7 terms you should know when talking to a Lender

[Tamara Deering]

1. If you are new to borrowing money to fund your investments here are some terms that mortgage brokers and lenders commonly throw around without any explanation.  I did not list them in any particular order.  If there are other terms you are unfamiliar with or you didn't know about when you first started borrowing money please respond to this post so we can help out our new investors.
2. Rate - This is the interest rate that you will pay for the privilege of borrowing money, expressed a percentage.
3. Points - A point is 1 percent of the loan.  Typically points will be used when discussing the origination fee or the discount rate.
4. Origination Fee - this is the amount the lender charges to underwrite the mortgage (also called a note).  If you use a mortgage broker they may charge a fee as well as the lender. You may be able to get a lower origination fee by going directly to the lender but you will need to do more work to compare rates.
5. Discount Rate - Some lenders, mainly conventional lenders rather than asset based lenders, will offer a discount rate or fee to reduce the interest rate. For example, you will be quoted a rate of 5.75% with no fees but 4.9% with a 1.5 point discount rate. Whether or not it makes sense to pay a higher fee for less interest depends on several factors but mainly if you are going to keep the mortgage in place long enough to cover the fee.
6. LTC - Loan to cost, this is the ratio between the purchase price of a property and the loan amount.  If the purchase price of a property is $100,000 and your loan is $80,000 the LTC is 80%.  Divide the loan amount by the purchase price (cost) to determine your LTC.  Sometimes lenders will restrict the LTC to ensure you have some of your own money in the deal.
7. LTV - Loan to value, this is the ratio between the current market value of the property and the loan amount. Current market value is determined by an appraisal or a broker's price opinions. Some lenders refer to current market value as the As-Is value. Most lenders will limit the amount they will loan to a certain percentage of value. To calculate LTV divide the current market value of the property by the loan amount. If the current market value of a property is $120,000 and the required loan amount is $80,000 your LTC is 67%. IMPORTANT: Some lenders use LTC and won't offer 100% financing other lenders use LTV and if the deal is good enough you can get 100% financing.
8. ARV - As repaired value, this is the amount the property will be worth after you complete the repairs and upgrades to the property. ARV is determined by an appraisal or a broker's price opinion. Your construction budget influences the ARV so be as detailed as you can with your list of repairs and your level of finishes. Your lender uses the ARV to determine amount of construction repairs they will fund. Note: If your ARV is based on installing granite countertops and you install laminate you may not receive your entire budgeted amount when you submit for your draw. A good rule of thumb to follow if you are borrowing construction funds is that you can always go up on your finish level but you can't go down.