Description of Common Lending Terms
Bridge Loan – A short term loan intended to provide or extend financing pending the arrangement of larger and longer term financing.
Combined Loan-to Value Ratio (CLTV) – CLTV is the total amount of all debt secured by the loan collateral as a percentage of the total estimated value of the collateral. For example, if the borrower has an existing first position loan on their house for $100,000 and is looking for an additional (2nd lien) loan of $50,000 to be secured by the same house, if the house has a value of $200,000, the CLTV would equal 75%.
Hard Money Loans – Hard Money Loans, also known as private money loans, are usually made by private, non-banking organizations which are generally secured by real estate and command interest rates higher than what a typical bank would require because they usually carry more risk. Even though Hard Money Loans may be more expensive than traditional financing, they offer competitive advantages such as: 1) greater flexibility in structuring loan terms to better fit a borrower’s needs, 2) quick turnaround times, and 3) less reliance on income verification and credit scores.
Late Charge – The Late Charge is the additional amount due to a lender when a payment is not paid by the borrower within the agreed upon grace period. Typically the Late Charge amount will be a percentage of the late payment amount.
Lien Position – The lien position defines the order in which claims against the Loan Collateral will be satisfied in the event of a foreclosure or bankruptcy. Most lenders prefer to lend only in the first lien position, but Payette Financial may take a “subordinate” (2nd or 3rd liens) in exchange for a higher interest rate.
Loan Collateral – Loan Collateral will almost always consist of a fixed asset, typically real estate, to provide security for a loan. Non-real estate assets will be considered to the extent the Value of the asset is stable and verifiable.
Loan Costs – Loan Costs are expenses associated with putting together a loan. They are paid by the borrower at the time loan funds are disbursed and are often paid from (netted out of) the proceeds from the loan. They include, but are not limited to: cost of title insurance, escrow services, appraisal (if necessary), loan documentation charges, credit reports and loan broker commission fees (if applicable).
Origination Points – These are one-time fees paid by the borrower at the closing of the loan. Origination Points are quoted and calculated as a percentage of the total requested loan amount.
Pre-payment Premium – The premium, if any, that a borrower must pay to a lender if the loan is repaid before the final maturity date. Pre-payment premiums are usually the highest if the loan is pre-paid quickly after it is made. If pre-payment of the loan occurs after the first 24 months of the loan, the premium is usually very small, if any at all.
Interest Rates – The percentage compensation to be paid by the borrower to the lender at pre-determined intervals (typically monthly). Rates are quoted as annual charges and may be fixed for the duration of the loan or could adjust as frequently as monthly based upon changes to various index rates such as Prime or LIBOR. The interest rate set by Payette Financial will be based on several factors such as: 1) the state of the economy, 2) type of Loan Collateral, 3) Lien Position, 4) CLTV and 5) size of the loan. To determine the true cost of the loan, the Origination Points should be factored in by the borrower as well.
Term – The Term of a loan refers to the amount of time between the origination of the loan and its maturity date. Term may also mean the amortization period which may be different than the maturity date if the loan does not fully amortize (i.e. a balloon payoff at maturity). An “x” month amortization term defines the payment amount necessary to pay the loan balance down to zero in “x” number of months.
Value – There are different ways to establish the Value of Loan Collateral, and one or more may be used in any given situation. These include: 1) previous price paid for the property, 2) tax assessed value, 3) appraisal from an independent firm, 4) sale prices of comparable properties, and 5) an evaluation of the cost basis/replacement cost for the property.