Working with Kiavi
Glossary of Commonly Used Real Estate Finance Terms
Abatement – a reduction in the amount of property tax due to claims that the property’s valuation is to
Addendum – A document that's included in a homebuyer's Purchase and Sale Agreement that includes additional information or requests for items not included in the purchase and sale agreement. Language included in an addendum can override terms in the purchase and sale agreement.
AIV (as is value) – The property value as it exists, as of the appraisal date.
Appraisal – A professional estimate of how much the property is currently valued or will be worth after updates.
ARM (adjustable rate mortgage) –An adjustable-rate mortgage (ARM) is a home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for a period of time. After that, the interest rate applied on the outstanding balance resets periodically, at yearly or even monthly intervals.
ARV (after repair value) – The market value that the investment property is expected to have after it has been improved or renovated.
Bridge loan – A short-term loan used to bridge the gap between one obligation and the next. Bridge loans are a great way to move from one investment to another.
Capitalization rate – A real estate valuation measure used to compare different real estate investments. It represents the ratio between the net operating income produced by an asset and the original capital cost or its
Close – Officially, a loan is closed when all signed and notarized legally binding documents are recorded by the county clerk.
Closing Costs – Expenses incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include origination fees, property taxes, charges for title insurance, escrow costs or appraisal fees. Closing costs will vary according to the county and state, and the lender that is funding the mortgage.
Commercial use – A property with no residential component that is only used for a business.Construction Holdback – Funds in addition to the borrower’s loan amount that are held specifically to pay for costs associated with a rehab project for the property. Borrowers show proof that they have completed their work (photos, videos, etc.), and then additional funds can be paid out, either in pieces or as a whole.
Default – The failure, for longer than 30 days, to meet the legal obligations of a loan.
Distressed properties – Properties that are in poor condition or near foreclosure.
Down Payment – Money paid by the buyer on a home purchase, which makes up the difference between the purchase price and the mortgage amount.
Draw schedule – A detailed payment plan for construction projects. This schedule helps hard money lenders determine when they need to provide funding to borrowers based on the work completed.
DSCR or DSC (debt service coverage ratio) – Ratio of property income to property costs (aka PITIA). This equation is used to determine if a rental investment property’s cash flow is enough to cover the borrower’s loan payment in addition to all re-occurring expenses. As a borrower, the DSCR can help you gauge the profitability of your project saving you time and money.
DTI (debt to income ratio) –The ratio, expressed as a percentage, that results when a borrower’s monthly payment on all debts (mortgage, car payments, credit cards, etc.) is divided by their monthly income.
Equity – The difference between the fair market value and current loan amounts on the property. Or, the percentage of the property that the owner actually owns.
Escrow – An account run by a third party that disburses payments based on the loan agreement. The money is typically used to cover property taxes and homeowner’s insurance.
Exit strategy – A real estate exit strategy is how the borrower plans to pay off the loan and reduce liability. It is a plan for how to exit one situation for a better one.Foreclosure – The process through which the lender legally takes control of the property due to the borrower missing loan payments.
Guarantor – The person who promises to pay a borrower’s debt if the borrower defaults on their loan.
Hard costs – Direct costs relating to the construction or improvement of a building or structure.
Hard money loan – Also called a private equity loan or a private money loan, a hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real estate property.
Holdback – The portion of a hard money loan that is not paid until the project reaches a certain stage, such as completion of the framing.
Holding costs – Costs associated with owning a property for a period. This includes insurance, taxes, and utilities.
HUD-1 – A form that lists all the transaction cash flows between the property’s buyer, seller, and lender.
Interest Rate – A percentage of the principal loan amount charged by the lender for use of money.
Investment – a loan that an investor purchases in a secondary sale transaction with hopes of generating future income
Lien – A legal form filed by a lender showing possession of property belonging to a borrower until the debt is paid off.
Liquidity – How quickly an individual or firm can purchase or sell a property due to having cash on hand.
Loan broker – See: real estate broker below.
Loan officer – Person who evaluates, authorizes or recommends the approval of loan applications.
Loan points – An origination fee. One point is equal to one percent of the loan’s principal amount. Two points on a $100,000 loan would be $2,000. Most private money/hard money loans fall between 2 and 5 points.
LTC (loan to cost ratio) – Compares the financing amount of a commercial real estate project to its costs. It is calculated by taking the loan amount and dividing it by the construction cost.
LTV (loan to value ratio) – Compares the proposed loan amount to the appraised value of the completed project. (Loan amount divided by appraised value)
Maturity – The date the final payment of a loan is due.
Origination Fee – The fee charged by a lender to prepare loan documents and order third-party work. This is usually a percentage of the full loan amount.
PITIA – Principal amount, interest, taxes, insurance, association dues. In layman's terms, the continuous costs that are associated with owning a property.
Points – Charges assessed at closing by the lender or broker. Each point is equal to 1 percent of the loan amount (e.g, two points on a $100,000 mortgage would cost $2,000)
Principal – The balance of the loan, which can be paid down incrementally over time.
Private lenders – Individuals or companies that lend to real estate investors and developers. Finding the right private lender can be tough – here are five qualities to look for in a private lender.
Purchase – Obtaining a new mortgage to complete the acquisition of a new property. The mortgage may be for part or all of the sales price.
Purchase Price – The price that is paid to buy a home, not including closing costs or real estate commission.
Purchase Sale Agreement (PSA) – A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Real estate broker – Someone who acts as an intermediary to facilitate real estate transactions. In the case of a hard money loan transaction, they gather important information from the borrower such as income, employment documentation, and credit reports to assess how much the borrower can afford.
Real estate investor – Someone who purchases properties with the goal of making a profit, either through renting or reselling.
Refinance – Replacing an old loan with a new one. Typically, people refinance to take advantage of a lower interest rate, but can also refinance when an old loan becomes due.
Rental – Kiavi loan product offering for customers looking to get a short-term mortgage for the purposes of a property to lease to someone else
ROI – Return on Investment
SOW (scope of work) – An outline of all the renovations scheduled to be completed before the property is sold, including their estimated costs.
Short Sale – A situation when a seller is selling their property for less than they owe on their loan. A bank or lender must approve the sale at a lower price.
Soft costs – Non-construction costs such as legal, financing, architects, etc. required for the project.
Tax Lien – A lien placed upon a property due to unpaid property, income, or other taxes
Title – Proof of ownership on a real estate investment property.
Turnaround time – The amount of time from when an investment property is purchased to when it is sold.
Underwriting – The assessment of how much credit risk a lender will take on for an investment property. Underwriters will verify all of the required documentation and property details before approving a loan. Kiavi's underwriters are most concerned with the property’s value than the borrower’s credit history.