Hard money glossary: terms every investor should know
Here are plain-English definitions of the terms you'll see when you borrow from a hard money or private lender.
Terms
- After-repair value (ARV)
- What a property should sell for after the planned work is done, based on closed comparable sales.
- As-is value
- What the property is worth today, before any work.
- Asset-based lending
- A loan underwritten on the property and deal rather than the borrower's income or credit. Prairie Stone's loans are 100% asset-based.
- BRRRR
- Buy, rehab, rent, refinance, repeat: an investing strategy that uses short-term financing to buy and renovate, then long-term debt once rented.
- Comparable sales (comps)
- Recent closed sales of similar homes nearby, used to estimate value.
- Draw
- A release of rehab or construction funds after a stage of work is completed.
- Draw reserve
- The portion of the loan held back at closing to fund rehab or construction through draws.
- DSCR loan
- A long-term rental loan qualified on the property's rental income (debt service coverage ratio), often used to refinance after a BRRRR.
- Extension
- Additional time on a loan past its maturity date. With Prairie Stone, extensions require lender approval.
- First lien position
- The lender's mortgage is recorded first and paid first. Every Prairie Stone loan is a first mortgage.
- Hard money loan
- A short-term, asset-based real estate loan from a private lending company.
- Lender's title insurance
- Insurance protecting the lender against problems with the property's title. Required on every Prairie Stone loan.
- Loan-to-cost (LTC)
- The loan amount as a percentage of purchase price plus rehab. Prairie Stone can fund up to 100% of cost when it fits under 70% of ARV.
- Loan-to-value (LTV)
- The loan amount as a percentage of the property's value. For rehab loans, lenders often measure against ARV.
- Maturity date
- The date the loan must be paid off.
- Payoff
- The total needed to pay off the loan on a given date. Prairie Stone borrowers can request a payoff from the client portal.
- Personal guarantee
- The borrower's personal promise to repay if the borrowing entity doesn't.
- Points
- An upfront fee expressed as a percentage of the loan amount. One point equals 1%.
- Pre-approval
- A lender's initial indication that a deal fits its criteria, before final underwriting.
- Scope of work
- The itemized list of planned repairs and their costs.
- Term sheet
- A summary of the proposed loan amount, rate, fees and terms for a specific deal, usually sent after pre-approval. Check my deal.