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Hard Money Terminology

 

Abstract of title: The chain of title of a property including facts relating to all parties that claim an interest, have been involved in transfer of the property, have placed a lien, and other parties that have held or transferred title at some point in the property’s history. Should any incurable liens be found on the chain of title, the lender may not fund the loan due to the relative risk of collecting their payments and recovering the property in the event of default.

Acceleration clause: Clause within a mortgage contract that permits the lender to have the borrower pay the full mortgage debt. This typically occurs when a specified event indicated in the contract occur such as a specific date or upon the expiration of the mortgage term.

Accession: The growth or improvement of a property leading to an increase in its property. Typically occurs as a result of the property owner making additions, alterations, or improvements to the property. In the context of a hard money loan, many borrowers take out loans to increase the value of their property.

Acknowledgment: Validating one’s act, intent, or desire in the presence of a legally valid third party that is responsible for verifying the act. Executed to legally state the intent of the party making the acknowledgement.

Action to quiet title: Action by the court or a judge to state the legal title holders of a property, particularly when there is a dispute.

Actual Age: The age of the structure located on the land. Actual age is calculated by subtracting the age the property was built and the current date. In the context of hard money loans the actual age of a property is used to determine whether the property’s actual age is sufficient collateral to retain a loan.

Ad valorem: Real property tax imposed on property based on the property’s value.

Affordability index: Index used to indicate the relative affordability of property ownership.

All inclusive trust deed: Mortgage program that converts all existing mortgages into one larger mortgage. The purpose of this type of mortgage is to consolidate all mortgage debts into easier to understand mortgage product that typically costs less than multiple mortgages together.

Amortization: The period of time the loan will be in effect for. Mortgage payments are calculated using the amount of time the borrower will be paying back the loan.

Annual Percentage Rate (A.P.R.): The mortgage industry standard used to describe the cost of borrowing money. A major component of the Truth in Lending Act that standardizes all interest rates to be described using the A.P.R. so that consumers can easily compare interest rates without confusion.

Appraisal: Document indicating the current value of a property. The appraisal report is conducted by a certified appraiser licensed in the state in which the property resides. The purpose of an appraisal is to verify the value of the property, usually for the purpose of purchasing or refinancing a loan.

Assignee: The party whom a property or note is transferred to.

Assignment: An assignment is the legal document that transfers an interest from one entity/person to another.

Arm’s length transaction: Transaction where all parties in the transaction have been disclosed all pertinent regarding the transaction.

Assessed valuation: Real property valuation of the value of a property. The assessed valuation is used to determine the property taxes a property owner is due for.

Assumption: Substituting one party who holds debt for another party. Lenders typically have clauses in a contract that prevent the seller from allowing the buyer to assume the mortgage of the seller.

Attorney in fact: Agent given the right to assume the responsibility of representation of their client with regard to all decision making abilities including making offers, accepting offers, and making payments on behalf of the principal

Balloon payment: Larger payment than normal that typically ends at the termination of the loans term or the maturation of the mortgage program.

Blanket mortgage: Mortgage used for multiple properties.

Beneficiary: The lender of the note. The beneficiaries investment is protected by the deed of trust.

Borrower: Party who is borrowing money from a lender.

Bridge Loan: A common term interchangeably referred to as a hard money loan. Bridge loans are typically short term loans, usually less than 36 months.

Breach: Violations of the terms of an agreement. In the context of a hard money loan a breach is a nonpayment.

Buyer’s market: Economic period where there are more seller’s in the market than buyers, causing property values to decrease or temporarily flat line.

Capital assets: Property used to make income from.

Capitalization rate: The rate of return on an income producing property expressed as a yearly return based on the amount invested. Calculated by using the total net income from the property and dividing it by the cost of the investment.

Cash flow: Gross income minus all expenses. Net income.

Certificate of redemption: When a property owner brings current defaulted property taxes they are given a certificate of redemption. The certificate indicates the property owner is no longer in property tax debt. Sometimes given by the property owner to a lender or other creditor to indicate their current property tax status.

Chain of title: Sequence of history regarding the title of a subject property.

Closing: The last portion of the real estate transaction after all components of the transaction have been executed including signing of documents and transfer of funds.

Cloud on title: Claims, interest holders, and encumbrances that are placed on the title of the property.

Color of title: Title claim that on its face may seem valid is defective.

Commission: Fee based on a percentage of the total price of the property bought or old or the loan amount the broker originated for the borrower.

Concurrent ownership: Ownership of a property by multiple parties.

Condition: Satisfaction of a requirement to perform or not perform something based on the terms of the contract. Should the condition not be respected the transaction will not be executed.

Cost approach: Appraisal method that determines the value of real property by using the value of land and costs to build to estimate the property’s value.

Covenant: Guarantee stated in writing indicating the borrower or owner will do or not do something.

Clear Title: Title that does not have any known defects, liens or encumbrances attached to the property.

Closing Costs: Closing costs refer to fees associated with closing a loan, real estate transaction or other financial transfer. Typical closing costs include loan fees, escrow fees, title fees, and appraisal reports. Each transaction is unique and has specific closing costs relating to the close. The purchaser and/or seller are responsible for paying closing costs.

Contingent: requiring a requirement to be fulfilled.

Deed: Official document that allows a property to be transferred between parties. The seller is known as the “grantor” while the buyer is called the “grantee.” There are various deed types and they involve the transfer of ownership.

Deed of Trust: A deed of trust is a legal security instrument that uses property as collateral for providing a borrower a loan. Using the property as collateral ensures the lender that the borrower has a stake in the investment and feels obligated to pay monthly mortgage payments or risk losing their collateral.

Down Payment: The initial contribution of a property buyer towards the purchase of a property. Typically, most lenders require at least a 20% down payment.

Due on Sale Clause: The due on sale clause is a provision that indicates the borrower’s responsibility to pay off the loan in the event the property is sold.

Equity: The difference between the value of the property and the loan amount. To calculate the equity, you must know the value of the property, and the loan amount. For example, if a property is valued at $100,000 and the borrower has a loan amount of 70%, they have 30% equity.

Escrow: A neutral third party that is responsible for executing the terms of the agreement based on the instructions of the purchase agreement. Escrow send, collects and submits necessary documents throughout the duration a transaction. Funds will be withheld by escrow until all parties have met their requirements.

First Deed of Trust: The first deed of trust is the primary lien on a property. A property cannot be sold without satisfying the financial demands of the first deed of trust.

Lien: A financial interest or stake in a property.

Hard Money: A hard money loan is a private loan, originated by investors for the purpose of a refinance or purchase loan. Hard money loans typically have shorter closing times, thereby making it more appealing to real estate investors who need access to capital now.

This type of loan is recommended for investors with bad credit or borrowers ho have a difficult time proving income. The hard money industry is not regulated by the government. This allows lenders to provide more flexible loan options.

Loan Underwriting: Analyzing the relative risks of providing borrower with a loan. Each bank has their own specific underwriting policies used to guide the approval process.

Market Value: The value of property on the open market as effected by supply and demand and current market conditions.

Mortgagor: The entity that provides a mortgage to a mortgagee.

Mortgage: A borrower who takes out a loan. By becoming a mortgagee the person is responsible for paying mortgage or risk losing their collateral.

Notice of Default: The initial step in the foreclosure process. This step acts as a warning to borrowers that their loan is in default and must be paid back or risk further foreclosure proceedings. The notice must be given directly to the borrower. The lender must supply the notice of default directly to the borrower either by mailing it to them or taping it on their front door. The notice of default will include the amount past due, balance and the timeframe in which the next step in the foreclosure process will emerge.

Points: Points are fees that a borrower must pay upfront. Typically, points cannot be added to the loan. One point represents one percent of the total amount. With respect to financing, one point represents one percent of the total loan amount. In real estate, one point commonly refers to the charge the buyer/seller must pay their agent for buying or selling the home. Many lenders allow points to be added into the loan, thereby increasing the total loan amount.

Principal: The total debt of a mortgage.

Processing: Collecting, submitting, and reviewing applicant’s application, property, financials, and other vital information used to approve a borrower.

Refinance:  The replacement of a loan for a new, which occurs as the new lender pays off the previous lender.

Trustee: Trustee is a term that describes someone who holds a position of interest in a property for another person.

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