REAL ESTATE GLOSSARY – REAL ESTATE TERMS DEFINED (Condensed Version)

  • Every industry has its own jargon, and real estate is no different.

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  • Adjustable-Rate Mortgage (ARM):  A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes.
    • Comment:  If you’re looking to save money, adjustable rate mortgages can make financial sense if you’re planning to sell or refinance your home before the introductory period ends.
  • Amortization:  The loan payment consists of a portion which will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time.
  • Annual Percentage Rate (APR):  This is not the note rate on your loan. It is a value created according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. It works sort of like this, but not exactly, so only use this as a guideline: deduct the closing costs from your loan amount, then using your actual loan payment, calculate what the interest rate would be on this amount instead of your actual loan amount. You will come up with a number close to the APR. Because you are using the same payment on a smaller amount, the APR is always higher than the actual note rate on your loan.
  • Application:  The form used to apply for a mortgage loan, containing information about a borrower’s income, savings, assets, debts, and more.
  • Appraisal:  A written justification of the price paid for a property, primarily based on an analysis of comparable sales of similar homes nearby.
  • Appraised Value:  An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property. Since an appraisal is based primarily on comparable sales, and the most recent sale is the one on the property in question, the appraisal usually comes out at the purchase price.
  • Appraiser:  An individual qualified by education, training, and experience to estimate the value of real property and personal property. Although some appraisers work directly for mortgage lenders, most are independent.
  • Assessed Value:  The valuation placed on property by a public tax assessor for purposes of taxation.
  • Buyer’s Agent:  This is the agent who represents the buyer in the home-buying process. On the other side is the listing agent, who represents the seller.
  • Cash ReservesRefers to any liquid assets you have remaining after paying your down payment and closing costs. Your liquid assets include any funds that can be quickly turned into cash, if needed.  Cash reserves are typically expressed in how many months worth of mortgage payments that can be made using those funds. Each mortgage payment includes the principal loan amount, interest, association fees (if applicable), property taxes, homeowner’s insurance, and mortgage insurance (if applicable).
    • Comment:  The amount of cash reserves that you need to have in the bank varies depending on the type of property you’re buying and the loan program you’re using. You’ll also want to be sure to also ask your lender about their specific requirements. However, you use the following to give you a general idea of how much you need to save.  FHA Loan: 3 months; Conventional: 0-6 month; and VA and USDA: No requirement.
  • Closing Costs:  Closing costs are separated into what are called “non-recurring closing costs” and “pre-paid items.” Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. “Pre-paids” are items which recur over time, such as property taxes and homeowners’ insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which they must issue to the borrower within three days of receiving a home loan application.  
  • Comment:  Be prepared to pay additional fees when you purchase a home. As a rule of thumb, closing costs to buy a home run about 2 to 4 percent of the purchase price, with the average around 3% of the sales price.  Typically, closing costs will amount to 2-5% of the purchase price of the home, and that doesn’t include the down payment. Common fees include excise tax, loan-processing costs and title insurance.  Also, depending on the lender, a specific amount of cash reserves may be required.
  • CommissionMost salespeople earn commissions for the work that they do and there are many sales professionals involved in each transaction, including Realtors, loan officers, title representatives, attorneys, escrow representative, and representatives for pest companies, home warranty companies, home inspection companies, insurance agents, and more. The commissions are paid out of the charges paid by the seller or buyer in the purchase transaction.
  • Common Area AssessmentsIn some areas they are called Homeowners Association Fees. They are charges paid to the Homeowners Association by the owners of the individual units in a condominium or planned unit development (PUD) and are generally used to maintain the property and common areas.
  • CondominiumA type of ownership in real property where all of the owners own the property, common areas and buildings together, with the exception of the interior of the unit to which they have title. Often mistakenly referred to as a type of construction or development, it actually refers to the type of ownership.
  • Comparative Market Analysis (CMA)A market analysis is a report on comparable homes in the area that is used to derive an accurate value for the home in question.  It examines the prices at which similar properties in the same area recently sold. Real estate agents perform a CMA for their clients to help them determine a price to list when selling a home or a price to offer when buying a home.
  • ContingenciesRefers to conditions that have to be met in order for the purchase of a home to be finalized. For example, there may be contingencies that the loan must be approved or the appraised value must be near the final sale price.
  • Conventional Mortgage:  Refers to home loans other than government loans (VA and FHA).
    • Comment:Conventional loans include “fixed rate” and “adjustable rate” mortgages. A fixed rate mortgage has a predetermined interest rate throughout the life of the loan; the most common are for 30 years. An adjustable rate mortgage has a variable interest rate; the most common are for 5, 7, or 10 years. If you’re looking to save money, an adjustable rate mortgages can make financial sense if you’re planning to sell or refinance your home before the introductory period ends; but if you’re planning to own your home longer than five years, it’s less risky to choose a fixed rate loan.
  • Deed of Trust:  Some states, like California, do not record mortgages. Instead, they record a deed of trust which is essentially the same thing.
  • Equity: A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.
  • Escrow: An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the earnest money deposit is put into escrow until delivered to the seller when the transaction is closed.
  • Escrow Account: Once you close your purchase transaction, you may have an escrow account or impound account with your lender. This means the amount you pay each month includes an amount above what would be required if you were only paying your principal and interest. The extra money is held in your impound account (escrow account) for the payment of items like property taxes and homeowner’s insurance when they come due. The lender pays them with your money instead of you paying them yourself.
  • Fixed-Rate Mortgage: A mortgage in which the interest rate does not change during the entire term of the loan.
    • Comment: If you’re planning to own your home longer than five years, it’s less risky to choose a fixed rate loan.
  • Home InspectionIt is a limited, non-invasive examination of the condition of a home, most often in connection with the sale of that home.  A home inspector is sometimes confused with a real estate appraiser. A home inspector determines the condition of a structure, whereas an appraiser determines the value of a property. A thorough inspection by a professional that evaluates the structural and mechanical condition of a property, which is typically provided by the seller and disclosed to the buyer. A satisfactory home inspection is of included as a contingency by the purchaser.
  • Home Owners Association (HOA)A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements.
  • Homeowner’s WarrantyA type of insurance often purchased by home buyers (for future problems to things such as plumbing and heating, which can be extremely expensive to fix) that will cover repairs to certain item, should they break down within the coverage period. The buyer often requests the seller to pay for this coverage as a condition of the sale, but either party can pay.
  • InterestThis is the cost of borrowing money for a home. Interest is combined with principal to determine monthly mortgage payments. The longer a mortgage is, the more you will pay in.
  • Mortgage BankerFor a more complete discussion of mortgage banker, see “Types of Lenders.” A mortgage banker is generally assumed to originate and fund their own loans, which are then sold on the secondary market, usually to Fannie Mae, Freddie Mac, or Ginnie Mae.  However, firms rather loosely apply this term to themselves, whether they are true mortgage bankers or simply mortgage brokers or correspondents.
  • Mortgage BrokerA mortgage company that originates loans, then places those loans with a variety of other lending institutions with whom they usually have pre-established relationships.
  • OfferThis is the initial price offered by a prospective buyer to the seller. A seller may accept the offer, reject it, or counter with a different offer.
  • Planned Unit Development (PUD):  A type of ownership where individuals actually own the building or unit they live in, but common areas are owned jointly with the other members of the development or association. Contrast with condominium, where an individual actually owns the airspace of his unit, but the buildings and common areas are owned jointly with the others in the development or association.
  • PointRefers to the origination fee charged by the lender, with each point being equal to 1% of the amount of the loan. It can also refer to each percentage difference between a mortgage’s interest rate and the prime interest rate.
  • Pre-ApprovalA loosely used term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. A pre-approval is usually done at a certain loan amount and making assumptions about what the interest rate will actually be at the time the loan is actually made, as well as estimates for the amount that will be paid for property taxes, insurance and others. A pre-approval applies only to the borrower. Once a property is chosen, it must also meet the underwriting guidelines of the lender. Contrast with pre-qualification.
  • Principal, Interest, Taxes, and Insurance (PITI)The four components of a monthly mortgage payment on impounded loans. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance.
  • Private Mortgage Insurance (PMI)Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
  • Title CompanyA company that specializes in examining and insuring titles to real estate.
  • Title InsuranceInsurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of a property.
Posted on February 11, 2020 at 2:57 am
Kathy Absher | Category: Glossary of Real Estate Terminology | Tagged

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