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Hard Money Lending Terms Explained

1031 exchange or reverse 1031 exchange

Real Estate like many assets gives the owner the opportunity to gain value over time. That increased equity in the property grows tax deferred until the property is sold. However, when you sell a property you will have to pay ordinary income tax or long-term capital gains tax…depending on length of time you have owned the property.

A 1031 exchange is a tax advantage given to investors who sell an investment property and use the funds to purchase another investment property of equal or greater value. If the sale and purchase of the new property is completed within a short window it can be done so, tax free.
10 things to know about 1031 exchanges

A reverse 1031 exchange is when you purchase the investment property before you sell the existing investment property you already own.
What Is a Reverse Exchange?

If a property cannot be found and purchased inside that window the taxes on the profit from the sale will be due.

Northwest Private Lending supports both 1031 and revers 1031 exchanges. As an example, it is not uncommon for investors who are coming to the end of that 1031 exchange window to use a Hard Money loan to purchase the new property quickly. Once they completed the 1031 exchange and have ownership of the property, they will then refinance the loan when they have more time to get a conventional loan.

Amortized Loan payments

An Amortized Loan is one with a set loan duration usually 10-years, 15-years, or 30-years and which a calculated amount of principal is paid every month so that the entire loan is paid off in full at the end of the loan duration.

Northwest private lending does not amortize our loan payments and instead only requires that the borrower pay the interest accrued for the previous month. We always allow our borrowers to pay down the loan or pay more than the interest which will reduce their loan balance.

Appraisal

An appraisal is a document that is created by a licensed appraiser who will come and evaluate the property for which the loan is being requested. They will evaluate the property and the surrounding comparable properties to give an estimate of the value for which the property could be sold.

Most lenders will require that an appraisal be completed before making a loan. This cost can range from around $400 to $1000 for single family homes but can be more for multi-family or commercial buildings. Depending on the schedule of the local appraisers, it can take as little as 1-week and as long as 4 to 5 weeks to get an appraisal.

Northwest Private Lending does not require appraisals. We internally evaluate all properties we make loans on which save the borrower the cost, but most importantly the time which is required to get this document.

Arrears

This is a term that describes accrued interest payments. Mortgages are paid in arrears meaning that when you make a mortgage payment on your loan you are really paying for the interest you accrued in the previous month.

Unlike rent which is due on the 1st of the month and is paying for the renter to live in the property for that next month. Mortgages are paid in Arrears which means that the owner has control of the property for a month and when they make a payment on the 1st they are paying the interest that accrued from their loan for the previous month.

Interest paid in arrears is the reason that you get a month or so buffer between when you close the loan and when your first payment is due. It is also the reason that when you go to pay off your loan that there is still remaining interest due.

A loan from Northwest Private Lending is a mortgage and therefore is paid in arrears.

Balloon Payment

A balloon payment is the payment of a large sum or the total loan balance to be paid at the end of a loan term. In contrast with an amortized loan which a borrower pays a portion of the principal every month and which the loan is fully paid off over time. Most Private Lenders only require that the interest be paid monthly. Therefore, the loan balance will remain, and a balloon payment will be required at the end of the loan term.

Northwest Private lending allows for partial payments to be made during the life of the loan or for the full balance of the loan to be repaid at the end of the loan period.

Bankruptcy

A Bankruptcy is allowed by the federal government and is a legal process in which a debtor can get varying levels of relief from their debts ranging from chapter 7, chapter 11, and chapter 13. A bankruptcy becomes public knowledge and will remain on a person’s credit history for a long period of time.

There are a lot of negative repercussion for the person going bankrupt and a bankruptcy should be considered a last resort. Northwest Private Lending prides ourselves on our ability to be flexible with our clients repayment strategies and always seeks to offer other options to our borrowers so that they never have to go bankrupt to pay off our loan.

Chapter 13, Title 11, United States Code

Bankruptcy – Chapter 7

A chapter 7 bankruptcy would be considered for the most serious of cases and is called a reset or straight liquidation bankruptcy. It is the process where a debtor who is unable to pay back their debts is appointed a trustee to liquidate any nonexempt assets in order to pay of their creditors. This type of bankruptcy can only be requested if they have not filed for bankruptcy in the past 7 years.

Bankruptcy – Chapter 11

A Chapter 11 bankruptcy is generally intended for companies and is a restructuring of debt and a way for companies or individuals who have exceeded the limits of a chapter 13 to work with creditors to restructure and repay under new terms that are set by the court. A chapter 11 is more complex than a chapter 13.

Bankruptcy – Chapter 13

A Chapter 13 bankruptcy is limited considered a debt restructuring or reorganization of debt. The intent is to still pay back creditors, but allows for a person or company to hold off on foreclosure proceedings with the intention of restructuring and repayment. In this instance the debtor is responsible for proposing a plan to repay their creditors over a 3 to 5 year period.

Closing Costs:

Closing costs are the cost a borrower must pay to get a loan. Every time a loan is created, there are several parties that play a role in the process all of who will require payment to complete the transaction. These fees are paid at the close of the transaction. These fees will included

  • Lender’s fees
  • Title insurance and Escrow fees
  • Attorney’s fees
  • Recording fees
  • Taxes
  • Property Insurance

Collateral

Collateral is the thing of value that is securing the loan. Most loans and all mortgages are loans that are secured by collateral and is called secured debt. A personal loan like a credit card is a loan that is not secured by collateral and is called an unsecured loan. Collateral can vary, but with a mortgage the primary collateral is a cash down payment and a lien on a piece of real estate. Other loans can be collateralized by, a car, jewelry, proceeds of a business.

Credit Score / Fico Scor

A person’s credit or FICO score is the number that is given to a person and represents their credit worthiness. Credit worthiness is the consideration by a lender of a borrower’s ability to pay their bills and debt obligations based on their history of doing so. Credit scores range from nonexistent to 850. A credit score of below 620 is generally considered poor and would either mean a person is new to the system or has a history of not making their payment on time. A credit score in the range of 640 to 740 is considered average. A credit score of 750 is considered great credit and shows a pattern of consistent on time payments across a varied range of bills and debt obligations over time.

Debt to Income Radio (DTI)

A person’s debt to income ratio is a person’s total monthly debt payments divided by their gross (before taxes) monthly income. Most conventional mortgages will not allow a person’s DTI to be greater than 43% when the new mortgage is included in their monthly expenses.

Delinquent Loan

Every loan will have loan terms or expectations or repayment. A Delinquent loan is one in which the borrower has not met the terms of the loan agreement. They can include any aspect of the terms laid out in the loan agreement but are most commonly delinquent due to late payments or the inability to pay off the loan on time.

Default

Default is a term in which a delinquent borrower has been notified by the lender as being in default of their agreement. A loan default is at the discretion of the lender and therefore a loan may be delinquent but not called into default by the lender. A notification of a loan default is generally the first step in the foreclosure process.

Equity

Equity is the value of the home minus the debt owed by the owner. Equity can come from either the cash down payment, the reduction of the loan from payments, or the increase of the value of the property over time. Equity is the primary consideration of a Hard Money Loan

Escrow

A real estate transaction has multiple parties which can include a buyer, a seller, and a lender; all of whom have their own interests. Escrow a neutral 3rd party who oversees the transaction and insures that all parties are represented fairly and that all the documents are signed correctly. Escrow also manage all the receipt and disbursement of funds to all parties related to the transaction.

Extension Fee

All loans have a duration in which the loan needs to be paid off. With an amortized loan the loan will be paid off through the monthly principal payments required in the monthly payment. Interest only loans do not pay down the principal loan balance so at the end of the loan duration the loan needs to be refinanced or paid off. If the loan is not paid off the loan can be extended and is at the discretion of the lender. Many lenders charge an extension fee which can be an amount or a percentage of the loan balance that is being extended.

Northwest Private lending’s policy is to extend performing loans for free.

Fair market value

The Fair market value is the estimated value a property could be sold in current market conditions. Because a property is really worth what a buyer is willing to pay for it, this is a subjective number. This value can come from a 3rd party appraisal company, an evaluation of comparable properties that have sold during a period of time or by a data aggregator like Zillow or Redfin. On a purchase, generally the FMV is dictated by the agreed upon sales price on a purchase and sales agreement. On a refinance, most lenders will require an appraisal to determine the FMV.

NWPL does not require appraisals or 3rd party evaluations and chooses to evaluate and internally determines a property’s FMV and can do so within 24 hours. This can save days or weeks in the loan process.

Forced Place Insurance

The insurance placed on a property by the lender (lien holder) in the event a borrower allows their own coverage to lapse. The premium is advanced by the lender and billed to the borrower to be paid within 30 days.

Foreclosure

Foreclosure is the process in which a lender formally requests the forced sale of a property to repay a delinquent loan. Foreclosure is a process while a foreclosure sale is an event. The process of foreclosure can vary depending on the loan, the type of foreclosure, and collateral type. Foreclosures can take as little as 120-days, but commonly take much longer.

Foreclosure

Northwest Private Lending lends our own money and therefore can have a lot more flexibility with our borrowers who are late or cannot make their mortgage payments. We pride ourselves on our ability to work with borrowers to find alternative solutions. We will do everything we can to work with a client and use foreclosure as a last resort or when a client is unwilling to work with us.

Foreclosure – Judicial

A judicial foreclosure involves the court system to review and approve the foreclosure. This process allows the lender to get a judgment against the borrower’s other assets to pay off the loan if the underlying asset does not fully cover the loan. Judicial foreclosures generally take more time and depending on the state there can be a redemption period given to the borrowers to redeem the property out of foreclosure.
https://www.investopedia.com/terms/j/judicial_foreclosure.asp

Foreclosure – Non-Judicial

A Non-Judicial foreclosure is one in which the sale of the underlying asset is the only thing that will go towards the repayment of the loan. This type of foreclosure does not require the court system and does not allow a redemption period.

Foreclosure Fees

The costs (legal and other) incurred by a lender to foreclose on a property. These costs are the responsibility of the borrower.

Funding

The process of funds being disbursed to the borrower during the closing of a new loan transaction

Grace Period

The period between the due date (i.e. 1st of the month) and the date late charges will assess.

Hard Money Lender

A lender that makes private money loans that traditional lenders typically won’t fund.

Foreclosure auction

A Foreclosure auction or Sheriff’s sale is the day and time a property will be sold by the county to repay a delinquent loan. A foreclosure auction is an auction of interested parties and real estate investors who will bid on the property. The highest bidder will then own the property for the amount bid. The starting bid is always what is owed by the lender.

Foreclosure sales have always required that the buyer have cash in hand. The sole purpose of a foreclosure is to have the banks’ loan repaid. If at the foreclosure auction the property sells for more than what is owed, the remainder of the funds go to the borrower. The starting bid at a foreclosure sale can be no more than what the bank is owed which creates the opportunity for an investor to purchase a property at a discounted price. In order to participate in this process, the person buying the property must have cash.

Hard Money is generally considered cash and is the loan of choice for foreclosure purchases. Northwest Private Lending often funds investors who want to purchase properties through a foreclosure auction

Interest

The money paid regularly at a particular interest rate for the use of money lent. Common types of interest include:

  • Interim (or Prepaid) Interest – The interest paid by the borrower at loan closing from the funding date to the end of that month.
  • Periodic Interest – The money owed each period as defined by the note, usually monthly.
  • The percentage rate that lenders charge for the use of their money. Also known as note rate.

Interest reserves

The funds paid by the borrower and held by the lender for future interest payments. Typically, these occur on construction loans.

Investment Property

A non-owner occupied property. Can be commercial or residential.

Late Fees

A fee paid by a borrower if a loan payment is not made before the end of the grace period.

Lien

A legal claim on real property, generally for the payment of a debt or obligation.

Lien Position

The position that determines claim priority on a property. The two different types include:

  • First Position – This position is the primary mortgagor on the property.
  • Junior Lien – A lien against a property not in first position or priority. For example, a second mortgage, or third or fourth position.

Loan to Value Radio

The amount of outstanding debt on real property divided by the fair market value of the property.

Loan agreement

A loan agreement are the terms of the loan set by the lender and agreed to by the borrower. The loan agreement will lay out the payment terms, timelines, fees, and loan duration. They will also describe the rights of the lender should a loan become in default.

Northwest Private Lending is committed to clear, simple, and easy to understand loan terms. Many lenders loan documents can be 10-50 pages and would be almost impossible to read at closing. We have written our loan agreement in large font and on less than 5-pages so that it can be easily read and understood by all our borrowers before they sign.

Maturity date

The date when the full loan balance, accrued interest, and fees are due to be paid off as defined on a note or loan modification agreement.

Mortgage

The document that pledges collateral property(ies) as security. Also known as a deed of trust or trust deed.

Note

An abbreviation for promissory note. It discloses the interest rate and terms of the loan and is an obligation of debt.

Payoff

The act of paying off a loan by paying the outstanding principal amount and any additional interest and/or fees due to completely satisfy the loan obligation.

Per Diem

The daily rate of interest as defined in the note.

Personal Guarantee

A guarantee by an individual to a lender for the entire outstanding loan amount plus legal fees, accrued interest, and costs associated with collecting the loan. This type of guarantee entitles the lender to access the individual’s personal assets to repay the loan.

Points

Finance charges paid at closing. Each point equals 1% of the loan amount. For example, one point on a $100,000 loan is equivalent to $1,000. Some lenders charge a flat fee rather than points. Also known as origination fees.

Preliminary Title Report (PTR)

A search performed by a title company to determine property ownership and the liens filed on the property. Includes an offer to insure title on a property. Also known as a binder or title commitment.

Pre-payment Penalty

The penalty a lender may impose if a loan is paid off before it is due or before a specified time period, as defined in the loan’s note.

Principal Balance

The outstanding balance of the principal on a loan, which does not include interest or other charges.

Private Money Lender

Promissory note

A promissory note is a formal document in which the borrower promises to repay the loan. A promissory note can also include the terms of the loan.

Northwest Private Lending is committed to clear, simple, and easy to understand loan terms. Many lenders loan documents can be 10-50 pages and would be almost impossible to read at closing. We have written our promissory note in large font and on 2-pages so that it can be easily read and understood by all our borrowers before they sign.

Purchase and sales agreement (PSA)

Refinance

The process of obtaining a new loan on an already-owned property.

Redemption Rights

Security Interest

An ownership interest that a lender takes in the borrower’s property to ensure repayment of the debt. Typically through a mortgage or deed of trust.

Servicer

A company that handles all payment-related transactions with borrowers, including accepting monthly payments, issuing monthly statements, providing year-end tax statements, and paying property taxes and insurance when due.

Title Company

The evidence of right to ownership of real property.

Title Insurance

An indemnity policy issued by a title company that insures an owner and/or lender against loss due to title defects, liens, or encumbrances. Also known as a title policy.

Underwriting

The process lenders use to determine the risks related to the property and the involved borrower for any given loan.

Northwest Private Lending Inc NMLS # 1522364 // ML # 5496 is based in Portland, Oregon. NW Private Lending is an Equal Opportunity Hard Money Lender. We provide quick acess to capital for borrowers, real estate agents and mortgage brokers in Oregon and Washington. NW Private Lending is a collateral based lender focusing on bridge loans, fix and flip or rehab loans, commercial loans and non-owner occupied real estate investment properties.

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