Glossary of Colorado Loan Terms

  • Acceleration Clause

    A clause in a loan document that gives the lender the right to demand immediate repayment of the entire principal balance of the loan (accelerate the maturity date) in the event that the borrower violates one or more provisions in the document.

  • Application Fee

    An up-front fee that some brokers and lenders charge to accept an loan application. It may or may not be applied to third-party costs such as a property appraisal or legal fees, and it may or may not be refundable if the lender declines the loan or the borrower refuses to accept the loan.

  • Appraisal Fee

    An up-front fee many lenders require to pay for the cost of a third-party property appraisal. It is typically non-refundable regardless of the appraiser's determination of value.

  • ARV (After Repair Value)

    After Repair Value is the value of a property in need of rehabilitation once the rehabilitation has been accomplished and the property is ready for market in its improved condition. This acronym is used most often by real estate investors and hard money lenders involved in the fix and flip end of the real estate business.

  • Back-End Fee (Exit Fee)

    A fee charged by some lenders that is due when the loan is re-paid, sometimes referred to as an exit fee. If applicable, it is generally a percentage of the loan amount. It is a way to reduce the initial cost to the borrower but still give the lender their desired yield.

  • BPO (Broker's Price Opinion

    A written opinion, by a licensed real estate broker, of the probable selling price of a property based on sold and/or listed prices of comparable properties, current market conditions and the broker's general knowledge and experience. Under certain circumstances, a lender may accept a BPO as an alternative to a more expensive full appraisal performed by a licensed or certified appraiser.

  • Bridge Loan

    A short-term loan, intended to last only until more permanent financing can be arranged or the property is sold. Most hard money loans can be thought of as bridge loans.

  • Cap (Interest Rate Cap)

    A common feature in adjustable-rate loans used to limit the risk of financial hardship to the borrower due to an increase in the loan interest rate when the interest rate is tied to an index such as Prime or LIBOR. For example, the loan documents could 'cap' the upward adjustment in the interest rate in any adjustment period and/or put a 'cap' on the maximum rate the lender can charge over the life of the loan, i.e an interest rate ceiling.

  • Cash-Out Loan (Cash-Out Refinancing)

    A loan for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes "cash-out" of the transaction.

  • Ceiling (Interest Rate Ceiling)

    See Cap.

  • Collateral

    The asset(s) pledged by the borrower to secure repayment of a loan.

  • Credit Score

    A single numerical score, based on an individual's credit history, that measures that individual's credit worthiness. Credit scores are as good as the algorithm used to derive them. The most widely used credit score is called FICO after the Fair Issac Co. which developed it.

  • Debt Service Coverage Ratio (DSCR)

    The DSCR is a measure of the ability of an income-producing property to service (make the payments on) the debt (loan) on the property, usually calculated on an annual basis.  The formula: DSCR = NOI (net operating income) / total loan payment (PITI).

  • Deed in Lieu of Foreclosure

    Deeding the property to the lender as an alternative to having the lender foreclose on the property.

  • Deed of Trust

    Agreement under which a borrower (the trustor) conveys the right of ownership (title) of his or her assets or property to a trustee as a security for the sum advanced by a lender (the beneficiary of the trust). If the loan is paid back as agreed, the trustee re-conveys the title to the trustor. If not, the trustee has the legal power to sell (liquidate) the assets or property at a public sale to repay the loan.

  • Default

    Failure of the borrower to honor one or more terms agreed to in the loan documents. A default can trigger an acceleration clause and cause the loan to become immediately due and payable.

  • Environmental Site Assessment

    An examination of the property by licensed professionals for the purpose of identifying potential or existing environmental contamination issues. The analysis, often called an ESA, typically addresses both the underlying land as well as physical improvements to the property. A Phase I ESA does not usually include actual collection of physical samples or chemical analyses of any kind. If results of the Phase I indicate existing contamination or the likelihood that contamination exists, a Phase II ESA may be ordered. The Phase II is a more detailed investigation does involve sample collection and chemical analyses.

  • Equity

    The difference between the value of the property and amount of the outstanding loans(s) on the property.

  • Exit Strategy

    The borrower's plan to repay (exit) the loan. Most often, the plan is to refinance the loan or sell the property. Because hard money loans are of short duration, hard money lenders focus a great deal on the legitimacy of the borrower's exit strategy.

  • FICO Score

    See Credit Score.

  • Floor (Interest Rate Floor)

    A common feature in adjustable-rate loans used to establish the lowest interest rate possible under the terms of the loan agreement.

  • Forbearance Agreement

    An agreement by the lender not to exercise the lender's legal right to foreclose in exchange for an agreement by the borrower to a plan that will cure the borrower’s loan default(s). A forbearance agreement is not a long-term solution nor is it a permanent loan modification; it is designed for borrowers who have temporary financial problems.

  • Form 4506

    Request for Copy of Tax Return, an IRS form used to request a copy(s) of federal tax returns. Some lenders require such form be signed and submitted to the lender as part of the loan application process.

  • Front-End Fee

    See Loan Origination Fee.

  • Good Faith Deposit

    A token amount of money advanced by the borrower to a lender to indicate borrower's ability and intention to a consummate the loan transaction. It is typically refundable, less any third-party costs incurred in the due diligence process, if the lender is not able to fund the loan. It is usually not refundable if the borrower declines accept the loan on the terms previously agreed to.

  • Loan Guarantee

    A promise by a person or an entity to assume a debt obligation in the event of nonpayment by the borrower. The person or entity that guarantees the loan is referred to as the guarantor.

  • Loan Origination Fee

    A fee charged by a lender, usually expressed as a percentage of the loan amount (points), for originating, processing and closing a loan.

  • LTV (Loan to Value)

    The relationship between the amount of the loan and the value of the property, expressed as a percentage (loan amount/property value).

  • Negative Amortization

    Negative amortization occurs when the payment made by the borrower is less than the interest due. The difference is added to the loan balance and due at maturity.

  • Points

    A fee charged by a hard money lender to make the loan, expressed as a percent of the loan amount; e.g., "3 points" means a charge equal to 3% of the loan amount. Points are usually paid up-front, however, some or all the the 'points' might be due and payable at maturity.

  • Prepayment Penalty

    A charge imposed by the lender if the borrower pays off the loan prior to the maturity date. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months of interest.

  • Promissory Note

    A written, dated and signed two-party instrument containing an unconditional promise by the maker (borrower) to pay a definite sum of money to a payee (lender) on demand or at a specified future date.