Blue Dot Financial Glossary

A clear and concise guide to key lending terms used in real estate private credit.

Glossary A

After Repair Value (ARV): The estimated value of a property after renovations or improvements are completed.
Assignment of Rents: A clause allowing a lender to collect rental income from a property in the event of borrower default.

Balloon Payment: A large, lump-sum payment due at the end of a loan term after regular smaller payments.
Bridge Loan: A short-term loan used to “bridge” the gap between the purchase of a new property and the sale or refinancing of an existing one.
Builder’s Risk Insurance: Insurance that covers property and construction materials during a building or renovation project.
Business Purpose Lending: Loans made for investment or business activities, not for personal or consumer use.

Cap Rate (Capitalization Rate): A measure used to evaluate the return on investment for a property, calculated as net operating income divided by purchase price.
Change Order: A written agreement to modify the scope of work in a construction contract.
Comparable (Appraisal): Properties with similar features used to estimate the value of a subject property.
Completion Guarantee: A borrower’s or guarantor’s promise to complete a construction project as agreed.
Construction Escrow Account: A third-party account that holds funds and disburses them for construction-related expenses.
Construction Loan: A short-term loan used to finance the building of a new structure.
Contingency Reserve: Funds set aside to cover unexpected costs during a construction or renovation project.
Contract Assignment (Purchase Contract): The transfer of a buyer’s rights in a purchase agreement to another party.
Cross Default: A clause that triggers default on one loan if the borrower defaults on another loan.

Debt Service Coverage Ratio (DSCR): A ratio used to assess a property’s ability to cover its debt payments from income (NOI / Debt Payments).
Default Rate: A higher interest rate that applies after a borrower fails to meet the terms of a loan.
Draw Request: A formal request for the release of funds from a construction escrow.
Draw Schedule: A timeline of predetermined milestones tied to fund disbursements during a construction project.

Exit Fee: A fee charged at the end of a loan term, typically as a percentage of the original loan amount.

Final Inspection: The last property inspection before loan or construction project completion.
Force-Place Insurance: Insurance placed by a lender if the borrower fails to maintain required coverage.
Foreclosure: A legal process where a lender takes ownership of a property due to loan default.

General Liability Insurance: Insurance that protects against third-party claims of property damage or bodily injury.

Hard Costs: Direct construction expenses including labor, materials, and equipment.

Interest Reserve: Funds set aside from the loan proceeds to pay interest during the loan term.
Interest-Only Payment: A loan payment that covers only interest, not principal.

Lien Position: The order of priority in which lenders are repaid in the event of default.
Loan Holdback: Funds withheld until specific project milestones are completed.
Loan-to-Cost (LTC) Ratio: A metric that compares the loan amount to the total project cost.
Loan-to-Value (LTV) Ratio: A measure of the loan amount relative to the appraised property value.

Mechanic’s Lien: A legal claim against a property for unpaid construction or renovation work.

Non-Recourse: A loan where the lender’s only remedy for default is to seize the collateral (property), not pursue personal assets.

Origination Fee: A fee charged by a lender for processing a new loan, usually expressed as a percentage of the loan.

Permitting: The process of obtaining legal approval for construction or renovation work.
Personal Guarantee: A borrower’s promise to personally repay a loan if the entity borrowing defaults.
Prepayment Penalty: A fee charged if a borrower pays off a loan early.
Punch List: A list of minor issues or unfinished items to be completed before final project approval.

Rehab Loan: A loan used to purchase and renovate a property.
Recourse: A loan that allows the lender to pursue a borrower’s personal assets in the event of default.
Refinancing: Replacing an existing loan with a new one, often with better terms.
Reserves: Funds held for future expenses, such as taxes, insurance, or repairs.
Retainage: A portion of the contract amount withheld until the project is fully completed.
RUCA (Rural-Urban Commuting Area Codes): A classification system used to determine a property’s rural or urban status.

Schedule of Values (SOV): A document listing the work items and their assigned values in a construction budget.
Settlement Statement: A detailed breakdown of all costs and credits in a real estate transaction.
Soft Costs: Indirect construction expenses such as permits, design, and legal fees.

Term Sheet: A summary of key terms and conditions for a proposed loan.
Title Insurance: Insurance that protects against defects or issues with property ownership or title.

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