A Glossary of Financial Terminology

Combined Loan-To-Value Ratio (CLTV)

The total amount of all debt secured by the security as a percentage of the total estimated value of the security. For example, if the loan is a first position loan for $60,000, and the seller is carrying back a second position note for $20,000, behind the private-money lender, and the property is deemed to be valued at $100,000, then the LTV is 60% and the CLTV is 80%. The acceptable CLTV will vary based on the lender and the situation, but may in fact, under the right circumstances, exceed 100%.

Late Charge

The additional amount due a lender when a payment is not paid by the borrower within the agreed upon time period. Usually this amount will be a percentage of the late payment amount and will become due after a certain grace period is up.

Loan Costs

Costs associated with putting together a loan. They are paid at the time loan funds are disbursed (though commission arrangements may vary) and are generally paid by the borrower, though they are often paid from the proceeds of the loan. They include: the commission that is paid to the Loan Broker(s), the cost of title insurance, the cost of closing a deal through escrow at a title company, and the cost of recording official documents. Sometimes they include appraisal fees or document preparation or IRA rollover fees.

Loan-To-Value Ratio (LTV)

The total amount of the loan as a percentage of the total estimated value of the security. With regard to a subordinate position loan (a second or third, for example), this is the total amount of the loan added to the total amount of all superior liens as a percentage of the total estimated value of the security. The acceptable LTV will vary based on the lender and the situation, but generally 60-80% is considered acceptable, depending on the type of security.

Pre-payment Penalty

The penalty that a borrower must pay to a lender if a loan is repaid "early." Most loans do not have a pre-payment penalty in the traditional sense, but rather may have a three- to six-month minimum interest clause. This means that a loan must return at least three or six months in interest to the lender. For example, if a loan is repaid in six months or more, no penalty is assessed. However, if a loan is repaid in less than six months, the penalty is equal to six months interest less the interest already paid.

Private Money Lending

Commonly referred to as "hard money lending," and describes situations in which private individuals (as opposed to financial institutions) lend money to other individuals (or businesses) in exchange for a fair rate of return on the use of the funds.

Rate

The percentage that a loan to be paid by the borrower to the lender at fixed intervals (usually monthly). Rates are quoted as annual charges. Interest rates vary with both the state of the economy and the perceived risk involved with a particular loan

Security

Although almost anything may be used as security, or collateral, to effectively secure a loan, lenders generally only places loans that are secured by real estate (with the exceptions being floating homes, manufactured homes, and occasionally stock shares).

Terms

Refers to the length of a loan and the amortization. Most loans are either 1-3 year loans with interest only payments (no amortization). In some cases, there are longer term loans of 4-6 years with a 20-30 year amortization.

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