Welcome to the Private Money Glossary, your comprehensive guide to understanding key terms and concepts in the realm of private lending and finance. Whether you're a seasoned investor or new to the world of private money, this glossary provides clear definitions and explanations of terms related to loans, investments, regulations, and more. Dive into the world of private money with confidence as you explore and familiarize yourself with the terminology that shapes this dynamic and innovative industry.

If we should add any other terms tom this list please let us know contact@lendingautomator.com.

A
ADDITIONAL PRINCIPAL PAYMENT: An extra payment made on a loan beyond the minimum monthly amount, aimed at reducing the loan's principal and potential future interest. These payments can occur once or multiple times during the loan term.
 
AFTER REPAIR VALUE (ARV): Primarily used in fix-and-flip scenarios, the After-Repair Value estimates a property's resale worth after it has undergone necessary repairs or renovations.
 
AMORTIZATION: The gradual reduction of the remaining loan balance over a specified period, typically through regular payments.
 
AMORTIZATION SCHEDULE: A detailed breakdown of payments throughout the loan's lifespan, delineating portions allocated to principal and interest. It also indicates the remaining balance after each payment.
 
ANNUAL PERCENTAGE RATE (APR): The annual cost of borrowing, expressed as a percentage. This encompasses fees and points associated with the loan.
 
APPLICATION FEE: A fee charged to potential borrowers when they proceed with a full loan application.
 
APPRAISAL: A written assessment of a property's market value, crucial for determining its suitability for a mortgage. This assessment often includes comparisons with recently sold similar properties in the area.
 
APPRAISAL MANAGEMENT COMPANY (AMC): A third-party entity responsible for conducting property appraisals. Some lenders collaborate with specific AMCs that adhere to their appraisal forms and standards.
 
ARREARS (OR ARREARAGE): Unpaid debt resulting from missed loan payments. Arrears start accumulating from the date of the first missed payment.
 
ASSIGNMENT: A physical document that transfers rights of a property, title, or other entity from one party to another.
 
AUTOMATED CLEARING HOUSE (ACH): An electronic system for fast and secure money transfers.

B
BAD BOY CLAUSE: This clause typically requires the guarantor or involved parties not to engage in illegal activities related to the property. If such activities occur, the guarantor and co-guarantors may be held personally responsible.
 
BALLOON LOAN: A type of loan that often features lower interest rates and payments compared to a fixed 15/30-year term. During the loan's term, only a portion of the principal is amortized, with the full balance becoming due at the end of the term.
Bankruptcy: A legal process where an individual or business seeks court assistance to eliminate debts and settle obligations to creditors.
 
BASIS POINT (BPS): A standard unit used to measure changes in interest rates, with one basis point equaling 0.01% or 1/100 of 1%.

BINDER TITLE POLICY: Short-term insurance coverage for a property during its transfer of ownership, typically occurring during a sale. It provides protection against physical damage and unforeseen events during the closing process.
Broker Price Opinion (BPO): An assessment of a property's value conducted by a real estate broker, often performed for listings involving foreclosures or short sales.

C
CAP: In the context of an adjustable-rate loan, the cap sets the maximum limit on how high the interest rate can rise over the course of the loan.
 
CAPITAL EXPENDITURE (CAPEX): These are funds used by a company to either maintain existing assets or acquire new ones, which can include property, equipment, or technology.
 
CASH FLOW: Often discussed in relation to rental properties, cash flow refers to the difference between the income generated from rental revenue and the expenses associated with the property.
 
CHAPTER 13 BANKRUPTCY: Also known as the wage earner's plan, Chapter 13 bankruptcy involves individuals repaying all or part of their debts over a period of three to five years, based on their income and at their discretion.
 
CHAPTER 7 BANKRUPTCY: In Chapter 7 bankruptcy, debtors discharge most of their debts and get a fresh start. However, they may need to surrender property that can be sold to repay creditors, and their credit score will be negatively impacted.
 
CLOSING: Also referred to as settlement, this is when all parties involved sign the final loan documents to complete a transaction.
 
CLOSE OF ESCROW: This occurs when all parties in a real estate transaction have fulfilled their obligations, signaling the completion of the transaction.
 
CLOSING COSTS: These are fees paid during the closing of a mortgage or loan, including charges for loan origination, processing, attorneys' fees, title search, taxes, and insurance.

CO-SIGNER/CO-BORROWER: An individual who signs the loan alongside the borrower and shares responsibility for repayment and liability.

COLLATERAL: Physical property used to secure the value of a loan, providing assurance to the lender.
 
COLLECTION: When a loan becomes delinquent, efforts are made to collect the past due amount, often leading to foreclosure proceedings, especially with hard money lenders who are more aggressive in collecting.
 
COMBINED LOAN TO VALUE (CLTV): This is the total loan amount on a property divided by its current value, often used when there are multiple loans on the property.

CONDITIONAL PERSONAL GUARANTEE: A term in a loan agreement making the borrower personally responsible for debt repayment in case of default.

CREDIT BUREAU: An organization that collects and analyzes individual credit information, providing reports to credit card companies, lenders, and financial institutions. Major agencies include Equifax, Experian, and TransUnion.
 
CREDIT REPORT: A report from credit bureaus detailing an individual's credit health, including credit score, open accounts, balances, monthly payments, and histories of liens and bankruptcies.

CREDIT SCORE: Ranging from 300 to 850, this score reflects borrowing eligibility, with higher scores generally leading to better borrowing rates.

CREDITOR: An individual or organization to whom money is owed.
 
D
DEBT CONSOLIDATION: This involves paying off multiple debts with varying interest rates by taking out a single loan with a lower interest rate.

DEBT SERVICE COVERAGE RATIO (DSCR): A ratio that shows how much cash can be generated for each dollar of principal and interest owed, indicating a borrower's ability to meet debt obligations.

DEBT-TO-INCOME RATIO: The percentage of your gross monthly income that goes toward paying monthly debt obligations, serving as an indicator of financial health and borrowing capacity.

DEFAULT: When a borrower fails to repay a loan according to the terms specified in the loan agreement.

DEFAULT INTEREST RATE: A provision in some loans where the borrower, after missing a payment, is required to pay the remaining balance of the loan with a higher interest rate.

DEPRECIATION: The decrease in value of an asset over time due to factors like market conditions, physical damage, and aging.
 
DISCLOSURES: Informational documents that provide detailed information about a loan, including costs, and consumer rights and regulations at both federal and state levels.
 
DISCOUNT RATE: This can refer to the interest rate charged to banks for loans acquired from the Federal Reserve Bank through a discount loan window. It can also refer to the interest rate used in discounted cash flow (DCF) analysis to estimate the future value of cash flows.
 
E
EQUITY: This is the difference between the current appraised market value of a property and the outstanding loan balance and liens. Having more equity is typically advantageous as it provides more lending options for properties that are currently owned.
 
ESCROW: A neutral third-party holding account that collects and holds funds during a real estate transaction. These funds are released to the appropriate parties once all conditions of the transaction are met.
 
ESCROW COMPANY: Also known as a Settlement Services Company, this entity acts as a neutral third party that collects and holds funds during a real estate transaction. It releases these funds to the appropriate parties once all conditions of the transaction are satisfied.

ESTOPPEL CERTIFICATE: Also called an Estoppel Letter, this due diligence form is used in real estate transactions to validate the terms of a rental agreement or loan.
 
F
FICO SCORE: Ranging from 300 to 850, the FICO score is developed by the Fair Isaac Corporation. It indicates your borrowing eligibility, with higher scores typically leading to better borrowing rates.

FAIR MARKET VALUE: This refers to the price at which a property is likely to sell on the open market.

FINDER'S FEE OR REFERRAL FEE: A fee paid to an individual or company for referring a property to another party, resulting in the successful completion of a sale.
 
FIXED-RATE LOAN: A loan with a set interest rate and defined principal and interest payments that remain unchanged throughout the loan's term.
 
FORECLOSURE: The process where a lender repossesses a property to resell it if the property owner defaults on their loan.
 
FORECLOSURE FEES: Costs incurred by the lender when repossessing a property through foreclosure.
 
FULL RECOURSE LOAN: A type of loan where the lender can pursue a guarantor's assets unrelated to the loan if the property alone cannot cover the debt.
 
FRACTIONALIZED LOAN: A loan funded by multiple guarantors.
 
G
GROSS MARGIN: Revenue earned from property sales, subtracting the costs associated with acquiring and investing in the property.

H
HOMEOWNERS ASSOCIATION (HOA): An organization typically found in townhome or condominium developments. It establishes rules and regulations to maintain a certain standard within the property. Property owners automatically become members and are required to pay monthly or annual dues.

I
ITIA: Interest, taxes, insurance, and association (HOA) dues. This acronym is commonly used in calculating the Debt Service Coverage Ratio (DSCR) for a property.
 
INTEREST ONLY: A loan where the borrower pays only the interest throughout the loan term, without reducing the principal amount. Typically, the remaining principal is due in a lump sum on a specified date, or the loan must be refinanced into a new loan that includes principal payments.

INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER (ITIN): A number issued by the Internal Revenue Service (IRS) to individuals who need a U.S. taxpayer identification number but are not eligible for a Social Security number.

INTEREST RATE: Represents the cost of borrowing money, expressed as a percentage. It is the amount of interest accrued and added to the principal during the loan's lifespan.

J
JUNIOR LIEN: Also referred to as a second mortgage, is a loan that utilizes the property as collateral when there is already an existing secured loan on the property. Examples of junior liens include home equity loans or lines of credit.

L
LENDER: An individual, group, or business that provides funds for the purchase or rehabilitation of a property, with specific repayment terms and associated costs.

LETTER OF INTENT (LOI): A document outlining the terms of a real estate transaction between parties before entering into a binding contract. Typically, the letter of intent is non-binding.

LIBOR: London Interbank Offered Rate, was previously a key benchmark for setting interest rates on adjustable-rate loans. However, it was phased out of use in US loans by the end of 2022 and replaced by the Secured Overnight Financing Rate (SOFR) due to its perceived higher accuracy and security.
 
LIEN: A legal claim on a property that remains until an active debt is paid off. In case of non-payment, the lien can be used to repossess the property to satisfy the debt.

LIMITED PERSONAL GUARANTEE: An agreement by a borrower that they will repay the loan along with other major shareholders in the organization if the loan defaults. The lender has the right to the borrower's personal assets to repay the loan.
 
LIQUIDITY: The speed and ease with which an asset can be converted into cash without significantly affecting its market price.
 
LOAN-TO-VALUE RATIO (LTV): A measure used by lenders to assess the risk of a secured loan. It is calculated by dividing the outstanding debt on real property by its fair market value. A lower LTV indicates lower risk, making it more likely to secure funding and obtain a better interest rate.

M
MORTGAGE LOAN ORIGINATOR: A professional affiliated with a lending institution who guides borrowers through the lending process, from application to closing. These experts stay updated with current regulations, interest rates, and procedures to ensure loans are efficiently and accurately funded.

MORTGAGE (DEED OF TRUST): A loan specifically designed for home purchases. The lender places a lien on the property until the borrower fully repays the principal and interest over the loan term.

N
NET OPERATING INCOME (NOI): A metric used to assess the profitability of a real estate investment. It is determined by subtracting operating expenses from revenue before taxes.

NOTE: Also referred to as a promissory note, is a formal document that outlines the borrower's commitment to repay a loan at an agreed-upon interest rate until the loan's maturity date.

O
ORIGINATION: The procedure of creating a loan account to finance the purchase of a new property or to refinance an existing property.

P
PAYOFF: The process of settling the remaining principal loan balance and accrued interest up to the current date. Once the loan balance reaches zero, the loan is considered fully repaid.

PAYOFF STATEMENT: A document that outlines the final amount needed to complete the loan. This figure includes the remaining principal, fees, and accrued interest calculated up to the payoff date.

POINTS: A finance charge paid to a lender during closing, which can be used as a closing fee or to reduce the interest rate. One point equals 1% of the loan amount, so for every $100,000, one point is $1,000.

POWER OF ATTORNEY: A legal document that grants another individual the authority to make decisions on behalf of someone else regarding legal matters, finances, and medical treatment.

PRIVATE MONEY LENDER (PML): A lender backed by private funding that can originate loans for non-owner-occupied real estate investments. Lend Some Money is an example of an excellent private money lender.

PROMISSORY NOTE: A signed document that contains an agreement to repay a loan at a specified rate until the loan is fully repaid.

PRINCIPAL BALANCE: The remaining amount of principal left on a loan, excluding accrued interest.

PREPAYMENT STEPDOWN OPTIONS: Also known as prepayment penalties, are additional fees incurred when extra principal is paid on a rental or refinance loan. These penalties are structured with a step-down feature over a 3- or 5-year term, meaning the fees reduce each year within the term. For example, a 5-year stepdown will have prepayment fees from the first year to the fifth year for any additional principal payments. After the sixth year, no prepayment fees are added for extra principal payments on the loan.

PRIOR TO DOC (PTD) CONDITIONS: An internal review conducted by an underwriter to determine the documents required from a borrower to proceed with loan qualification.

PRIOR TO FUNDING (PTF) CONDITIONS: Submitting a collection of documents to the underwriter for review to ensure that all qualification requirements are met before the loan can be funded.

R
REFERRAL FEE: A commission or finder's fee paid to an individual or firm that facilitated the connection between the parties involved in a transaction.

REFINANCE: The process of revising an existing loan or mortgage agreement, often with a new lender, to pay off the remaining balance with a new interest rate or payment schedule. This is typically done to obtain a lower interest rate or to access the current equity in a property for purposes such as repairs, upgrades, or other uses.

RELIEF OF STAY: A legal term that refers to a creditor being allowed by the court to proceed with collections or foreclosure on a property that is part of a bankruptcy filing.

RIGHT OF RESCISSION: A right granted by US law that allows a borrower to cancel a refinance loan within three days after signing the promissory note, receiving the Truth in Lending disclosure, and receiving two copies of the notice of right to rescind.
Renewal Fee is a fee paid when a loan term ends and needs to be renewed, especially if the remaining principal is unpaid. The borrower pays this fee to renew the loan for an additional term, with rates varying depending on market conditions. This fee is not applicable to all loans.

S
SECURE LOAN: A type of loan that is supported by a tangible asset such as property. This asset serves as collateral in case of default, allowing the creditor to claim it if necessary.

SELF-DIRECTED IRA: AN individual retirement account where a custodian oversees alternative investments at the account owner's direction. This arrangement permits private money investors to extend hard money loans from their retirement funds.
 
SERVICER: A third-party company tasked with managing payment-related transactions with borrowers, including handling payments (principal, interest, property taxes, and insurance), issuing monthly statements, and distributing annual tax statements (1098 form).

SETTLEMENT SERVICES COMPANY: A third-party entity, often an attorney or escrow company, responsible for executing and finalizing the closing documents and disbursing funds at the conclusion of a loan transaction.

T
TIME VALUE OF MONEY: A principle that states money available today holds more worth than an identical sum in the future, owing to its potential for earning through investment.

TITLE BINDER: A commitment, typically lasting two years, to issue a title insurance policy. This allows a seller to reuse the title policy for issuance to the buyer at a reduced cost. It's important to note that a title binder is not the same as an actual title insurance policy.

TITLE INSURANCE:  Insurance that safeguards both the borrower and lender against issues discovered on a title during a real estate transaction.

TRUST DEED OR DEED OF TRUST: An agreement between the borrower and a lender to hold a property deed with a third party until the loan is fully repaid.

TRUTH IN LENDING ACT: A federal law in the US that mandates borrowers to receive written disclosures containing loan terms from the lender before they become legally obligated to repay the loan.
 
U
UNDERWRITING: The thorough evaluation process employed by lenders to assess the eligibility and risk associated with a loan before disbursing funds.

UNLIMITED PERSONAL GUARANTEE: AN agreement whereby a borrower commits to repaying the loan, alongside other major shareholders in the organization, if the loan defaults. The lender can claim the borrower's personal assets to settle the loan.
 
USURY: Refers to the charging of interest rates on borrowed money that exceed the market rate.

V
VARIABLE RATES: Interest rates that vary throughout the loan term, influenced by fluctuations in market rates. These rates can either rise or fall over time.