Real Estate Terms you should know
Remembering all the terms and acronyms in real estate can be tricky. Save this page to your phone and remember to bring it up when someone asks you about CMA, DTI or even FICO
Real Estate Terms you should know
Remembering all the terms and acronyms in real estate can be tricky. Save this page to your phone and remember to bring it up when someone asks you about CMA, DTI or even FICO.
An adjustable-rate mortgage, or ARM, has an introductory interest rate that lasts a set period of time and adjusts every six months thereafter for the remaining loan term. After the set time period your interest rate will change and so will your monthly payment
Affordability or home affordability refers to the amount of money you can comfortably afford to spend on a home. Experts say a home is considered affordable if the mortgage consumes no more than 30% of a household’s income. Home affordability assessments primarily take into account your income, down payment, and monthly debts.
Repayment of a mortgage over the loan term through regular monthly installments of principal and interest, based on an amortization schedule. If you have made your required monthly payments, at the end of the loan term (e.g., 15 or 30 year mortgage), you will own your home.
One of two debt-to-income ratios that a lender analyzes to determine a borrower’s eligibility for a home loan. The ratio compares the borrower’s monthly debt payments to gross income.
A backup offer is one made on a home where the seller has already accepted an offer. The backup puts the buyer in line to buy the home if the accepted offer falls through.
A buyer whose purchase agreement includes a contingency that allows the seller to continue to market the home to other prospective buyers. For instance, a buyer may agree to buy the home only if they can sell their own home first. That buyer can be bumped if a better offer comes along.
The fee or commission paid to a buyer’s agent or brokerage for finding and managing a home purchase for a buyer. Typically represented as a percentage of the sales price, the fee is paid by the seller at closing.
A concrete point at which buying a home makes more financial sense than renting one.
Market conditions that exist when homes for sale outnumber buyers. Homes can sit on the market for a long time, and prices tend to drop.
A homeowners insurance policy that pays the replacement cost of a home, minus depreciation, should damage occur.
Fees associated with the purchase of a home that are due at the end of the sales transaction. Fees may include the appraisal, the home inspection, a title search, a pest inspection and more. Buyers should budget for an amount that is 2% to 5% of the home’s purchase price.
This is a statement a borrower will receive from their lender at least three days before closing on a home. The line items should look similar to what a borrower sees on their loan estimate when first applying — there are limits to how much any fees can change in the time period between application and closing day, so borrowers should review their closing disclosure closely and ask their lender about any changes.
An in-depth analysis, prepared by a real estate agent, that determines the estimated value of a home based on recently sold homes of similar condition, size, features and age that are located in the same area.
Or comparable sales, are homes in a given area that have sold within the past several months that a real estate agent uses to determine a home’s value.
Conditions written into a home purchase contract that protect the buyer should issues arise with financing, the home inspection, or something out.
A home loan not guaranteed by a government agency, such as the FHA or the VA.
The number of days a property listing is considered active.
A deed is the legal document that establishes ownership of real property, and is also used to transfer the ownership of real property to another person or entity.
A ratio that compares a home buyer’s expenses to gross income.
Banks, savings and loans, and credit unions. These institutions underwrite as well as set home loan pricing in-house.
The portion of a home’s purchase price that a buyer must pay upfront. A minimum requirement is often dictated by the loan type.
An in depth investigation of a property that helps ensure you know as much about a property as you can before buying it. Due diligence officially starts once an offer has been accepted, and typically involves a home inspection, review of property records to ensure improvements received the necessary permits, etc. within a period of time agreed to by the buyer and seller. Buyers can renegotiate their offer if they uncover problems, or they can cancel the offer without paying a penalty.
A security deposit made by the buyer to assure the seller of his or her intent to purchase.
A percentage of the home’s value owned by the homeowner.
A clause or addendum to a real estate contract or offer that states a buyer is willing to raise his or her offer price to a predetermined amount if the seller receives a higher competing offer for the property.
A federal law that makes discrimination based on a person’s race, color, religion, sex (including gender identity and sexual orientation), national origin, disability, or familial status illegal within the housing context, including buying a home or getting a mortgage.
A government-sponsored enterprise chartered in 1938 to help ensure a reliable and affordable supply of mortgage funds throughout the country.
A government agency created by the National Housing Act of 1934 that insures loans made by private lenders. The Federal Housing Administration is part of the U.S. Department of Housing and Urban Development.
Loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA). FHA loans are different from conventional loans because they can be approved for borrowers with lower credit scores and may allow for down payments as low as 3.5% of the total loan amount. Maximum loan amounts can vary by county.
A FICO score is a measure of creditworthiness that lenders use to determine whether they will lend you money to buy a home. The score, reported as a single number, is based on data compiled by the three major credit reporting bureaus (Experian, Equifax and TransUnion). Scores range from 300-850.
A mortgage with principal and interest payments that remain the same throughout the life of the loan because the interest rate does not change.
Forbearance is an agreement with a lender that allows a homeowner to catch up on payments if they fall behind on their mortgage. The agreement allows the borrower to catch up either by the lender reducing the amount owed or suspending loan payments for a certain period.
A property repossessed by a bank when the owner fails to make mortgage payments.
A government agency chartered by Congress in 1970 to provide a constant source of mortgage funding for the nation’s housing markets.
A visual evaluation performed by a licensed home inspector to look for any potential defects or items of note related to the property, building(s), and the systems in a home. Inspection occurs when the home is under contract or in escrow.
A policy that protects the structure of the home, its contents, injury to others and living expenses should damage occur
One of two debt-to-income ratios that a lender analyzes to determine a borrower’s eligibility for a home loan. The ratio compares total housing cost (principal, homeowners insurance, taxes and private mortgage insurance) to gross income.
A period of time (typically 30 days or more) after a buyer has made an offer on a home and a seller has accepted. During this time, the home is inspected and appraised, and the title searched for liens, etc.
A jumbo loan is a mortgage that exceeds the conforming loan limits for a given area as set by two federally backed home mortgage companies. In 2023, a jumbo loan for most of the United State is one over the conforming limit of $726,000. Areas with especially high home prices have higher limits.
A lien is any legal claim upon a property for a debt or a non-monetary interest in the property. A lien is a security interest that can give a creditor the right to take possession of a property secured by a loan, such as a mortgage, when the borrower defaults on the loan obligations. Most lenders will require title insurance to protect their interests should there be outstanding liens on the property securing their security interest.
The price of a home, as set by the seller.
A three-page document sent to an applicant three days after they apply for a home loan. The document includes loan terms, monthly payment and closing costs. A loan estimate can help borrowers shop and compare costs of loans with lenders. You are not obligated to accept the loan just because you received a loan estimate. Smart mortgage shoppers apply for at least two loans and use the loan estimates to determine which lender they want to use.
The amount of the loan divided by the price of the house. Lenders reward lower LTV ratios.
A licensed professional who works on behalf of the buyer to secure financing through a bank or other lending institution.
An account required by a lender and funded by a buyer’s mortgage payment to pay the buyer’s homeowners insurance and property taxes. A portion of your monthly payment goes into the escrow account to cover taxes and insurance. If your mortgage doesn’t have an escrow account, you may pay the property-related expenses directly.
A mortgage insurance premium (MIP), is a monthly mortgage insurance premium paid by a borrower for a mortgage insurance policy with an FHA loan. Mortgage insurance protects the lender if the borrower defaults on the mortgage loan. Unlike private mortgage insurance (PMI), MIP is managed internally by the government and lasts for the life of the loan — meaning it won’t roll off when you reach a certain LTV ratio like it does when you have PMI.
When you buy mortgage points, you pre-pay the interest rate by making an upfront payment to the lender at closing in exchange for a lower interest rate. Pre-paying interest is also known as buying down your interest rate. The points or prepaid interest is usually paid during closing.
A database where real estate agents list properties for sale.
A fee, charged by a broker or lender, to underwrite and process a home loan application. An origination fee is not a single fee. It’s a set of lender-specific fees that are part of your costs when closing a mortgage loan.
Pending means the seller has accepted an offer, a purchase contract has been signed, and contingencies between the buyer and seller have been addressed.
A combination of loans bundled to avoid private mortgage insurance. One loan covers 80% of the home’s value, another loan covers 10% to 15% of the home’s value, and the buyer contributes the remainder.
Prepaid interest owed at closing, with one point representing 1% of the loan. Paying points, which are tax deductible, will lower the monthly mortgage payment.
A thorough assessment of a borrower’s income, assets and other data to determine a loan amount they would qualify for. A real estate agent will request a pre-approval or pre-qualification letter before showing a buyer a home.
A basic assessment of income, assets and credit score to determine what, if any, loan programs a borrower might qualify for. A real estate agent will request a pre-approval or pre-qualification letter before showing a buyer a home.
A prepayment penalty is a fee some lenders may charge if you pay off some or all of your mortgage early. Not all mortgages carry a prepayment penalty. Be sure to read the fine print carefully.
Prime rate is the interest rate charged by a lender to customers who are the least likely to default on their loans. The most credit-worthy customers (mainly large corporations), receive the best or lowest rate that the lender would offer any of its customers. Each lending institution sets its own prime rate. Typically, most consumers’ mortgage interest rate is going to be higher than the prime rate.
A fee charged to borrowers who make a down payment that is less than 20% of the home’s value. The fee, 0.3% to 1.5% of the yearly loan amount, can be canceled in certain circumstances when the borrower reaches 20% equity.
A reduction in taxes based on specific criteria, such as installation of a renewable energy system or rehabilitation of a historic home.
Market conditions that exist when buyers outnumber homes for sale. Bidding wars are common. Prices are often higher than average.
The sale of a home by an owner who owes more on the home than it’s worth. The owner’s bank must approve a lower listing price before the home can be sold.
The value assigned to a home by a local government to determine the amount of property taxes a homeowner owes. The assessment, which is usually made once a year, differs from an appraisal, which estimates the value of a home, based on market conditions when it’s listed for sale.
The government’s legal claim against property when the homeowner neglects or fails to pay a tax debt.
Insurance that protects the buyer and lender should an individual or entity step forward with a claim that was attached to the property before the seller transferred legal ownership of the property or “title” to the buyer.
Fees imposed by the state, county or municipality on transfer of title.
A period of time (typically 30 days or more) after a buyer has made an offer on a home and a seller has accepted. During this time, the home is inspected and appraised, and the title is searched for liens, etc.
When a homeowner owes more on their mortgage than their home is worth.
A process a lender follows to assess a home loan applicant’s income, assets and credit, and the risk involved in offering the applicant a mortgage.
A 2-1 buydown is a concession or incentive negotiated with a seller or builder that temporarily reduces a buyer’s mortgage interest rate by 2 percentage points the first year and 1 percentage point the second year of your mortgage. In the third year, the interest rate goes back to the fixed rate obtained from the lender.