If you're exploring private lending for your real estate investments, you may encounter industry terms that can seem a bit technical or confusing. At Chateau Capital Group, we believe in empowering our clients with the knowledge they need to make informed decisions. Below, we've compiled a list of common terms in private lending and real estate investing that you might come across—and what they mean in plain English.

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General Private Lending Terms

1. Hard Money Loan 
A hard money loan is a short-term, asset-based loan secured by real estate. This type of loan is often used by real estate investors who need fast funding or have less-than-perfect credit. These loans are based more on the value of the property than on the borrower’s credit history.

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2. Loan-to-Value (LTV) Ratio
The LTV ratio compares the amount of the loan to the value of the property. For example, if a loan has a 70% LTV ratio, the loan covers 70% of the property’s value, and the borrower covers the remaining 30%.

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3. After-Repair Value (ARV)
ARV refers to the estimated value of a property after it has been repaired or renovated. This is especially important for investors looking to "fix and flip" properties, as lenders use ARV to determine how much they are willing to lend.

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4. Bridge Loan
A bridge loan is a short-term loan that helps investors “bridge” the gap between purchasing a property and securing long-term financing or selling the property. It provides liquidity during transitions.

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5. Points (Origination Fee)
When you hear points in private lending, it refers to fees charged upfront by lenders. These are typically a percentage of the loan amount. For instance, 2 points on a $100,000 loan equals $2,000 in fees.

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6. Term Sheet
A term sheet is a summary of the key loan terms, such as interest rates and LTV, provided by the lender before the final agreement is made. This document helps both parties understand the terms upfront but is not a legally binding contract.

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Loan Structure & Investor Terms

7. Interest-Only Loan
With an interest-only loan, the borrower pays only the interest during the term of the loan, with the principal balance due at the end of the loan term. This type of loan structure can keep monthly payments lower.

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8. Balloon Payment
A balloon payment is a large payment due at the end of a loan term. Investors often make smaller monthly payments during the loan and then pay off the remaining balance in a lump sum at maturity.

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9. Prepayment Penalty
A prepayment penalty is a fee charged if the borrower pays off the loan early. Some lenders apply this to ensure they receive the full interest they expected from the loan.

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10. Loan Covenant
A loan covenant is a condition in a loan agreement. It may require the borrower to maintain certain financial ratios or meet specific performance benchmarks throughout the loan term.

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Property & Market-Specific Terms

11. Distressed Property
A distressed property is one that is in poor condition or facing foreclosure. These properties are often sold at a discount, making them attractive to real estate investors who plan to rehabilitate and sell or lease them.

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12. Title Insurance
Title insurance protects both the lender and the buyer from losses that arise from disputes over property ownership or defects in the title.

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13. Due Diligence
Due diligence refers to the thorough evaluation of a property before a transaction is completed. This process often includes appraisals, inspections, and reviews of financial records to ensure the property is a sound investment.

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14. Escrow
In real estate transactions, escrow is when a neutral third party holds funds or documents until all conditions of a deal are met. It helps ensure that both the buyer and lender are protected.

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15. First-Position Lien
A first-position lien is the primary loan on a property. In the event of a default, the lender with a first-position lien has the right to be paid back before any other liens.

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16. Cross-Collateralization
In cross-collateralization, multiple properties are used as collateral for a single loan. This can offer greater security for lenders while giving borrowers more flexibility in their financing options.

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Loan Performance & Risk Terms

17. Default
A default occurs when the borrower fails to meet the obligations of the loan, such as missing payments. In the event of default, the lender may initiate foreclosure proceedings.

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18. Foreclosure
Foreclosure is the legal process by which the lender takes possession of the property after a borrower defaults on their loan. The property is then sold to recover the lender’s losses.

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19. Recourse vs. Non-Recourse Loan

• A recourse loan allows the lender to pursue the borrower’s other assets if they default.

• A non-recourse loan limits the lender’s ability to seize only the property used as collateral.

 

20. Yield Spread
The yield spread is the difference between what the lender pays to borrow funds and the interest rate they charge the borrower. It represents the lender’s profit margin.

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Conclusion

Understanding these terms is critical for navigating the world of private lending and real estate investing. By familiarizing yourself with these concepts, you can make more informed decisions and confidently move forward with your investment strategies. At Chateau Capital Group, we specialize in providing fast, flexible lending solutions for real estate investors. Whether you're looking to finance a fix-and-flip project or need a bridge loan, we’re here to help.

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Need more information? Contact us today to learn more about how our private lending services can help make your next real estate investment a success!