Fairfield Financial Services, Inc. - Private Money Loans, Lending & Borrowing


Collection Account Charges
Lenders may do the collection and accounting of their own loans, ask our office to administer their loans, or ask another third-party to perform this service. If our office does the loan collection and accounting (which is generally the case), the collection account charges will be as specified in our page entitled Collection Account Services. The borrower is expected to pay the collection account charges.
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. So, 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%.
Instrument of Security
Also known as "paper," this is the legal documentation that provides the framework for the relationship between the borrower, the lender, and the security. The instrument of security may be a note and trust deed, a land sale contract, a mortgage, or a lien holder title (with manufactured homes or floating homes, for example).
Late Charge
The additional amount due to a lender when a payment is not paid by the borrower within the agreed upon grace period. Typically the late charge amount will be a percentage of the late payment amount and will become due after a certain grace period has passed.
Loan Costs
The 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 (see our article, Why 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 on occasions, document preparation or IRA rollover fees.
Loan-To-Value Ratio (LTV)
With regard to a first position loan, this is 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.
The position defines the order in which claims against the security will be satisfied in the event of a foreclosure. Most lenders prefer to lend only in the first position, but some lenders will go in a "subordinate" position (second, third, etc.) in exchange for a higher rate of return.
Pre-payment Penalty
The penalty (if any) that a borrower must pay to a lender if a loan is repaid "early." Most loans placed through our office 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
Also commonly referred to as "hard money lending," this terminology 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.
The percentage compensation 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. Most first position loans placed by our office during the past few years involved rates ranging between 11% and 15%.
Although almost anything may be used as security, or collateral, to effectively secure a loan, our office generally only places loans that are secured by real estate (with the exceptions being floating homes, manufactured homes, and occasionally stock shares).
This refers to the length of a loan and the amortization. Most loans placed by our office are either 1-3 year loans with a interest only payments (no amortization). In some cases, we may make longer term loans of 4-6 years with a 20-30 year amortization (an N year amortization defines the payment amount necessary to pay the loan balance down to zero in N years time).
There are different ways to establish the value of a security, and one or more may be used in any given situation. Among these are the following: (1) previous transfer price(s) for the property, (2) tax assessed value, (3) appraised value, as assigned by a paid and impartial licensed appraiser, (4) a Market Value Analysis (MVA) provided by a Realtor, (5) transfer prices for comparable properties, (6) an income analysis, (7) an evaluation of the cost basis for the property.