Clay Sparkman
This post was first published on this blog on 7.20.10. Occasionally I go back and look for high value posts, knowing that either new members were not there when they were originally posted, or that long-time members may have missed them on the first run. This is one of those posts that I feel is worth posting a second time (having made a few changes imposed upon us by time and circumstances).
Most of you are probably familiar with the nomenclature of private money lending, but from time to time, I find myself clarifying the meaning of one or more of the essential words, acronyms or phrases. And so I shall publish here a brief glossary of such terms for your reading enjoyment. Consider this to be a bit of continuing education, either in the interest of enlightening you, reminding you, or just plain boring you—however that may be.
Collection account charges
Lenders may do the collection and accounting of their own loans, ask our office to administer their loans, or ask another third-party to perform this service. If our office does the loan collection and accounting (which is generally the case), the collection account charges will be as specified in our page entitled Collection Account Services. The borrower is expected to pay the collection account charges.
Combined Loan-To-Value ratio (CLTV)
This is the total amount of all debt secured by the security as a percentage of the total estimated value of the security. So, for example, if the loan is a first position loan for $60,000, and the seller is carrying back a second position note for $20,000, behind the private-money lender, and the property is deemed to be valued at $100,000, then the LTV is 60% and the CLTV is 80%. The acceptable CLTV will vary based on the lender and the situation, but may in fact, under the right circumstances, exceed 100%.
Instrument of security
Also known as “paper,” this is the legal documentation that provides the framework for the relationship between the borrower, the lender, and the security. The instrument of security may be a note and trust deed, a land sale contract, a mortgage, a lien holder title (with manufactured homes or floating homes, for example), or some other trust deed style instruments utilized only in certain states.
Late charge
This is the additional amount due to a lender when a payment is not paid by the borrower within the agreed upon grace period. Typically the late charge amount will be a percentage of the late payment amount and will become due after the grace period has passed.
Loan costs
These are the costs associated with putting together a loan. They are paid at the time loan funds are disbursed (though commission arrangements may vary) and are generally paid by the borrower, though they are often paid from the proceeds of the loan. They include: the lender, any commission that is paid to the Loan Broker(s), the cost of title insurance (see our article, Why Title Insurance?), the cost of closing a deal through escrow at a title company, and the cost of recording official documents. For our loans, they include a document preparation fee, a property inspection fee, and an account setup fee (for servicing the loan).
Loan-To-Value ratio (LTV)
With regard to a first position loan, this is the total amount of the loan as a percentage of the total estimated value of the security. With regard to a subordinate position loan (a second or third, for example), this is the total amount of the loan added to the total amount of all superior liens as a percentage of the total estimated value of the security. The acceptable LTV will vary based on the lender and the situation, but generally up to 70% is considered acceptable, depending on the loan particulars, the borrower particulars, and the type and quality of the security.
Position
The position defines the order in which claims against the security will be satisfied in the event of a foreclosure. Most lenders prefer to lend only in the first position, but some lenders will go in a “subordinate” position (second, third, etc.) in exchange for a higher rate of return.
Pre-payment penalty
This is the penalty (if any) that a borrower must pay to a lender if a loan is repaid “early.” Most all loans placed through our office do not have a pre-payment penalty of any kind.
Private money lending
Also commonly referred to as “hard money lending,” this terminology describes situations in which private individuals (as opposed to financial institutions) lend money to other individuals (or businesses) in exchange for a fair rate of return on the use of the funds.
Rate
The percentage compensation to be paid by the borrower to the lender at fixed intervals (usually monthly). Rates are quoted as annual charges. Interest rates vary with both the state of the economy and the perceived risk involved with a particular loan. Most first position loans placed by our office during the past few years involved rates ranging between 10% and 14%.
Security
Although almost anything may be used as security, or collateral, to effectively secure a loan, our office generally only places loans that are secured by real estate (with the exceptions being floating homes, manufactured homes, and occasionally stock shares).
Term
This refers to the length of a loan and the amortization. Most loans placed by our office are 1-3 year loans with interest only payments (and thus no amortization; that is, they are interest only). Fairfield is what you would call a bridge lender. That meaning that we provide a way to get from point A to point B, but that you must have a plan for exiting point B and moving on the next stage of your project.
Value
There are different ways to establish the value of a security, and one or more may be used in any given situation. Among these are the following: (1) previous transfer price(s) for the property, (2) tax assessed value, (3) appraised value, as assigned by a paid and impartial licensed appraiser, (4) a Market Value Analysis (MVA) or Broker Price Opinion (BPO) provided by a Realtor, (5) transfer prices for comparable properties, (6) an income analysis, or (7) an evaluation of the cost basis for the property.
That’s about all I’ve got. If anyone out there has other terms which they wish to offer up, either with a definition or in search of one, please step forward. Don’t be shy. I need all the help I can get.
— Clay (clay@privatemoneysource.com, 503-476-2909)
Clay is Vice President of Fairfield Financial, a primary source for private money since 1964. Fairfield is currently targeting loans in OR, WA, AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX. To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php
Tags: hard money borrowing, hard money brokering, hard money loans, private money borrowing, private money brokering, private money loans
