If you work in private lending or hard money financing, the terminology you use directly affects how you structure deals, manage risk, and stay compliant. This glossary defines 15 core terms every private lender and note servicer should understand before the first dollar changes hands.

Hard Money Loan

A hard money loan is a short-term, asset-backed loan funded by a private lender rather than a bank or institutional lender. Approval is based primarily on the value of the collateral property, not the borrower’s creditworthiness. These loans carry higher interest rates and shorter repayment windows than conventional financing, typically ranging from six months to three years. They are most common in fix-and-flip projects, land acquisition, and time-sensitive commercial transactions where speed matters more than cost.

Private Lender

A private lender is any non-institutional individual or entity that provides mortgage financing outside the regulated banking system. Private lenders include individual investors, family offices, and private lending funds. They operate under fewer regulatory constraints than banks, which allows faster underwriting and more flexible loan terms. That flexibility comes with increased responsibility: private lenders must manage their own compliance obligations, servicing processes, and default procedures, or engage a qualified servicer to handle those functions on their behalf.

Loan Servicing

Loan servicing encompasses every administrative function that occurs after a loan closes: collecting payments, maintaining payment histories, managing escrow accounts where applicable, issuing statements, handling borrower communications, and processing payoffs. For private mortgage notes, professional servicing creates the paper trail that protects lenders in the event of default or litigation. Servicers also handle the operational side of workout agreements and, when necessary, coordinate the early stages of default resolution. Compliant servicing depends on consistent record-keeping practices that support every stage of the note’s life cycle.

Promissory Note

A promissory note is the borrower’s written, legally binding promise to repay a specific principal amount under defined terms, including interest rate, payment schedule, and maturity date. In private mortgage lending, the promissory note is the debt instrument itself, separate from the security instrument. If a borrower defaults, the note establishes what is owed. The deed of trust or mortgage establishes what property secures that debt. Both documents together form the foundation of a properly structured private mortgage loan.

Deed of Trust / Mortgage

A deed of trust or mortgage is the security instrument that pledges real property as collateral for the promissory note. A deed of trust involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) who holds legal title until the loan is repaid or until the trustee is directed to initiate foreclosure. A mortgage involves two parties and must go through a judicial foreclosure process in most states. Private lenders should understand which instrument governs in their state, as it directly determines foreclosure timelines and procedures.

Loan-to-Value (LTV)

Loan-to-value ratio compares the loan amount to the appraised or market value of the collateral property. A loan of $200,000 on a property valued at $250,000 produces an LTV of 80%. Private lenders typically require lower LTV thresholds than conventional lenders, often targeting 65% or below, to maintain a meaningful equity cushion in the event of default. LTV is the primary risk metric in hard money underwriting because it determines how much recovery is available if a foreclosure becomes necessary.

Expert Take

Raw LTV numbers tell an incomplete story without local market context. A 65% LTV on a property in a stable, liquid market offers genuine downside protection. That same ratio on a rural property with limited comparable sales, a shrinking buyer pool, or a softening price trend may leave a lender exposed. Liquidity, days on market, and directional price movement in the immediate submarket all affect what LTV actually means in practice. Lenders who underwrite to a number without assessing what that number represents in the specific market tend to discover the gap only after a default forces a sale.

Default

A default occurs when a borrower fails to meet one or more material obligations under the promissory note or loan agreement. The most common trigger is missed payments, but defaults can also arise from failure to maintain insurance, unpaid property taxes, or unauthorized transfer of the collateral property. When a default occurs, the loan servicer typically initiates a cure notice under the terms of the agreement before any formal enforcement action begins. Early identification of default risk is critical – review the early warning signs that often precede a formal default event.

Foreclosure

Foreclosure is the legal process through which a lender enforces its rights under the security instrument to recover the collateral property when a borrower defaults on the loan. The process varies significantly by state, with some states requiring full judicial proceedings and others permitting a non-judicial trustee’s sale process. Timelines, notice requirements, and redemption rights differ across jurisdictions, which makes local legal counsel essential. Private lenders unfamiliar with state-specific procedures should review real examples of default servicing and foreclosure administration before a default event forces the question.

Workout Agreement

A workout agreement is a negotiated modification of the original loan terms designed to help a borrower resolve a default or avoid one. Common workout structures include temporary payment deferrals, loan extensions, interest rate reductions, and forbearance agreements. For private lenders, a well-documented workout can preserve the relationship, avoid the cost and delay of foreclosure, and keep a performing loan on the books. However, workout agreements carry their own risks if structured without clear exit conditions or if the borrower’s financial picture makes recovery unlikely. Review the red flags to watch for during loan workouts before entering any modification discussion.

Origination Fee

An origination fee is a charge paid to the lender at loan closing in exchange for underwriting and funding the loan. In private and hard money lending, origination fees are commonly expressed as points, where one point equals one percent of the loan amount. Origination fees compensate lenders for the risk, capital deployment, and operational work involved in funding a private mortgage loan. Disclosure and compliance requirements around origination fees vary by state and loan type, making accurate documentation and settlement statement presentation a servicing priority from the start.

Exit Strategy

An exit strategy is the borrower’s defined plan for repaying the loan at or before maturity. In hard money and bridge lending, where loans are intentionally short-term, exit strategy is a primary underwriting consideration. Common exit paths include selling the property, refinancing into conventional or long-term financing, or completing a renovation that increases value enough to support a cash-out refinance. A borrower without a credible exit strategy is a borrower likely to request an extension or default at maturity. Private lenders should evaluate the feasibility of the exit before funding, not after the maturity date arrives.

Underwriting

Underwriting is the process of evaluating the risk of making a specific loan. In private mortgage lending, underwriting focuses primarily on the collateral: its value, condition, location, and market liquidity. Secondary factors include the borrower’s experience, financial capacity, and the credibility of the stated exit strategy. Because private lenders are not required to follow agency guidelines, underwriting standards vary widely across the market. Consistent, documented underwriting criteria protect lenders from both credit losses and regulatory scrutiny. A review of common underwriting red flags can sharpen evaluation before commitment.

Bridge Loan

A bridge loan is a short-term loan intended to provide interim financing until a borrower can secure permanent financing or complete a transaction. Bridge loans are typically secured by real property and share many structural characteristics with hard money loans, including asset-based underwriting, elevated interest rates, and short terms. They are most often used in acquisition scenarios where speed is essential, where a property does not yet qualify for conventional financing, or where the borrower needs time to stabilize income or complete improvements before refinancing into long-term debt.

Non-Performing Loan (NPL)

A non-performing loan is a note on which the borrower has stopped making required payments, typically defined as 90 or more days past due. In the private mortgage market, non-performing notes are bought and sold as a distinct asset class, often at a discount to unpaid principal balance. For active lenders, the primary focus is preventing loans from reaching non-performing status through early intervention and structured workout options. Once a loan becomes non-performing, recovery options narrow and costs increase. Understanding the most common default servicing mistakes can reduce how frequently loans reach this stage.

Subordination Agreement

A subordination agreement is a legal document in which a lienholder with a senior position agrees to allow a junior lienholder to take priority. This arrangement is most common when a property owner refinances a first mortgage and the existing second lienholder must subordinate to the new first lien to allow the refinance to proceed. In private lending, subordination agreements also arise when multiple loans are secured by the same property. Lenders accepting a junior lien position should understand how subordination affects their recovery options in a foreclosure scenario. Private lenders can review the full scope of lien priority mistakes that create exposure in multi-lien structures.

Note Servicing Center provides professional loan servicing for private mortgage notes, supporting lenders at every stage of the loan life cycle from payment processing and record-keeping through default resolution and payoff. Visit noteservicingcenter.com to learn how institutional-grade servicing protects your portfolio and simplifies your operations.