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 4 for more.

Debt Service Coverage (DSC):

A frequently used term referring to the ratio between the monthly net income an income-producing property makes compared to the monthly loan payment required. For example, if a warehouse is leased and produces a monthly income of $1,100 and the monthly payment on the mortgage loan is $1,000 the property has a debt service coverage (DSC) ratio of 1.1. Almost all banks and institutional lenders require at least a 1.1 (and sometimes higher) debt service coverage ratio. Hard money lenders are more flexible about this type of requirement. Hard money lenders will often consider creating an interest reserve (see below) to help borrowers make monthly interest payments until their DSC ratio is adequate.

Instrument of Security (or “Paper”):

This is the legal documentation that establishes the relationship between the borrower, the lender, and the security. The “Paper” can be in the form of a note and trust deed, a land sale contract, a mortgage, or a lien holder.

Loan Fee:

Loan fees are often called “points.” These are the fees charged by the private money lender at the time of loan closing and are deducted from the principal amount of the loan. Do not confuse these with loan broker fees.

Rate:

Rate is the percentage of interest that the borrower must pay to the lender at fixed intervals (monthly, quarterly, etc.). It is usually quoted as an annual charge. Interest rates vary with both economy and the perceived risk associated with a specific loan. Montegra usually charges between 9% and 11% interest for its hard money loan rates.

Term Sheet:

A written summary document of the loan terms provided by a hard money lender to a prospective borrower. These terms include interest rate, loan fee, length of loan, renewal options, and loan to value requirements. A term sheet does not commit the lender to fund the loan but merely describes how it would be structured.

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.