Intermediate terms

Lender-Ready Investor: Financial Terms Guide

Explore key financial terms essential for real estate investors preparing for lending. This curated guide clarifies concepts you'll encounter when organizing your finances and assessing investment capacity. A helpful reference for understanding lender readiness.

Learning Path

Financial Planning

Financial planning is the comprehensive process of managing your money to achieve personal and investment goals, involving budgeting, saving, investing, and risk management.

Beginner5-6 min

Underwriting

Underwriting is the process by which lenders assess the risk of lending money for a real estate transaction, evaluating the borrower's creditworthiness and capacity to repay, as well as the property's value and marketability.

Intermediate15-18 min

Personal Cash Flow

The total amount of money an individual or household has left after all income and expenses are accounted for over a specific period, indicating financial health and capacity for savings or investment.

Beginner5 min

Asset Verification

Asset verification is the process lenders use to confirm a borrower's financial resources, ensuring they have sufficient funds for a down payment, closing costs, and reserves for a real estate purchase.

Beginner3 min

Loan-to-Value Ratio

The Loan-to-Value (LTV) ratio is a financial metric used by lenders to assess the risk of a mortgage loan, calculated by dividing the loan amount by the property's appraised value, expressed as a percentage.

Intermediate14-15 min

Net Worth

Net worth is a measure of your financial health, calculated by subtracting your total liabilities (what you owe) from your total assets (what you own). It provides a snapshot of your financial standing at a specific point in time.

Beginner4-5 min

Lender

A lender is an individual or financial institution that provides funds to a borrower for real estate acquisition or development, expecting repayment with interest. They are crucial for leveraging capital in real estate investment.

Intermediate13-14 min

Tax Returns

Tax returns are official documents filed with tax authorities, such as the IRS, reporting an individual's or entity's income, expenses, and other financial information to determine tax liability, serving as a critical financial record for real estate investors.

Intermediate4-6 min

Financial Reserves

Financial reserves are liquid funds specifically set aside by real estate investors to cover unexpected property expenses, vacancies, and capital expenditures, ensuring the stability and resilience of their investment portfolio.

Intermediate2-3 min

Debt Capacity

Debt capacity is the maximum amount of debt an individual or entity can prudently take on while maintaining financial stability and meeting repayment obligations. For real estate investors, it's a critical metric for assessing borrowing limits, managing risk, and planning portfolio expansion.

Intermediate5-6 min

Mortgage Pre-approval

Mortgage pre-approval is a formal assessment by a lender of how much money you can borrow for a mortgage, based on your verified financial information, providing a strong advantage when making an offer on a property.

Beginner15-18 min

Investment Capacity

Investment capacity is an investor's total ability to acquire and manage new real estate assets, considering financial resources, debt access, risk tolerance, and operational capabilities. It dictates the scale and pace of portfolio expansion.

Intermediate5 min

Down Payment

A down payment is an initial upfront payment made when purchasing a property, representing a portion of the total purchase price and reducing the amount of money borrowed through a mortgage.

Intermediate15-18 min

Liabilities

Liabilities are financial obligations or debts that an individual or business owes to others, representing money that must be paid back in the future.

Beginner2 min

Funding

The process of providing capital for a real estate investment or project, typically involving a mix of debt and equity to acquire, develop, or refinance properties.

Intermediate3 min

Liquidity

Liquidity in real estate refers to the ease and speed with which a property can be converted into cash at its fair market value. Real estate is typically considered an illiquid asset due to the time and costs involved in selling.

Intermediate5-6 min

Affordability Analysis

A critical financial assessment for real estate investors to determine if a property's costs, including mortgage, taxes, insurance, and operating expenses, are sustainable relative to their income and other financial obligations, ensuring positive cash flow and mitigating risk.

Intermediate6 min

Personal Financial Statement

A Personal Financial Statement (PFS) is a document that summarizes an individual's financial position at a specific point in time, detailing assets, liabilities, and net worth. It is a critical tool for real estate investors seeking financing or evaluating their financial health.

Intermediate5 min

Credit Report

A credit report is a detailed record of an individual's credit history, including borrowing and repayment activities, used by lenders to assess creditworthiness.

Beginner14-15 min

Debt Service Coverage Ratio

The Debt Service Coverage Ratio (DSCR) is a financial metric used in commercial real estate lending to assess a property's ability to generate sufficient Net Operating Income (NOI) to cover its annual mortgage debt payments.

Advanced15-18 min