Glossary
The vocabulary of private lending, defined the way underwriters use it.
7
70% Rule
A screening heuristic: pay no more than 70% of ARV minus repair costs. Aligns with lenders’ 70–75% ARV caps.
A
After-Repair Value (ARV)
The estimated market value of a property after planned renovations are complete, supported by comparable sales. Most hard money lenders cap total loan amount at 65–75% of ARV.
Asset-Based Lending
Underwriting that relies primarily on the collateral’s value and the deal’s merits rather than the borrower’s income. Hard money is a form of asset-based lending.
B
Balloon Payment
The full remaining principal due at the end of a short-term, interest-only loan. Nearly every hard money loan ends in a balloon.
Bridge Loan
Short-term financing used until a property is sold or refinanced into permanent debt. See bridge loans.
Broker Price Opinion (BPO)
A valuation prepared by a licensed real-estate agent instead of an appraiser; faster and cheaper, commonly accepted by hard money lenders for as-is and ARV estimates.
BRRRR
Buy, Rehab, Rent, Refinance, Repeat — a strategy that uses a short-term rehab loan followed by a long-term DSCR refinance to recycle capital into the next property.
Business-Purpose Loan
A loan made for investment or commercial purposes rather than for the borrower’s personal, family or household use. Hard money lenders generally lend only for business purposes, which exempts them from most consumer-mortgage regulation.
C
Cross-Collateralization
Pledging a second property as additional security for a loan, often to replace a down payment or increase leverage.
D
Debt Service Coverage Ratio (DSCR)
Rental income divided by the loan payment (PITIA). A DSCR of 1.25 means rent covers the payment 1.25 times. See DSCR loans.
Deed of Trust
A three-party security instrument (borrower, lender, trustee) used in many states that allows non-judicial foreclosure, which is one reason private lenders favor those states.
Draw
A disbursement of rehab or construction funds from the holdback after completed work is inspected. See how draw schedules work.
E
Exit Strategy
How the loan will be repaid: sale, refinance, or payoff from other funds. Lenders approve the exit as much as the property.
Extension
An agreement to lengthen the loan term past maturity, typically for 3–6 months at a fee of 0.5–1 point.
F
Fix and Flip Loan
Short-term financing for purchasing and renovating a property for resale. See fix and flip loans.
H
Hard Money Loan
A short-term, asset-based real-estate loan from a private lender or fund, priced above bank rates in exchange for speed, flexibility and tolerance for distressed property or non-traditional borrowers. “Hard” refers to the hard asset securing the loan.
Holdback
The portion of a loan reserved at closing and released in draws for renovation or construction.
I
Interest-Only (IO)
Payments that cover interest but not principal, leaving the full balance due at maturity. Standard on hard money loans.
Interest Reserve
Loan proceeds set aside at closing to make the monthly interest payments, common on construction and larger bridge loans.
L
Loan-to-Cost (LTC)
Loan amount divided by total project cost (purchase plus rehab). Typical maximums run 80–92.5%.
Loan-to-Value (LTV)
Loan amount divided by the property’s current appraised value.
M
Maximum Allowable Offer (MAO)
The most a flipper should pay for a property: ARV × 70% minus rehab cost, under the 70% rule.
N
Non-Recourse
A loan where the lender’s remedy is limited to the collateral; the borrower is not personally liable beyond specific carve-outs. Rare in residential hard money.
O
Origination Points
An upfront fee equal to a percentage of the loan amount (1 point = 1%), paid to the lender at closing.
P
Personal Guarantee
The borrower’s personal promise to repay a loan made to their LLC, giving the lender recourse beyond the property.
Prepayment Penalty
A fee for paying off a loan early. Uncommon on fix and flip loans, standard on DSCR loans (often a 3-2-1 step-down).
Private Money
Capital lent by individuals or small groups rather than institutional funds; terms are negotiated and often more flexible than institutional hard money.
Proof of Funds
Documentation (bank or brokerage statements) showing the borrower has the liquidity to close and carry the loan.
R
Rehab Budget / Scope of Work
A line-item list of planned renovations with costs, used to size the holdback and schedule draws.
S
Seasoning
The time a borrower must own a property before a lender will refinance based on the new appraised value rather than purchase price.
Scope Creep
Unplanned expansion of the renovation beyond the approved budget — the most common reason flips run out of time and money.
T
Term Sheet
A non-binding summary of proposed loan terms (amount, rate, points, term, conditions) issued by a lender before full underwriting.
Title Insurance
Coverage protecting the lender (and optionally the owner) against defects in title; lender’s policy is required on virtually every hard money loan.
U
Usury
State law limits on interest rates. Business-purpose and entity-borrower loans are exempt in many states, which is why lenders prefer LLC borrowers.
Y
Yield Spread / Lender Spread
The difference between what a lender pays its capital source and what it charges the borrower; the lender’s gross margin.
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