These are a few of the commonly used terms that you may hear when discussing Private Money loans (and their definitions)

Appraisal

An independent and expert opinion on the value of a property.

For mortgage valuations of improved residential property in the US, the appraisal is most often reported on a standardized form, such as the Uniform Residential Appraisal Report.[1] Appraisals of more complex property (e.g. -- income producing, raw land) are usually reported in a narrative appraisal report. If the appraiser's opinion is based on Market Value, then it must also be based on the Highest and Best Use of the real property.

Three approaches to value

There are three general groups of methodologies for determining value. These are generally independent of each other:

• The cost approach

• The sales comparison approach and

• The income approach

Balloon

A mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity.[1] The final payment is called a balloon payment because of its large size. Balloon payment mortgages are more common in commercial real estate than in residential real estate.[2] A balloon payment mortgage may have a fixed or a floating interest rate.  An example of a balloon payment mortgage is the 7-year Fannie Mae Balloon, which features monthly payments based on a 30-year amortization.[

Cash to Close

The amount of cash needed by the borrower to close a transaction.

Closing Costs

Costs of the transaction, these fees include points, title and escrow fees, processing fees, recording fees and other fees associated with a real estate transaction.

Conventional Financing

Standard institutional or bank financing.

Credit Report

Report provided by the (three) credit bureaus (Equifax, Experian and Transunion) which shows the borrowing and pay-back performance history, current status, and debt profile of an individual.

Down Payment

Amount of money needed to cover the difference between the loan amount and the purchase price.

Deed  (“Deed of Trust” or “Trust Deed”)

It is the security instrument for your loan. It is the document that is recorded in the public records.

A deed of trust contains three parties:

• The Trustor, which is you, the borrower

• The Trustee, which is an entity that holds "bare or legal" title

• The Beneficiary, which is the lender

The deed of trust is an instrument that identifies the following:

• Original loan amount

• Legal description of the property being used as security for the mortgage

• The parties

• Inception and maturity date of the loan

• Provisions of the mortgage and requirements

• Late fees

• Legal procedures

DTI (Debt-To-Income Ratio)

Ratio of debt to pretax income, often expressed as front-end (housing payment only) or back-end (all debt) ratios. (Monthly Debt divided by Monthly Income)  For example:

$5000 monthly income, $1400/mo housing payment only; $1700/mo housing pymt + any other monthly debts would equal DTI ratios of 28%/34%.

Earnest Money

Funds deposited to an escrow company with a purchase agreement to show the buyers commitment to the transaction.

Funds held in Escrow

Usually for construction or rehab loans, these are funds held in escrow to be used for construction or repairs to the subject property.

Hazard Insurance

Insurance which covers damage or loss to the property.

HUD-I (Settlement statement)

Final accounting prepared by escrow/title company at closing which shows where all of the funds  in the transaction are coming from and going to.

Loan-to-Value (LTV)

Ratio of the loan amount to the value of the property. (Loan Amount divided by the Value) For hard money purposes, this typically needs to be in the 50-60% range. For example:

A property worth $200,000 with a loan amount of $100,000 would mean a 50% LTV.

Note  (aka: “Promissory Note”)

Document disclosing the particular rate and terms that is signed at closing as a promise to repay the loan.

Points

Fees expressed as a percentage of the loan amount that are added to the cost of a loan.

For  example:

2 points on a $200,000 loan amount would be $200,000 x 2% (or 0.02) = $4,000.

Hard money loans typically range from 3 points to 10 or more, depending on the transaction.  These points are typically paid to the broker and/or investor.

Pre-Payment Penalty

A financial penalty for paying off a loan in full prior to the end of the loan’s full term. A typical scenario is for a pre-designated number of months (usually the first 1 to 3 years) the borrower will be charged the equivalent of 6 mo’s interest if paying off more than 20% of the principal balance within a 12 month period.