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 3 for more.

Interest Reserve:

Hard money lenders frequently are open to considering the option of holding back funds from the loan amount funded to create an interest reserve. These funds can be used to pay all or a portion of the monthly income needed to service the loan until such time as a property can stand on its own feet. This type of interest reserve, normally not used by banks or institutional lenders except for construction loans, is particularly useful in cases where a property has a temporary high vacancy rate and gives the owner of the property time to find more tenants to increase the income. The total loan amount funded (even if it contains an interest reserve) still must fall within the hard money lender’s LTV criteria.

Loan Broker:

An intermediary who takes information from a prospective borrower and then contacts a direct lender, like Montegra, to pass on hard money loan information. Loan brokers do not control the funds. They typically charge a loan broker’s fee of 1% to 2% which the borrower has to pay them on top of the loan fees paid to the direct lender. As previously stated, a borrower needs to be sure whether the lender they  are working with is a “direct lender” or a “loan broker” before making a decision to use them.

Loan Costs: 

There are various costs associated with making a new loan which are paid at the time of disbursement. These are generally paid by the borrower, though they can also be paid out of the proceeds from the loan. The initial costs can include: loan broker’s commission, title insurance, closing and escrow (if working with a title company) costs, document preparation and recording fees, and appraisal fees.

Non-recourse Loan:

A “non-recourse” loan means that the lender does not require any personal guarantees for the repayment of the loan. This type of non-recourse financing is typical in life insurance company loans of over $10,000,000 but is not often found in the hard money lending world. Note: Most loans closed by hard money lenders require a personal guarantee from the owner of the property and perhaps from other individuals with a greater personal net worth than the property owner. This guarantee means the hard money lender (like a bank or any institutional lender) has the right to go after funds for repayment of the loan. Some hard money lenders will consider funding non-recourse loans but often charge a higher interest rate, higher loan fees, and make the loan at a lower LTV.

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.