Private Money Lending
Glossary

The definitive reference for private money lending and hard money lending terminology. Over 60 terms defined by the attorneys at Geraci LLP, with over 30 years of combined private lending legal experience.

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A

Acceleration Clause
A provision in a loan document that allows the lender to demand immediate repayment of the entire outstanding loan balance upon the occurrence of a specified event, typically a borrower default. In private money lending, acceleration clauses are triggered by events such as failure to make payments, failure to maintain insurance, unauthorized transfer of the property, or breach of any material loan covenant.
After-Repair Value (ARV)
The estimated market value of a property after all planned renovations and improvements have been completed. ARV is a critical metric in fix-and-flip lending because private money lenders often base their loan amount on a percentage of the ARV rather than the current as-is value. A typical private money fix-and-flip loan is structured at 65-75% of ARV.
Allonge
A separate piece of paper firmly attached to a promissory note that is used to endorse or transfer the note to another party. When a private money lender sells or assigns a loan, the transfer is typically documented through an allonge endorsed by the original lender. The allonge must be permanently affixed to the original note to be valid.
Assignment of Rents and Leases
A document that transfers the borrower's right to collect rental income from tenants to the lender. In private money lending, this document is particularly important for DSCR loans and rental property loans. An absolute assignment (effective immediately, with the borrower collecting as the lender's agent) provides stronger protection than a conditional assignment (triggered only upon default).

B

Balloon Payment
A large, lump-sum payment due at the end of a loan term. Most private money loans are structured with monthly interest-only payments and a balloon payment of the full principal balance at maturity. For example, a 12-month fix-and-flip loan might require interest-only payments for 12 months, with the entire principal due at the end of the term. State-specific balloon payment disclosures are required in many jurisdictions.
Blanket Mortgage (Cross-Collateralization)
A single mortgage or deed of trust that secures a loan with multiple properties as collateral. Private money lenders use blanket mortgages when a borrower pledges more than one property to secure a single loan. Cross-collateralization provisions may also appear in loan agreements, allowing the lender to apply collateral from one loan to cover defaults on another.
Bridge Loan
A short-term loan used to bridge the gap between two transactions — typically the purchase of a new property before the sale of an existing one, or short-term financing while the borrower arranges permanent financing. Bridge loans from private money lenders typically carry terms of 6-24 months and interest rates between 8-14%. Bridge loans are one of the most common private money loan types.
Business-Purpose Exemption
A regulatory concept that exempts loans made for business, commercial, or investment purposes from many consumer lending regulations. The business-purpose exemption is the single most important legal concept for private money lenders because it exempts most private money loans from TILA, Dodd-Frank's Ability-to-Repay rule, RESPA, and many state consumer lending statutes. The exemption must be properly documented — a business-purpose affidavit signed by the borrower is standard practice.

C

Completion Guaranty
A guarantee, typically from the borrower or a principal of the borrowing entity, that renovation or construction work will be completed according to the approved scope and within a specified timeframe. In fix-and-flip and construction lending, the completion guaranty gives the lender recourse against the guarantor personally if the project is abandoned or materially delayed.
Compliance Rider
An addendum to loan documents that contains state-specific regulatory provisions, disclosures, and legal language required by the laws of the state where the property is located. A compliance rider ensures the loan documents meet the requirements of the applicable jurisdiction without requiring a complete rewrite of the core documents for each state.
Construction Draw
A disbursement of loan proceeds for renovation or construction work, released after the lender (or an inspector) verifies that a specified milestone has been completed. Private money construction loans typically disburse funds in 3-6 draws, with each draw tied to completion of a defined phase of work. Draw schedules are governed by the draw agreement in the loan documents.
Cross-Default
A provision that triggers a default on one loan if the borrower defaults on a separate loan with the same lender (or sometimes any lender). Cross-default provisions are common in private money lending when a lender has multiple active loans to the same borrower or related entities.

D

Debt Service Coverage Ratio (DSCR)
The ratio of a property's net operating income (NOI) to its total annual debt service (loan payments including principal, interest, taxes, insurance, and HOA). A DSCR of 1.0 means the property's income exactly covers the loan payment. Most private money lenders require a minimum DSCR of 1.0 to 1.25. DSCR loans are underwritten primarily on the property's cash flow rather than the borrower's personal income. See: DSCR Loan Documents Guide
Deed in Lieu of Foreclosure
A voluntary transfer of property ownership from the borrower to the lender to satisfy a defaulted loan, avoiding the formal foreclosure process. In private money lending, a deed in lieu can save months of foreclosure proceedings, but the lender must ensure the borrower has clear title and that there are no junior liens that would survive the transfer.
Deed of Trust
A three-party security instrument involving a borrower (trustor), a lender (beneficiary), and a neutral third party (trustee). The borrower transfers legal title to the trustee, who holds it as security for the loan. If the borrower defaults, the trustee can conduct a non-judicial foreclosure sale without court involvement. Approximately 28 states use deeds of trust as the primary security instrument. See: Deed of Trust vs. Mortgage Guide
Default Interest Rate
A higher interest rate that takes effect when the borrower is in default on the loan. Private money loan documents typically specify a default rate 3-5 percentage points above the contract rate. Lenders must ensure the default rate does not push total interest charges above applicable usury limits. See: Usury Laws by State
Draw Agreement
A document that governs the disbursement of loan proceeds for construction or renovation, specifying the draw schedule, inspection requirements, holdback amounts, and conditions for each disbursement. Draw agreements are essential for fix-and-flip loans and construction loans. See: Fix-and-Flip Loan Documents

E

Estoppel Certificate
A signed statement by a tenant confirming the terms of their lease, including rent amount, lease duration, security deposit, and any defaults. Private money lenders making DSCR loans or loans on occupied rental properties may require tenant estoppel certificates to verify the rental income supporting the loan.
Extension Agreement
An agreement between the lender and borrower to extend the maturity date of a loan beyond its original term. Extension agreements in private money lending typically require an extension fee (0.5-1% of the loan balance), may adjust the interest rate, and reaffirm all original loan terms and covenants.

F

Fix-and-Flip Loan
A short-term private money loan used to purchase and renovate a residential property for resale. Typical terms include 6-18 month duration, interest rates between 9-14%, origination fees of 1-3 points, and loan-to-ARV ratios of 65-75%. Fix-and-flip loans require specialized documents including draw agreements and completion guarantees. See: Fix-and-Flip Loan Documents
Forbearance Agreement
A written agreement in which the lender temporarily refrains from exercising its remedies (such as foreclosure) in exchange for the borrower's commitment to cure the default within a specified timeframe. In private money lending, forbearance agreements are used when the lender believes the borrower can resolve the default with additional time — for example, when a fix-and-flip sale is pending but delayed.
Foreclosure
The legal process by which a lender takes possession of a property after the borrower defaults on the loan. There are two types: non-judicial foreclosure (available in deed of trust states, faster, does not require court involvement) and judicial foreclosure (required in mortgage states, involves court proceedings, typically takes 12-36 months). The type of foreclosure available depends on the state and the security instrument used. See: Deed of Trust vs. Mortgage Guide

G

Guaranty (Personal Guaranty)
A legally binding promise by an individual (the guarantor) to be personally liable for repayment of a loan if the borrower (typically an LLC or other entity) fails to pay. Most private money loans to entity borrowers require a personal guaranty from the principal(s) of the entity, giving the lender recourse beyond the collateral property.
Ground-Up Construction Loan
A private money loan to finance the construction of a new building from the ground up, as opposed to renovation of an existing structure. Ground-up construction loans are more complex than fix-and-flip loans and require additional documents including detailed draw schedules, contractor agreements, mechanic's lien waivers, and typically higher reserves.

H

Hard Money Lender
A non-bank lender that makes loans secured by real estate, underwritten primarily on the value of the collateral property rather than the borrower's personal creditworthiness. The term "hard money" refers to the "hard asset" (real property) securing the loan. The industry is increasingly adopting the term "private money lender" as the preferred terminology. Both terms describe the same type of lending. See: Private Money vs Hard Money
Holdback
A portion of the loan proceeds that the lender retains and disburses only after certain conditions are met — typically completion of renovation milestones. In fix-and-flip lending, the holdback is the renovation budget that is released through the draw process. A lender might fund 100% of the purchase price at closing but hold back the renovation budget for disbursement through draws.

I

Intercreditor Agreement
An agreement between two or more lenders that defines their respective rights, priorities, and obligations when they hold liens on the same property. In private money lending, intercreditor agreements are used when a borrower has both a senior loan and a mezzanine or junior lien, establishing which lender has priority in a foreclosure and what notice requirements apply.
Interest Reserve
A portion of the loan proceeds set aside at closing to make the borrower's monthly interest payments for a specified period. Interest reserves are common in fix-and-flip and construction loans where the borrower may not have income from the property during the renovation period. The reserve is depleted as each monthly payment is made.

J

Judicial Foreclosure
A foreclosure process that requires the lender to file a lawsuit in court and obtain a judgment before the property can be sold. Judicial foreclosure is required in approximately 21 states that use mortgages rather than deeds of trust. The process typically takes 12-36 months, compared to 3-6 months for non-judicial foreclosure in deed of trust states.

L

Loan Agreement
The comprehensive contract between lender and borrower that sets forth all terms, conditions, representations, warranties, covenants, and default provisions of the loan. In private money lending, the loan agreement supplements the promissory note and security instrument with detailed provisions covering everything from insurance requirements to financial reporting obligations.
Loan-to-Value Ratio (LTV)
The ratio of the loan amount to the appraised value of the property, expressed as a percentage. A $700,000 loan on a property worth $1,000,000 represents a 70% LTV. Private money lenders typically lend at 60-75% LTV for purchase loans and may go higher for renovation loans when factoring in after-repair value (ARV). Lower LTV provides more equity cushion and lower risk for the lender.
Loan-to-Cost Ratio (LTC)
The ratio of the loan amount to the total cost of a project, including purchase price and renovation costs. LTC is commonly used in fix-and-flip and construction lending. A lender offering 85% LTC on a project with $500,000 total cost (purchase + renovation) would provide a $425,000 loan.

M

Maturity Date
The date on which the entire remaining loan balance becomes due and payable. Private money loans typically have maturity dates of 6-36 months from origination. If the borrower has not repaid or refinanced the loan by the maturity date, the loan is in default unless an extension agreement is executed.
Mechanic's Lien Waiver
A document signed by a contractor, subcontractor, or material supplier waiving their right to file a mechanic's lien against the property for work performed or materials provided. Private money lenders making construction or renovation loans typically require lien waivers with each construction draw to protect their lien priority.
Mezzanine Debt
A form of financing that sits between senior secured debt and equity in the capital structure. In private lending, mezzanine debt may be secured by a second lien on the property or by a pledge of the borrower's equity interest in the entity that owns the property. Mezzanine lenders accept higher risk in exchange for higher returns.
Mortgage
A two-party security instrument between a borrower (mortgagor) and a lender (mortgagee) that creates a lien on real property. Unlike a deed of trust, a mortgage does not involve a trustee. Foreclosure under a mortgage typically requires judicial proceedings. Approximately 21 states use mortgages as the primary security instrument. See: Deed of Trust vs. Mortgage Guide

N

Non-Judicial Foreclosure
A foreclosure process that does not require court involvement. Available in states that use deeds of trust, non-judicial foreclosure is conducted by the trustee named in the deed of trust. The process is significantly faster than judicial foreclosure — typically 3-6 months — which is a major advantage for private money lenders operating in deed of trust states.
Non-Recourse Loan
A loan where the lender's only remedy upon default is to foreclose on the collateral property — the lender cannot pursue the borrower's other assets or personal income. Most private money loans are full-recourse (with a personal guaranty), but some larger commercial loans may be structured as non-recourse with limited carve-outs for fraud, waste, and environmental liability.

O

Origination Fee (Points)
An upfront fee charged by the lender at closing, typically expressed as a percentage of the loan amount. One "point" equals 1% of the loan amount. Private money lenders typically charge 1-3 points at origination. In some states, origination fees are included in the usury analysis, so the combined rate plus fees must not exceed applicable limits.

P

Payoff Letter (Payoff Statement)
A document issued by the lender that states the exact amount required to pay off a loan in full as of a specific date, including outstanding principal, accrued interest, fees, and any other charges. Private money lenders issue payoff statements when a borrower is refinancing, selling the property, or otherwise paying off the loan.
Pledge Agreement
An agreement in which the borrower pledges membership interests, stock, or other personal property as additional collateral for a loan. In private money lending, a pledge of the borrower's LLC membership interests gives the lender the option to take control of the entity (and thus the property) rather than foreclosing on the real estate directly.
Prepayment Penalty
A fee charged to the borrower for repaying a loan before the maturity date. Private money loans may include prepayment penalties or minimum interest guarantees to ensure the lender earns a minimum return even if the borrower pays off the loan early. Some states restrict prepayment penalties for certain loan types.
Private Money Lender
An individual or company that makes loans secured by real estate outside the traditional banking system. Private money lenders — also known as hard money lenders — typically fund business-purpose loans for real estate investors, including fix-and-flip loans, bridge loans, DSCR rental loans, and construction loans. The term "private money lender" is increasingly preferred over "hard money lender" to reflect the professional, institutional nature of the modern industry. See: Private Money vs Hard Money
Promissory Note
The legal document that contains the borrower's unconditional promise to repay a specified sum of money to the lender under defined terms. The promissory note is the primary evidence of the debt and includes the loan amount, interest rate, payment schedule, maturity date, and default provisions. It is the most fundamental document in any private money loan. See: Complete Guide to Loan Documents

R

Reconveyance
A document recorded in the public records that releases the lender's lien on a property after the loan has been paid in full. In deed of trust states, the trustee executes a deed of reconveyance. In mortgage states, the lender executes a satisfaction of mortgage. Recording the reconveyance is essential to clear title for the borrower.
Rehab Budget (Scope of Work)
A detailed document outlining all planned renovations, including line-item costs, project timeline, and contractor information. The scope of work is typically attached as an exhibit to fix-and-flip loan documents and serves as the basis for the draw schedule. Changes to the scope of work usually require lender approval.

S

Servicing (Loan Servicing)
The ongoing administration of a loan after origination, including collecting payments, managing escrow accounts, sending statements, handling defaults, and processing payoffs. Some private money lenders service their own loans; others engage third-party loan servicers. The servicing arrangement should be specified in the loan documents.
Subordination Agreement
An agreement by which a lienholder agrees to make their lien junior (subordinate) to another lienholder's lien. In private money lending, subordination may occur when a borrower takes a senior loan and asks the existing lender to subordinate to the new loan. Subordination changes lien priority and affects recovery in the event of foreclosure.

T

Table Funding
A transaction in which a loan is funded at the closing table by one entity (the funder) but originated in the name of another entity (the originator). In private money lending, table funding arrangements allow brokers or smaller lenders to originate loans using capital from institutional sources. Table funding has specific regulatory implications and must be properly documented.
Title Insurance
An insurance policy that protects the lender (lender's policy) or the property owner (owner's policy) against losses arising from defects in title, undisclosed liens, or other title issues. Private money lenders require a lender's title insurance policy on every loan to protect their security interest in the property.
Trust Deed Investor
An individual who funds private money loans directly, typically through a mortgage broker or lending platform. Trust deed investors provide the capital for individual loans and receive the promissory note and deed of trust as security. In some states (notably California), trust deed investors may be subject to different usury rules than licensed lenders.

U

UCC Financing Statement (UCC-1)
A legal form filed to give public notice that a lender has a security interest in a borrower's personal property (as opposed to real property). In private money lending, UCC filings are used to perfect security interests in items like business equipment, furniture, or the borrower's membership interests in an LLC.
Usury
The practice of charging interest on a loan at a rate that exceeds the legal maximum set by state law. Usury violations can result in severe penalties including forfeiture of all interest, treble damages, voiding of the loan, or criminal liability, depending on the state. Most states provide exemptions for business-purpose loans, which is why proper loan classification is critical for private money lenders. See: Usury Laws by State
Usury Savings Clause
A provision in loan documents that automatically reduces any interest or charges to the maximum permitted amount if a court determines the charged rate exceeds the applicable usury limit. Usury savings clauses provide a critical layer of protection for private money lenders against inadvertent usury violations. Attorney-drafted savings clauses are more effective than generic boilerplate language.

Y

Yield Spread Premium (YSP)
Compensation paid by a lender to a mortgage broker for delivering a loan at an interest rate above the lender's minimum acceptable rate. In private money lending, YSP arrangements must be disclosed to the borrower and may be subject to state-specific disclosure requirements. The YSP is typically expressed as a percentage of the loan amount.

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