A
- Accredited investor
- Under U.S. SEC Rule 501(a), an individual with income over $200,000 ($300,000 joint) in each of the last two years, net worth over $1 million excluding the primary residence, or certain securities licenses. Many private credit funds are limited to accredited investors.
- Amortization
- Repaying a loan through scheduled payments of principal and interest so the balance reaches zero by maturity. Most hard money loans are interest-only; DSCR loans usually amortize over 30 years.
- Appraisal
- A licensed appraiser's opinion of value. Private lenders may order an as-is value, an after-repair value, or both.
- ARV (after-repair value)
- The estimated market value of a property once planned renovations are complete. Flip lenders typically cap the total loan at 65–75% of ARV.
- Assignment of contract
- When a buyer (often a wholesaler) transfers their purchase contract to another buyer for a fee. Some lenders limit how large an assignment fee they'll finance.
B
- Balloon payment
- A large lump-sum payment of the remaining principal due at maturity. Interest-only bridge and flip loans end in a balloon.
- BPO (broker price opinion)
- A value estimate prepared by a real estate broker, sometimes used by private lenders instead of a full appraisal to save time and cost.
- Bridge loan
- Short-term financing (typically 12–36 months) that "bridges" a gap: closing fast, stabilizing a property, or waiting for permanent financing.
- BRRRR
- Buy, Rehab, Rent, Refinance, Repeat: a strategy using short-term money to buy and renovate, then refinancing into a long-term loan to pull cash out for the next deal.
- Business-purpose loan
- A loan made for investment or commercial purposes rather than personal, family or household use. Most private investor loans are business-purpose, which affects which consumer lending rules apply.
C
- Cap rate
- Net operating income divided by property value. A quick measure of an income property's unlevered yield.
- Cash-on-cash return
- Annual pre-tax cash flow divided by the cash you have invested. Popular for comparing leveraged rental deals.
- Cash-out refinance
- Replacing an existing loan with a larger one and taking the difference in cash. The "refinance" step in BRRRR.
- Closing costs
- Title, escrow, recording, legal, appraisal and lender fees paid at closing, typically 2–5% of the purchase price.
- Collateral
- The asset securing a loan, usually the real estate itself. The lender can foreclose on it if the borrower defaults.
- Cross-collateralization
- Using more than one property to secure a single loan. It increases leverage but puts every pledged property at risk.
D
- Deed of trust
- A security instrument used in many states that places title with a neutral trustee until the loan is repaid, often allowing faster non-judicial foreclosure.
- Default interest
- A higher interest rate that applies after a borrower defaults or misses maturity, often 18–24% or the state maximum.
- Draw schedule
- The plan for releasing rehab or construction funds in stages, usually after an inspection confirms the work was completed.
- DSCR (debt service coverage ratio)
- Income divided by debt payments. For rental loans, lenders typically use gross rent divided by PITIA; 1.00x is break-even.
- Due diligence
- Investigating a deal, property, borrower or lender before committing money: title, valuation, background, documents and references.
E
- Equity
- Property value minus loan balances. Lenders call the borrower's cash in the deal "skin in the game."
- Escrow
- A neutral third party that holds funds and documents until closing conditions are met, or an account that collects taxes and insurance.
- Exit strategy
- How the loan will be repaid, usually a sale or a refinance. Private lenders underwrite the exit as carefully as the entry.
- Extension fee
- A fee, often 0.5–1% of the loan, to extend a short-term loan past its original maturity.
F
- First lien position
- The senior claim on a property, paid first from any foreclosure sale. Most private lenders and note investors insist on first position.
- Fix and flip
- Buying a property, renovating it and selling it for a profit, usually within 3–12 months.
- Foreclosure
- The legal process by which a lender takes or sells collateral after default. Timelines range from a few months to several years depending on the state.
- Fractional note
- A small share of a single loan sold to many investors through an online platform.
G
- Gap funding
- Short-term money that covers the down payment or closing costs the primary lender won't fund, often from a second lender at a higher cost.
- Ground-up construction
- Building a new structure on land. It is financed with draws against a budget, typically at 75–90% of total cost.
- Guarantee (personal)
- A promise by the owners of a borrowing entity to repay the loan personally if the entity can't.
H
- Hard money
- Short-term, asset-based real estate loans from non-bank lenders, priced above bank loans in exchange for speed and flexibility.
- Holdback
- Loan funds held back at closing, typically the rehab budget, and released later through draws.
I
- Interest-only (IO)
- Payments cover only interest; principal is repaid at maturity. Standard for flip and bridge loans.
- Interest reserve
- Part of the loan set aside to cover monthly interest during construction or rehab.
J
- Judicial foreclosure
- Foreclosure through the courts, required in some states, and generally slower and costlier than non-judicial foreclosure.
L
- Lien
- A legal claim against property securing a debt. Recorded liens establish priority.
- LTC (loan-to-cost)
- Loan amount divided by total project cost (purchase plus rehab). Flip lenders often go to 85–93% LTC for experienced borrowers.
- LTV (loan-to-value)
- Loan amount divided by the property's current appraised value.
- LTARV (loan-to-ARV)
- Loan amount divided by after-repair value. It is the cap that usually limits flip leverage.
M
- Maturity date
- When the full remaining balance is due.
- Mezzanine financing
- Subordinate financing secured by ownership interests rather than the property, sitting between senior debt and equity.
- Mortgage
- A security instrument pledging real estate as collateral; also used loosely to mean any real estate loan.
- Mortgage fund
- A pooled investment vehicle that makes or buys real estate loans and distributes interest to investors.
N
- NOI (net operating income)
- Property income minus operating expenses, before debt service and income taxes.
- Non-recourse
- A loan where the lender can look only to the collateral, not the borrower's other assets, except for "bad-boy" carve-outs like fraud.
- Note
- Short for promissory note. It can also refer to the loan as an investment that can be bought or sold.
O
- Origination fee (points)
- An upfront lender fee expressed in points; one point equals 1% of the loan amount.
P
- PITIA
- Principal, Interest, Taxes, Insurance and Association dues: the full monthly housing payment used in DSCR math.
- Prepayment penalty
- A fee for paying a loan off early. Common on DSCR loans (e.g. 5-4-3-2-1 step-downs) and less common on flip loans.
- Private money
- Loans from individuals or private companies rather than banks, often relationship-based and secured by real estate.
- Promissory note
- The borrower's written promise to repay, stating the amount, rate, payments and maturity.
- Proof of funds (POF)
- Bank or brokerage statements showing the cash needed for the down payment, closing and reserves.
R
- Recourse
- A loan where the lender can pursue the borrower or guarantors personally for any shortfall after foreclosure.
- Rehab budget / scope of work (SOW)
- An itemized list of renovation tasks and costs that lenders use to size holdbacks and inspect draws.
- Reserves
- Cash a borrower must keep after closing, often enough for 3–12 months of payments.
S
- SDIRA (self-directed IRA)
- A retirement account whose custodian allows alternative assets such as private notes. Strict IRS rules ban transactions with disqualified persons.
- Seasoning
- How long you've owned a property before a refinance lender will use the new appraised value instead of your purchase cost.
- Second lien
- A subordinate loan paid only after the first lien is satisfied. It carries higher risk and a higher rate.
- Servicing
- Collecting payments, managing escrows, sending notices and handling defaults. Often outsourced to a licensed loan servicer.
T
- Title insurance
- Insurance protecting the lender (and/or owner) against defects in title. A lender's policy is essential for private lenders.
- Transactional funding
- Very short-term (often same-day) funding for a wholesaler's double close.
- Trust deed investing
- Investing in loans secured by deeds of trust, the term common in western U.S. states for private note investing.
U
- Underwriting
- The lender's evaluation of the property, borrower and deal to decide whether, and on what terms, to lend.
- Usury
- Charging interest above a state's legal maximum. Rules and exemptions (including for business-purpose loans) vary widely by state.
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