Lending Terms
Loan to Value (LTV)
The LTV of a loan is the ratio of the loan amount to the value of the property. For example, a loan with a 75% LTV on a $400K property would result in a $300K mortgage.
LTV = Loan Amount / Property Value
Loan to Cost (LTC)
The LTC on the other hand is the ratio of the loan amount to the total project cost, and is typically used in a commercial or construction lending situation. The Total Project Cost Includes acquisition costs, construction costs, and development costs. For example, if you buy the land for $100K, and it’ll cost $100K to develop and construct, an 80% LTC loan would be $160K.
LTC = Loan Amount / Total Project Cost
Hard Money Loan / Private Money Loan
There are plenty of ways to finance creative real estate deals, but hard money and private money are very popular ways of making deals happen.
Hard money is normally called ‘hard’ because it is secured to a hard asset and the interest rates/terms can be hard to accept compared to conventional purchases. Hard money is typically loaned through an organized group of investors or an online outlet, such as Kiavi or Finance of America. Hard money lenders are typically willing to lend on deals that conventional loan originators won’t touch. Hard money is most popular amongst flippers, who can sometimes find hard money lenders that will even offer 100% of the acquisition and 100% of the rehab amount.
Private money lenders are a much more flexible outlet for lending. Simplistically, a private money lender is anyone outside of a bank or hard money lender that is lending money to an investor. This could be in the form of your grandma lending you money or another investor you know lending toward a deal that you are trying to tackle. The terms of private money are completely up to the two parties. Private money is sometimes secured on the assets, and other times it’s a completely unsecured promissory note. Really, the possibilities are endless with private money.
Most investors don’t openly share their private money lenders because it’s typically a very personal relationship.
Seller Carryback/Owner financing
A seller carryback deal is when there is owner-provided financing at closing. The seller effectively acts as the bank and carries a mortgage on the property, collecting monthly payments from the buyer.
Amortization
This is the period in which a loan is paid off by regular payments. Realize that this is separate and distinct from the term of the loan.
Term of Loan (Balloon Payment)
The term of a loan is when the entire loan must be paid back. There are often times in creative financing or commercial loans that a loan will be amortized for a much longer period of time than the term, so a large payment (known as a balloon payment) will be due at the end of the term.
DSCR Loan
A DSCR Loan (Debt Service Coverage Ratio Loan) refers to a loan where the lender evaluates the eligibility based on the property's Debt Service Coverage Ratio. This ratio measures the income available to pay the debt. It is calculated by dividing the property's annual net operating income (NOI) by its annual debt service. Lenders use this ratio to assess the property's ability to generate enough income to cover the loan payments, making it an important factor for investment property loans. A higher DSCR indicates a greater ability of the property to cover the debt, thus increasing the likelihood of loan approval. A DSCR for a typical loan approval would be between 1.25 - 1.35.
DSCR = NOI / Debt Service
Interest Only (I/O Period)
Depending on the investment strategy, investors may ask their lender for a certain interest only period to maximize cash flow, maximize near-term DSCR, minimize monthly debt payments, or a myriad of reasons to want interest-only payments. The benefit is a reduced monthly payment, and the downside is that your loan principal isn’t reduced.
Warrantable versus Non-warrantable Condo
The distinction between a warrantable and non-warrantable condo is important mainly for financing purposes.
Warrantable Condo:
A warrantable condo meets specific requirements set by government-sponsored enterprises like Fannie Mae and Freddie Mac. These standards typically include factors like the percentage of owner-occupied units, no single entity owning a majority of the units, the financial health of the condo association, and the level of commercial space in the building. Warrantable condos are considered less risky for lenders, making it easier for buyers to secure financing, often with better loan terms.
Non-Warrantable Condo:
A non-warrantable condo does not meet these criteria. Reasons might include a high number of units being rented out, one entity owning multiple units, or the condo association's budget not meeting certain criteria. Since these properties are viewed as riskier investments, they are more challenging to finance. Lenders that do offer loans for non-warrantable condos typically do so with higher interest rates and larger down payments.
Secondary Market
This is where existing home loans and mortgage-backed securities are bought and sold. After a mortgage is originated by a lender in the primary market, it can be sold in the secondary market, often to government-sponsored enterprises like Fannie Mae and Freddie Mac. This process helps lenders free up capital to make more loans.
Portfolio vs Conventional Loan
Portfolio Loan:
This is a type of loan that a lender keeps in its own portfolio and does not sell on the secondary market. These loans are often held by the originating bank or financial institution and may not conform to the standards set by government-sponsored enterprises. They offer more flexibility in terms and underwriting standards.
Conventional Loan:
A conventional loan conforms to the standards set by Fannie Mae and Freddie Mac and is eligible to be sold on the secondary market. These loans typically have stricter qualifying criteria but often come with more favorable interest rates.
Delayed Financing
This is a financial strategy where an investor purchases a property with cash and then shortly afterwards takes out a mortgage on that property. The goal is to immediately regain most of the cash spent on the purchase. Delayed financing can be used to secure properties quickly in competitive markets or to invest in properties that might not initially qualify for financing.
Novation Agreement - Flip and Flip Strategy (not long term hold)
In a flip and flip strategy, which involves quickly buying, renovating, and selling a property for profit (not holding it long-term), a novation agreement might be used. This legal document transfers one party's rights and obligations under a contract to a third party. In the context of real estate flipping, it might be used, for example, to transfer the original purchase agreement to a new buyer, allowing the flipper to sell the property before they officially own it. However, this strategy is quite specialized and may not be commonly used or widely recognized in standard real estate practices.
