In the lending world, specifically hard money, numerous terms are used on a daily basis that are outside the vernacular of most. Just like any other profession, once you know the terms you are ready to do business. Fortunately, real estate terms are pretty much common sense and the language can be picked up quickly. This series of posts will introduce some of the most common hard money lending terms, or just provide as a refresh for some of those odd-ball terms from the private lending perspective. See Essential Hard Money Terms Part 2 for more.

Commitment Letter:

A more detailed description of the terms and conditions of a loan given by a hard money lender to the prospective borrower after the borrower indicates that the terms will work for them. A Commitment Letter is more binding for both borrower and lender and frequently requires deposits for such due diligence items as appraisals. Borrowers are able to rely on the terms of a Commitment Letter. When dealing with a reputable hard money lending firm which gives these Commitment Letters then borrowers will not encounter surprises at the loan closing.  Borrowers should make sure they understand the policy of the lender they are working with regarding Commitment Letters before deciding to use that lender.

Direct Private Capital Lender:

A lender who has control of the funds and actually makes the loan. A Private money lender who actually is a “direct lender” controls  the money and does not send your loan somewhere else. (See “Loan Broker” defined below.)  Borrowers need to make sure they understand from the beginning if they are dealing with a “direct lender” or with a “loan broker”.

Loan-to-Value Ratio (LTV):

A frequently used term referring to the ratio between the appraised value of a property to the amount of loan requested. This term is often abbreviated as “LTV.” For example, if a property has an appraised value of $1,000,000 and the lender states that they do not make loans over 65% loan to value, the maximum loan amount they will fund on the property is $650,000. Hard money lenders typically require loan to values that are under 65%. Montegra can fund hard money loans up to 75%.

Residential Loan (Business Purpose vs. Personal Purpose):

Unlike federally chartered banks, private capital lenders are supervised by State and Federal regulatory agencies as to what kind of residential real estate loans they are allowed to make. There are two types of residential loans: business residential purpose loans and personal purpose loans (also called consumer loans).  Examples of residential business purpose loans, or investment purpose loans, would be a house purchased for resale at a profit or a single family home, duplex, or four-plex used as a rental property. This type of loan can be done by a hard money lender under certain circumstances.  Consumer purpose loans are frequently secured by mortgages on the borrower’s primary residence. Regulatory agencies specify that hard money lenders cannot underwrite or fund personal loans when the majority of the funds from the loan are being used for a “personal, family, or household purpose” as opposed to a “business purpose.”

Stay tuned for more terms to come!

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.