days under a deed of trust.
Building a new structure from scratch on vacant land or after demolishing an existing structure. Ground-up construction loans finance land acquisition and all construction costs.
A short-term, asset-based loan secured by real estate and provided by private lenders rather than traditional banks. Hard money loans feature faster approval, flexible underwriting focused on property value rather than borrower qualifications, and higher interest rates.
Funds held in reserve by the lender for future disbursement, typically for renovation or construction costs. The holdback is released in draws as work is completed and verified.
A payment structure where monthly payments cover only the interest on the loan, not principal. Hard money loans typically feature interest-only payments, with principal due as a balloon payment at term end.
Real estate purchased for profit through rental income or appreciation, not for personal residence. Hard money loans are only available for investment properties (business purpose), not primary residences.
A legal claim against a property as security for a debt. When you get a hard money loan, the lender places a lien on the property. The lien must be satisfied (paid off) before clear title can be transferred.
The ratio of loan amount to total project cost (acquisition plus renovation). LTC is commonly used for construction and fix-and-flip loans. Example: $400K loan on $500K total cost = 80% LTC.
The ratio of loan amount to property value, expressed as a percentage. LTV = Loan Amount ÷ Property Value. Hard money lenders typically cap LTV at 65-75%. Lower LTV means more borrower equity and lower lender risk.
The ratio of loan amount to projected property value after renovations. LTARV is used for fix-and-flip and value-add loans. Example: $500K loan on $750K ARV = 67% LTARV.
The date when a loan term ends and full repayment is due. Hard money loans typically have maturity dates 6-24 months after closing. If you cannot repay by maturity, you may need to request an extension or risk default.
Property income minus operating expenses, before debt service. NOI = Gross Income - Operating Expenses. NOI is used to calculate property value (via cap rate) and DSCR.
A fee charged by lenders for processing a new loan, typically expressed as 'points' (percentage of loan amount). A 2-point origination fee on a $500,000 loan equals $10,000.
Fees charged by lenders as a percentage of the loan amount. One point equals 1% of the loan. Points are paid at closing. Example: 2 points on a $1M loan = $20,000.
A fee charged if a loan is paid off before a specified date. Many hard money loans have no prepayment penalty, allowing borrowers to exit early without additional cost.
Financing provided by private individuals or companies rather than traditional financial institutions. Private money and hard money are often used interchangeably—both refer to non-bank real estate financing.
A written promise to repay a loan under specified terms. The promissory note outlines loan amount, interest rate, payment schedule, and maturity date. It's the borrower's legal obligation to repay.
Replacing an existing loan with a new loan, typically to obtain better terms or access equity. Refinancing to conventional financing is a common exit strategy for hard money borrowers.
Renovation or restoration of a property. In hard money lending, rehab refers to the construction work financed by the loan. Rehab costs are included in the total project budget.
Insurance protecting against defects in property title that could threaten ownership. Lenders require title insurance to protect their lien position. Owners can also purchase coverage for their equity.
Examination of public records to verify property ownership and identify any liens, encumbrances, or title defects. A title search is required before any real estate loan closing.
Investing by funding or purchasing real estate loans secured by deeds of trust. Investors become the lender, earning interest income secured by real property. This is how private capital enters the hard money lending ecosystem.
The process of evaluating a loan application to determine risk and appropriate terms. Hard money underwriting focuses primarily on property value and exit strategy rather than borrower income and credit history.
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