The Ultimate Private Lending Glossary
From market trends to government regulations, the private lending industry is constantly evolving — and so is the language that exists within it. This dynamic landscape can make industry jargon challenging for even the most seasoned of lenders, signifying the need for a resource that can grow alongside the industry. Our Private Lending Glossary is a comprehensive and evolving guide, intended to empower professionals with clear and relevant definitions. Written and regularly updated by our attorneys, the Private Lending Glossary reflects decades of legal and industry expertise. We invite you to utilize this glossary as a tool in your professional journey. To explore, to learn, and to return to whenever new developments arrive in the private lending space.
-The Fortra Law team
a
- Adjustable-Rate Mortgage (ARM)
A type of home loan with an interest rate that varies or “adjusts” throughout the duration of the loan. The interest rate will typically be based on a financial index such as Wall Street Journal Prime or the 30 day Secured Overnight Financing Rate (SOFR).
The borrower felt that an adjustable-rate mortgage was the best option, due to the current condition of the market.
- After Repaired Value (ARV)
The projected value of a property that is to be repaired, rehabilitated, or newly constructed after completion of the build and stabilized.
In the context of underwriting, it is a variation in calculating loan to value ratios using the following formula: Loan Amount divided by Projected After Repair Value of the subject property multiplied by 100.
- Aggregator
An individual or business that is in the business of buying or acquiring loans from third-party lenders or originators.
- Amortization Schedule
A schedule of payments of a loan that shows the borrower the amount, the date, and the balance remaining for each month.
In most fully amortized loans, there will be a gradual reduction of interest payments and a gradual increase in principal repayments over time.
- Amortize
The gradual reduction of an amount through scheduled payments.
Amortized, amortizing
- Annual Percentage Rate (APR)
The total yearly cost of a loan charged to a borrower, represented in the form of a percentage.
When looking for the best loan option, a borrower must consider the Annual Percentage Rate (APR) to ensure they have the available funds to finance the loan.
- Appraisal
The estimated value of a property given by a licensed appraiser.
- As Is Value
The value of a property as it stands at the time of valuation.
Articles relating to As Is Value:
- Asset-Based Lending
A practice of lending that focuses primarily on the value of the collateral as opposed to the creditworthiness of the borrower.
*Asset-based Lending Is a broader type of lending that exists beyond Real Estate – it is often used in the context of Commercial Assets such as Receivables, Inventory, and other business assets that are not real property.
- Assignment & Allonge
- Assignment: The transfer of property or rights.
- Allonge: A sheet of paper utilized to provide additional space or endorsements on a contract.
- Assignment & Allonge: refers to the assignment of the security instrument (Mortgage or Deed of Trust) and an allonge to the promissory note (essentially “Pay to the Order of New Lender). These two documents collectively assign a loan to another party.
Articles involving Assignment & Allonge:
- Assignment of Rent (AOR)
A legal document in which a property owner transfers the right to collect rent payments to a third party, usually the lender.
- Assumption of Mortgage
A party not obligated on a loan agrees to voluntarily be obligated on the loan and complete the terms of the former borrowers’ loan agreement. This typically occurs after the property is transferred or sold and the mortgage is agreed to be assumed by the buyer/assignee of the property. Most commonly seen in inheritance situations.
The private lender agreed to the assumption of the mortgage by the borrower, enabling them to take over the existing loan while maintaining the same favorable terms established by the previous property owner.
b
- Balance Sheet
A summary of financial balances that an individual or organization has at a specific point in time. A balance sheet will outline assets, liabilities and the value of the equity of the organization.
Articles relating to Balance Sheet:
- Balance Sheet Lender
Direct lenders that source funds from their own balance sheet.
Articles relating to Balance Sheet Lender:
- Balloon Payment
A large lump-sum payment of principal that is due at the end of loan term.
Articles relating to Balloon Payment:
- Bridge Loan
A short-term financing option that a borrower utilizes to bridge the gap between one event (either a purchase or a refinance) to the next (either a further refinance or the sale of the property).
Articles relating to Bridge Loan:
- Broker
A business or individual that acts as a facilitator or intermediary on behalf of others to fund, sell, or buy loans, real estate, businesses or other assets. A mortgage/loan broker arranges or facilitates the funding, selling or buying of mortgages / loans for a fee.
Articles relating to Brokers:
- Broker Dealer
A business or individual that buys and sells securities on behalf of others for compensation. Broker-dealers must be duly licensed by state and federal securities regulators including FINRA. Individuals must pass and maintain good standing in specific exams offered through FINRA – these include Series 7, 82, 66, 65 exams.
Articles relating to Broker Dealer:
- Broker Price Opinion (BPO)
A property evaluation from a licensed real estate broker or mortgage broker.
Articles relating to Broker Price Opinion:
- Business Purpose Lending (BPL)
An industry phrase used to refer to the business of making loans secured by residential real estate – but only to those borrowers for whom the use of proceeds is for a commercial or business purpose. Commonly included loans are: Fix & Flip Loans (RTL Loans), DSCR Loans, SFR Construction Loans, and Bridge Loans
Also referred to as Business Purpose Loan
Articles relating to Business Purpose Lending:
c
- Capital Sources
A general term to describe the various sources of capital, ie: Warehouse Line of Credit (WLOC), Master Repurchase Agreement, Credit Facility, High Net Worth Investors, Joint Ventures
- Capitalization Rate (Cap Rate)
The rate of return on a property calculated by dividing the Net Operating Income (NOI) by the current market value of the property.
Articles relating to Capitalization Rate:
- Cash Out Refinance
A form of financing where an existing mortgage loan is replaced with a new larger loan, allowing the borrower to “cash out” on the difference between the initial loan balance and the new loan amount based on the increased value of the collateral property.
- Combined Loan to Value (CLTV)
A calculation used by lenders to measure the total amount of loans and other liens secured by a property compared to its market value to assess the risk of lending money to a prospective borrower to purchase or refinance that property.
Formula:
CLTV= Home Value
—
Total Loans×100
Articles relating to Combined Loan to Value:
- Commercial Real Estate (CRE)
A property that is used for business-related purposes, with the intent to generate profit, either from rental income or capital gain i.e., Multifamily, Hospitality, Mixed Use.
Articles relating to Commercial Real Estate:
- Construction Reserve / Draws
Loan proceeds that are held in reserve and advanced in periodic disbursements, called Draws, to fund real estate construction costs.
Articles relating to Construction Reserve/Draws:
- Correspondence Program
An arrangement or partnership between a lender and mortgage broker or correspondent lender allowing correspondent lenders to originate loans on behalf of the lender while following set guidelines created by the lender. The arrangement usually involves where the originator will temporarily fund the loan with their own capital and sell the loan to the correspondent lender.
Articles relating to Correspondence Program:
- Correspondent Lender
A broker or originator that originates and funds a loan through a correspondence program offered by a wholesale lender.
Articles relating to Correspondent Lender:
- Credit Facility
A financial arrangement between a borrower and lender that provides the borrower access to a specific amount of credit over a set period. The facility is typically on a revolving basis and includes a collateral pledge arrangement in which the equity of the borrower company and/or its assets are pledged as collateral.
A private lender may establish a credit facility with a real estate developer, allowing the developer to draw on the funds as needed to finance various projects, such as renovations or new constructions, while only paying interest on the drawn amounts.
- Cross Collateralization
A financing agreement where one or several assets are utilized as collateral for single or multiple loans.
Articles relating to Cross Collateralization:
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- Debt Fund
An investment fund that invests in debt instruments, such as loans, bonds, or fixed-income securities. Typically, a limited partnership or limited liability company that offers limited partnership interests or membership interests respectively to investors for certain stated returns or profit participation.
Articles relating to Debt Fund:
- Debt Service
The dollar amount required to cover the payment of a loan, whether interest-only or principal and interest, over a specific period.
The lender evaluated the borrower’s financial statements to ensure that their income was sufficient to cover the debt service, which included both principal and interest payments on the loan.
- Debt-Service Coverage Ratio (DSCR)
A metric used by lenders to determine the borrower’s ability to repay their debt by comparing the borrower’s net operating income to their debt service obligations.
Articles relating to Debt-Service Coverage Ratio (DSCR):
- Debt to Income Ratio (DTI)
A formula that determines a borrower’s ability to repay debt and manage monthly loan payments, calculated by dividing gross monthly income by monthly debt payments.
Debt
÷ X 100 = DTI%
Income
- Deed in Lieu of Foreclosure
A legal arrangement/agreement where a borrower transfers ownership of a mortgaged property to a lender to fulfill a loan agreement and avoid foreclosure.
Articles relating to Deed in Lieu of Foreclosure:
- Deed of Trust
A legal document/agreement between a lender, borrower, and third-party trustee, that uses real estate as collateral to secure a loan. Also known as a Trust Deed. Certain states utilize a Deed of Trust to secure real estate loans, others use mortgages.
Articles relating to Deed of Trust:
- Default
The failure to fulfill the terms and conditions of a loan agreement.
Articles relating to Default:
- Delinquent
A term used to describe the state of falling behind on payments.
Articles relating to Delinquent:
- Desktop Appraisal
A property valuation conducted by a licensed appraiser without physically visiting the property using technology and data to assess the property value.
Articles relating to Desktop Appraisal:
- Direct Lender
An individual or business that provides loans directly to a borrower as opposed to correspondence or wholesale funding relationships. Direct lenders are generally considered to have more discretion as opposed to wholesale / correspondent lenders.
The borrower preferred to work with a direct lender to expedite the loan approval process and secure financing quickly for their new property acquisition.
- Dry Funding
A disbursement process where the lender does not distribute loan funds until after all requirements are met or documents are signed.
The lender did not officially close the loan until after final title verification, opting for Dry Funding.
- DSCR Loan
A type of long-term, fully amortized, loan that utilizes the Debt-Service Coverage Ratio to determine the borrower’s ability to repay the loan. Typically used for rental properties, also referred to as Term Rental Loans. Applies to both SFR and Multifamily properties.
Articles relating to DSCR Loan:
- Dutch Interest
A method of calculating interest based on the risk assessment of the project, with interest charged based on the full loan amount, even if the principal has not been fully drawn by the borrower. This method is commonly used in construction loans.
The Borrower selected a loan offer with dutch interest to receive funding for their higher-risk project.
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- Environmental Indemnity
Used commonly in Commercial Real Estate loans – this is a legal agreement between a lender and a borrower, providing protection or security from damage or losses caused by environmental factors such as environmental contamination or risks.
- Escrow
A financial arrangement where a third party manages and holds funds for two parties that are involved in a transaction until specific conditions are met. The third party is typically required to be duly licensed as an escrow company by the state in which they practice.
- Exit Fee
A fee a lender charges a borrower at the maturity of the loan or before. This allows the lender to recoup any costs or prevent any unexpected losses. Separate from a pre-payment penalty, which is a fee for early paydown.
- Extension
An agreement between a borrower and lender to provide the borrower additional time to repay a loan past its original maturity date.
Articles relating to the term Extension:
f
- Family Offices
A family office is a private wealth management advisory firm that serves ultra-high-net-worth individuals and families. It provides a comprehensive suite of financial and personal services, tailored to the specific needs and goals of the family. These services can include investment management, tax planning, estate planning, philanthropy, and even concierge-style services.
After evaluating various investment options, the family office decided to allocate a portion of their capital to private lending to achieve higher yields while maintaining a conservative risk profile.
- Fix & Flip Loan / Rehabilitation Loan
A Bridge Loan designed for borrowers who intend to purchase properties, renovate them, and sell them for profit.
Articles relating to Fix & Flip:
- Fixed Interest Rate
An interest rate that remains the same for the entirety of the loan agreement, regardless of changes in market condition or other variables.
- Forbearance
A temporary agreement in which a lender allows a borrower to reduce or pause their loan payments for a period of time without penalty.
Articles relating to Forbearance:
- Foreclosure
A legal process a lender uses to recover the loan balance from a borrower who has failed to make payments by forcing the sale of the property.
- Full Recourse
A loan agreement that grants a lender the right to seek repayment by seizing a borrower’s personal assets in addition to the collateral to repay the outstanding balance on a loan if the borrower defaults.
The loan terms held a full recourse agreement to provide the lender with additional protection if the borrower defaulted.
- Fully Amortized Adjustable-Rate Mortgage (ARM)
A loan that combines the features of fixed-rate and adjustable-rate mortgages.
- Fund
A investment vehicle designed to pool investor capital in the form of Limited Partnership or LLC Membership Interests to acquire, invest, and pool assets for a stated return or participation in profits. See Debt Fund
g
- Ground-Up Construction Loan
A Bridge Loan designed for borrowers looking to fully develop a structure from the ground up, providing necessary capital for purchasing land, covering construction costs, and permits or fees.
h
- Hard Money Lending
A lending business practice where the lenders focus primarily or only on the value of the collateral (property) rather than borrower credit and financial history. Typically hard money lending is associated with more efficient underwriting and quicker closings as compared to conventional lending practices. This is commonly used in real estate finance.
Articles relating to Hard Money Lending:
- High Net Worth Investors (HNWI)
Individuals with high net worths that usually meet the definition of Accredited Investor as defined by 17 CFR 230.501:
a. Individuals: $1,000,000. net worth (less primary residence) or $200,000 adjusted gross income for the past two years or $300,000 for husband and wife or passed Series 7, 65, or 82 in good standing.
b. Entities: $5,000,000.in assets or all owners are individually accredited investors.
c. Trusts: $5,000,000. in assets.
- Home Equity Line of Credit (HELOC)
A line of credit that is secured by the borrower’s property, allowing the borrower to withdraw funds based on the property’s equity. HELOCs are typically revolving lines of credit.
i
- Income Property
Real estate that is developed or purchased with the intent to generate income through leasing the property to others, or generating operating income from business operations on sight.
- Institutional Investors
A large organization that accumulates funds to purchase or invest in securities, property, and other assets on behalf of its members, clients, or shareholders.
Institutional Investors can include:
- Aggregators
- Banks – National, regional, and local banks that make loans on real estate and lend to private lenders in the form of “Warehouse Lines of Credit.”
- Publicly Traded REITs – Real Estate Investment Trusts that are publicly traded on an exchange, like the New York Stock Exchange.
- Private Equity Firms – Investment partnerships that buy, manage, and sell companies, operating on behalf of institutional and accredited investors.
- Interest Reserve
A portion of the loan set aside by the lender to cover the borrower’s interest payments during the loan term, ensuring that the lender will receive interest payments on time if the borrower has insufficient funds.
The private lender included an interest reserve in the loan agreement, allowing the borrower to allocate funds specifically for interest payments while they renovated the property and prepared it for sale.
j
- Judicial Foreclosure
A legal process that involves filing a lawsuit in a court of law, utilized by lenders to recover unpaid loan proceeds and fees and/or claim property when a borrower defaults on a loan.
- Junior Loan
Also known as a subordinated loan or second lien
A type of loan that sits in a position junior to another loan in terms of payment priority.
The borrower took out a junior loan to finance the completion of the project, knowing that it would sit behind the senior loan in the repayment hierarchy.
k
- Key Principal (KP)
The primary individual or entity who takes on the financial responsibility of a loan, often required to provide collateral or guarantee the loan.
l
- Land Loan
A type of loan used to finance the purchase of a plot(s) of land.
The loan may secure “raw land,” which has no entitlements (no permits, engineering, legal approvals or infrastructure; undeveloped), or “entitled land,” which does have entitlements (has necessary legal approvals, ready for development).
- Lender Finance
A type of funding in which lenders will provide other lenders with the financing they need to fund new loans. Lender finance loans are typically secured by the borrower’s equity or the loans funded using the lender finance loan proceeds.
The firm utilized lender finance to leverage its investment in real estate projects, allowing for greater purchasing power while minimizing upfront capital requirements.
- Lien
A legal claim from a lender that is placed on a borrower’s property to secure the repayment of a loan or to secure the repayment of a debt. A lien is typically recorded with the appropriate government agency. Secretary of State for personal property, County Recorder’s Office for real property. Examples: Mortgage / Deed of Trust are liens. Mechanic’s Lien. Tax Lien.
Articles relating to Lien:
- Liquid Asset
An asset type that can be quickly converted to cash so the asset can be sold with minimal impact on its value.
- Loan Buyer
An entity or individual that purchases loan portfolios or loans from lenders.
The loan buyer purchased a portfolio of residential mortgages from the private lender, hoping to profit from the steady stream of interest payments over time.
- Loan Fees
Charges associated with the processing, approvals, and maintenance of a loan, in addition to the interest rate, typically paid by the borrower.
Types of loan fees include:
i. Origination Fees – Fees charged for obtaining a loan. Typically a percentage of the loan amount.
ii. Underwriting Fees – Fees charged for underwriting the loan, typically included in finance charges.
iii. Late Fees – Fees charged as a percentage of the payment due when late.
iv. Exit Fees – Additional compensation due at the end of the loan when the loan is paid off. - Loan Origination
The process of finding a borrower who needs a loan, negotiating the terms of the loan and submitting it for underwriting and funding.
- Loan to Cost (LTC)
A metric used by lenders to determine the potential risk associated with financing a construction project calculated by dividing the total loan amount by the total project cost.
- Loan to Value (LTV)
A ratio used by lenders to determine the potential risk of a loan calculated by comparing the amount of the loan to the appraised value (or purchase price) of the property.
m
- Master Repurchase Agreement
A short-term borrowing mechanism that is used by private lenders to borrow funds by using their loans as collateral. A lender sells a loan or other asset (such as mortgage-backed securities) to a buyer (another financial institution), with the agreement to repurchase the asset later. These are used as a means to provide financing to lenders to fund or lever loans.
The lender entered a Master Repurchase Agreement (MRA) with the bank, allowing them to temporarily sell their loan and access necessary capital to fund new projects while agreeing to repurchase the loan within a set amount of time.
- Mezzanine Loan
A type of Junior Loan that sits between senior secured debt and junior secured debt. It is secured by the all or a portion of the equity (ownership interests) of the borrower entity. These loans typically have higher interest rates and/or equity in the underlying property.
The borrower secured a mezzanine loan to bridge the gap in financing for its expansion, knowing that it would come with higher interest rates due to its subordinate position in the capital structure.
- Mortgage Banker
An individual or entity that funds, services, and originates mortgage loans.
- Mortgage Insurance
An insurance policy to protect lenders if the borrower defaults on a mortgage loan.
n
- Net Operating Income (NOI)
A metric used to assess the profitability of a property by deducting all operating expenses from the total income generated by the property.
NOI=Gross Rental Income−Operating Expenses
- Non-Performing Loan (NPL)
A loan that is not performing according to its terms, either from the borrower failing to fulfill payment obligations, or the note has matured without being paid off.
A lender issues a $500,000 loan to a real estate developer for a property renovation project. The developer makes timely payments for the first six months but then experiences financial difficulties, causing them to miss payments for three consecutive months. At this point, the lender classifies the loan as a non-performing loan due to the missed payments.
- Note-on-Note Financing
A lender financing program where a lender provides financing that is secured by an existing loan.
A lender has originated $10 million worth of loans to real estate investors. To raise additional capital for future lending without selling the loans, the lender seeks a note-on-note financing arrangement. They pledge these $10 million in existing loans as collateral for a $5 million loan from an institutional investor. The lender now has $5 million in capital to lend to new borrowers while retaining the interest payments from the original loans.
o
- Originator
An individual or company that sources, structures, and processes loan applications, acting as an intermediary between borrower and lender.
Articles relating to Originator:
p
- Personal Guaranty
A legal commitment made by an individual or entity to accept full responsibility of a loan if the borrower defaults on the loan.
Articles relating to Personal Guaranty:
- Prepayment Penalty
A fee incurred by a borrower when their loan is paid off early before the loan term ends.
The lender charged the borrower a prepayment penalty fee to recoup lost interest income.
- Prequalification
An assessment process given by a lender to evaluate a borrower’s financial situation to determine the loan amount the borrower is qualified to receive.
The borrower submitted their basic financial information to the lender in a prequalification process.
- Principal
The amount of the loan or money borrowed, excluding interest or fees, that must be repaid.
As a borrower makes timely payments, their principal balance decreases.
- Private Equity Firms
A financial institution that manages investment funds on behalf of institutional and accredited investors to generate returns. They typically invest in other companies by acquiring ownership interests.
A private equity firm is looking to acquire a new private lending business to add to its portfolio, with the intent of taking it public or reselling the business.
- Private Label Securitization
A securitization not issued or offered by an investment bank, government agency, or sponsored program.
The investment firm opted for private label securitization to package and sell its mortgage loans.
- Private Lender
GENERAL term: A business or individual that is not a bank or financial institution and makes loans secured by real estate.
INDUSTRY term: A lender that is not a bank or financial institution that concentrates on making business purpose loans secured by SFR or loans secured by CRE.
- Private Lending
GENERAL term:
The business practice of a private lender. A type of financing offered by entities or individuals that are not banks or financial institutions.
INDUSTRY term:
A subset of the mortgage industry that concentrates on loans secured by residential or commercial real estate but the lenders are not banks or other depository institutions. These loans are primarily commercially oriented or for “business purpose”. This Bridge Loans, RTL or Fix & Flip Loans, DSCR Loans and Construction Loans.
PRIVATE LENDING CAN REFER TO:
- Private Money Lending
Synonymous with Hard Money Lending.
The practice of smaller private businesses or individuals lending personal investment funds to borrowers, with a focus on real estate investments, conducted outside the traditional financial industry.
The real estate investor turned to private money lending when traditional banks refused to finance his renovation project.
- Promissory Note
A written promise from a borrower to a lender in a legally binding document, where the borrower promises to pay the lender a specific amount under agreed-upon terms.
Articles relating to Promissory Note:
q
- Qualifying Mortgage
A loan that qualifies for conventional mortgage financing offered by government agency lenders and banks.
r
- Rated Securitization
Securitization rated by a rating agency, like Morningstar, to assess risk and meet due diligence requirements.
The firm chose to invest in rated securitization products because they provide a more transparent assessment of credit risk.
- Real Estate Investment Trusts (REITs)
An entity that operates, finances, or owns income-producing real estate, providing individual investors an opportunity to earn a share of the income without having to finance or manage the properties directly. REITs must meet certain testing obligations to qualify. These qualifications are set forth by the IRS in 26 U.S. Code S856, et. al
Articles relating to Real Estate Investment Trusts (REITS):
- Real Estate Owned (REO)
Properties owned by a lender, bank, or government agency, after the unsuccessful sale of the property at a foreclosure auction in association with a foreclosure of a defaulted loan.
- Registered Investment Advisors (RIA)
An individual or firm registered with a state securities regulator, FINRA , and/or the Securities and Exchange Commission (SEC) that manage investment portfolios, recommend investments, and provide investment advice for clients.
Articles relating to Registered Investment Advisors (RIA):
- Reperforming Loan (RPL)
A loan that was previously considered to be non-performing, that has been rectified, modified, or refinanced by the borrower fulfilling timely payments.
A lender buys a reperforming loan at a discount, having previously been classified as non-performing due to the borrower missing several payments.
- Residential Transitionary Lending (RTL)
A term used to describe short-term loans (12 months or less) secured by residential real estate. This term is often associated with residential investment properties as opposed to primary residences.
Similar to: Fix & Flip Lending, Business Purpose Lending (BPL)
When a borrower is looking to upgrade to a larger home but requires immediate funds to purchase the new property before selling their current one, they often rely on residential transitionary lending to facilitate the transition smoothly.
s
- Secured Loan
A loan backed by borrower collateral, which can include property such as vehicles, real estate, or other personal assets.
- Securitization
The financial process of pooling various income producing assets, such as mortgage loans or consumer debt, and levering them in tranches with bonds or other interest-bearing securities that can be sold to investors.
Related Terms: Private Label Securitization, Rated Securitization
They employed securitization to bundle their real estate loans into investment-grade securities.
- Real Estate Owned (REO)
