The majority of private lenders today are institutional, meaning their capital comes from some sort of financial institution, including hedge funds, private equity firms, loan aggregators and other Wall Street investment companies. The institutional private lending world has its own terminology that is foreign to most real estate investors and even to traditional private lenders. In this guide, I’ll explain and clarify 10 common terms used by institutional private lending companies (aka hard money lenders or bridge lenders).
1) BPL: Business Purposes Lending (or Business Purpose Loan)
This is a broad term used to describe all private mortgage lending for investment real estate. In the institutional world, BPL is a investment class which has to be differentiated from consumer-purpose lending secured by owner-occupied homes. Most of the institutions that buy consumer home loans don’t buy business purpose loans.
In California, traditional private lenders have used the term “business purpose loan” for many years before institutional private lending existed, but with a different meaning. It’s an equity cash out loan secured by an owner-occupied home in which the funds are going to be used for a business or investment purpose. California legislation provides an exemption to federal consumer lending laws which makes it possible for licensed private lenders and licensed mortgage brokers to originate these types of loans.
2) Residential
It’s technically an asset class, but Residential is commonly used to describe consumer home loans as opposed to loans secured by residential investment properties. I believe Residential was a common term long before business purpose loans became popular in the institutional world, which was around 2014.
3) Commercial
Commercial, also an asset class, is used as a synonym to business purpose lending. It’s a loan for commercial purposes, even though most of the loans are secured by single family homes. There are 2 very large national private lending firms that have the word Commercial in their company names, even though they don’t lend on commercial real estate, except for small multifamily or mixed-use properties. The individuals who formed these companies came from the institutional investment world where everyone in that space understands that commercial refers to the purpose, not the property type. However, your average real estate investor or mortgage broker will likely be confused seeing the word commercial when they’re seeking financing secured by a residential investment property.
4) DSCR: Debt Service Coverage Ratio
In institutional private lending, DSCR is not just a ratio. It’s a loan type. These are long-term loans for stabilized residential rental properties that are either being rented or are in rent-ready condition. The debt service coverage ratio is the main qualifier, not the borrower’s personal income. The minimum term for these loans is 3 years, but most are 30-year terms with a fixed interest rate.
5) LTR: Long-Term Rental
In institutional private lending, LTR is both a property type and a loan type. In the context of a loan type, it’s the same thing as a DSCR loan, and the rental income is calculated based on an annual lease agreement. From what I remember, when long-term rental loans were first offered by institutional private lenders back in 2018, LTR was the common term used to describe these loans at the time. DSCR became a more popular term one or two years later.
6) STR: Short Term Rental
A short-term rental loan is also a DSCR loan, but for a residential property that is rented on a nightly, weekly or monthly basis. When institutional private lenders first started offering DSCR loans, it was only for long-term rentals. It took a little time for institutional loan buyers to get comfortable with buying loans secured by short-term rentals, but it was made possible because there is enough data available to project rental income annually, even though the cash flow is not consistent on a monthly basis with these investments. Many real estate investors call these Airbnb loans, but not all investors use Airbnb to rent their properties, so that’s not an appropriate term.
7) Bridge Loan
In institutional private lending, Bridge Loan is the broadest term used to describe any loan that is short-term, meaning less than 2 years. Fix and Flip, Rehab and Rent, Ground-up Construction. Rental property purchase. Equity Cash Out. All of these are considered to be bridge loans if the loan term is less than 2 years. Anything longer than 2 years is a DSCR loan.
8) RTL: Residential Transition Loan
With this term, the word Residential does mean residential property. RTL is synonymous with Bridge Loan to refer to any loan with a short term, but RTL is primarily used to describe loans that include a rehab or construction budget. A loan would finance the transition of an old ugly vacant house into a modern home which will be sold to a homeowner or leased to a tenant. A vacant lot is transitioned into a brand new home and sold or leased upon completion. Some people use the term RTL for a rental property purchase or refinance, so long as loan term is less than 2 years. The transition for rentals is going from vacant to tenant-occupied or transitioning from a short-term bridge loan to a long-term DSCR loan.
9) Balance Sheet
You may hear an institutional private lender state that they fund loans using their own balance sheet. This just means that the money used to fund a loan is coming from their bank account or an account which they control, as opposed to being funded by a third party capital provider. It doesn’t mean that the loan will remain on their balance sheet throughout the loan term. In fact, the opposite is typically the case with institutional private lending. The loans are sold to an institution shortly after the loan closes. This is the beauty of the institutional capital model for private lending. So long as the loan is underwritten to institutional capital standards, lenders can easily sell loans to recycle their capital and continue lending at a large scale. If a lender calls themselves a “balance sheet lender”, that typically means they don’t sell any of their loans.
10) Capital Markets
Capital Markets is a term used to describe the activity of selling loans, and it also refers to the entire ecosystem of loan trading. Many institutional private lending companies have one person or a capital markets team focused on the task of selling loans shortly after funding. They form relationships with multiple capital providers and determine which loans to sell to which buyer depending on their appetite, pricing and other factors.
Resource to Learn More Private Lending Terms
If you’d like to learn about more institutional private lending terminology, there is a great resource I can recommend. The National Private Lenders Association has published a private lending glossary which defines 90 private lending terms, and it’s available for anyone in the public to download. The glossary was created by some of the biggest players in our space who operate, or represent, some of the largest institutional private lending companies in the country. To download the glossary from the NPLA website, click the link below.
The glossary will likely be updated periodically as the industry evolves and as the association’s members suggest additional terms to be added.
The NPLA has not paid us to be mentioned here. I have been a member of the organization since April 2021 and currently serve on the Membership Committee. I attend all the bi-monthly meetings where some of the largest lenders in our space openly share valuable information and insights. I also get housing market data from economists every month, and I meet in person at NPLA conferences 3 times a year. I highly recommend joining the association if you’re a private lender, broker, capital provider or service provider.
How to Find Institutional Private Lenders
Institutions have brought so much capital to the private lending industry, which has helped real estate investors thrive over the past decade with lower interest rates than what traditional private lenders typically charge. That changed in 2022 when interest rates increased and the cost of capital went up, but institutional private lenders continue to lend at a large scale and still fund the majority of private real estate loans in the United States today.
If you’re seeking private financing for an investment real estate deal, use our website PrivateLenderLink.com as a resource. Most of the private lending companies listed on the site are institutional. There are two options for using our platform.
Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly by email, phone call, or visit their websites. First select a loan type, then enter the state where the property is located.
Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.
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