Glossary of Hard Money Lending Terms

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After Repair Value (ARV)

 

The estimated value of a property after all planned renovations and improvements are completed. Hard money loans are often based on a percentage of the ARV.

 

Balloon Payment

A large, final payment due at the end of a loan term. Most hard money loans are interest-only with the principal paid as a balloon at maturity.

 

Bridge Loan

 

A short-term loan used to “bridge” the gap between immediate financing needs and long-term financing solutions. Often used to secure a property quickly while waiting for permanent funding.

 

Broker Price Opinion (BPO)

 

An estimate of a property’s value provided by a licensed real estate broker. Used as an alternative to a full appraisal in some lending scenarios.

 

Collateral

 

The real estate property pledged as security for repayment of the loan. If the borrower defaults, the lender has the right to seize the collateral.

 

Draw Schedule

 

A predetermined timeline or structure for releasing rehab funds in stages, based on work completed. Used in fix-and-flip or construction loans.

 

Entity (LLC/Corporation/Trust)

 

A legal business structure used to borrow funds, often for liability protection. Hard money loans are typically made to business entities rather than individuals.

 

Exit Strategy

 

The borrower’s plan for repaying the loan—typically by selling the property (flip) or refinancing into a conventional mortgage (buy-and-hold).

 

Fix and Flip

 

A real estate investment strategy involving purchasing a distressed property, renovating it, and selling it at a profit.

 

Hard Money Loan

 

A short-term, asset-based loan secured by real estate. Approval is based primarily on the property’s value, not the borrower’s income or credit.

 

Interest-Only Loan

 

A loan where the borrower pays only the interest each month, with the full principal due at the end of the term.

 

Loan-to-Value (LTV)

 

The ratio between the loan amount and the value of the property. For example, a loan of $200,000 on a $300,000 property has a 67% LTV.

 

Loan-to-Cost (LTC)

 

The ratio of the loan amount to the total cost of the project (purchase + rehab). Used to evaluate how much of the project is being financed.

 

Points

 

A fee charged by the lender, expressed as a percentage of the loan amount. For example, “2 points” on a $100,000 loan equals $2,000.

 

Prepayment Penalty

 

A fee charged if the borrower pays off the loan before the agreed-upon term ends. Many hard money loans waive this after the first few months.

 

Private Lender

 

An individual or business (like CommonwealthLending.com) that lends money secured by real estate, outside of traditional banks or credit unions.

 

Rehab Budget

A breakdown of the renovation costs for a project. Used to assess loan terms and determine draw schedules.

 

Term Sheet

 

A non-binding summary of the proposed loan terms including interest rate, loan amount, duration, and points.

 

Underwriting

 

The process by which a lender reviews and evaluates the property, borrower, and proposed loan to determine approval and terms.