GLOSSARY OF REAL ESTATE TERMS
Agent
An individual who represents a seller, a buyer or both, in the purchase or sale of real estate.
Amortization
The schedule of loan payments that establishes the amount of payment to be applied to the principal and the amount to be applied to interest, usually on a monthly basis, for the full term of the loan.
Annual Percentage Rate (APR)
The TOTAL interest rate of a mortgage, including the stated loan interest as well as any upfront interest paid in securing the loan. The APR will invariably differ from the mortgage rate quoted due to the inclusion of these items.
Appraisal
An estimate of value of a Real Estate property by a professional third party. Virtually all non-owner financed mortgages will require an appraisal and is generally paid for by the buyer.
Adjustable Rate Mortgage (ARM)
A mortgage in which the Interest rate is adjustable, meaning that the rate can go up or down according to prevailing financial market conditions.
Assessment
The value of a property as determined by the local tax jurisdiction which is used to determine the amount of your property taxes.
Buyer's Agent
A Real Estate Agent that has made an agreement to represent the buyer exclusively, rather than the seller.
Comparable Market Analysis (CMA)
A comparison of the prices of similar houses in the same general geographic area. A CMA is used to help determine the value of a property, either for the seller or the buyer.
Closing
The process that effects the final transfer of the deed from the seller to the buyer, as well as finalize all aspects of the mortgage of the property.
Closing Costs
Funds needed at the time of closing (separate from and in addition to the down payment). Loan origination fees, discount points, Attorney fees, recording fees and pre-paids are some items that may be included.
They often will total from 3% to 5% of the price of the home, payable in cash.
Contingencies
These are conditions - or "safety valves" written into Real Estate offers and contracts to prevent a buyer from being forced to buy a house that is unsatisfactory - either structurally or financially. Examples of contingencies are "This contract is subject to the buyer obtaining a satisfactory whole house inspection." or "Subject to the buyer being able to obtain a mortgage."
Condominium
Housing where the owner owns only the unit in which they live - from the interior walls inward, generally - as well as a portion of the common area.
Debt to Income Ratio
The ratio of a borrower's total debt as a percentage of their total gross income.
Deed
The document that, when recorded with your local government, determines ownership of a property. Transferred from seller to buyer at closing.
Earnest Money
M oney that is submitted with an offer to purchase which indicates a buyer's seriousness and good faith. In virtually all cases, earnest money will need to be submitted at the time of the offer and remains in escrow until the time of closing, at which time it becomes part of the down payment.
Equity
The difference between the value of a property and the total of any outstanding mortgages or loans against it.
Escrow
Funds held in reserve both prior to closing (for example the earnest money and deposit) by a third party and after closing by the mortgage company to pay future taxes and homeowners insurance. In some areas, "escrow" also refers to the closing process.
Fixed Rate Mortgage
A mortgage loan where the interest rate is established at its origination and continues unchanged through the life of the loan.
FSBO (For Sale By Owner)
Real Estate that is sold without the assistance of an Agent. FSBO can refer to both the individual selling the property "They are a FSBO," or the property itself "that house is a FSBO."
Foreclosure
The process through which a lender takes back property from a defaulting owner and re-sells it.
Homeowner's Association
An owners group, whether in a condominium, townhouse or single family subdivision that establishes general guidelines for the operation of the community, as well as its standards.
Inspection
A whole house inspection of a home being considered for purchase, which looks for defects in the property.
Interest
That portion of a mortgage payment that is the "charge" for using the lender's funds.
Lien
A legal claim against a piece of property that can prevent it from being sold unless the lien is satisfied (paid off). Liens can be filed by unpaid contractors, or other debtors, in a legal process so they will be paid when a property is sold.
Listing
A property for sale by a Real Estate Brokerage and Agent.
Loan Origination Fee
A charge imposed by the lender, payable at closing, for processing the loan.
Lock-in
An agreement by the lender at the time of mortgage application or shortly thereafter, to write the mortgage at a specific interest rate, whether rates rise or fall up to the date of closing. Obviously a good move if rates are rising, not so good if they are falling. Lock-ins have specific expiration dates, such as 30, 60 or 90 days in the future.
LTV (Loan to Value)
The ratio of the amount of the mortgage as a percentage of the value of the property.
MLS (Multiple Listing Service)
A listing (almost always computerized) of all the properties for sale by Real Estate Brokerages in a given geographical area.
PMI (Private Mortgage Insurance)
Required on virtually all conventional loans with less than 20% down payment. Although the payments for PMI are included in your mortgage payment, it protects the lender should you default on the loan. On FHA loans, you will pay a MIP (Mortgage Insurance Premium) which accomplishes the same purpose.
Points
1 point is equal to 1% of the loan value, paid at closing. Points can be loan origination fees or "discount points"
which reduce the interest rate of the loan (you are actually paying a finance charge up front). When a lender, for example, quotes a rate of 8 1/2% with 1 + 1 points, 1 point is for the origination fee and 1 point is for the discount fee.
Prequalification
The first stage of a mortgage application where the lender will run a basic credit report and determine your debt to income ratio in order to see how much mortgage you qualify for.
Pre-paids
Paid for (in cash) at closing for such items as homeowners insurance for one year and real estate taxes for several months.
Principal
The amount borrowed for a mortgage loan. Your monthly mortgage payment will be applied to both the interest and the principal (be assured, though, that the lions share will go to the interest portion in the first years of the loan).
Property Tax
An annual or semi-annual tax paid to one or more governmental jurisdictions based on the amount of the property assessment. Generally paid as part of the mortgage payment.
Recording
The act of entering deed and/or mortgage information into public record with your local government jurisdiction.
Sub-Agent
A Real Estate Agent who is working with a buyer but who represents the seller in the transaction.
Title Insurance
Protects your title - your ownership rights - from claims against it. Paid at closing, title insurance may be the responsibility of the buyer, the seller, or both, depending on what is traditional in your locality.
Warranty
Covers either most of the house in a new home, or selected items (for example the heating and air conditioning system or the water heater) in a used home. Warranties can vary widely and are optional in used homes (paid for by either the buyer or the seller).
Zoning
Laws that govern specifically how a zoned area can be used. For example, an area may be zoned for single family residential, condominiums, commercial commercial or retail, or a mix of two or more uses.
I have covered the major terms you should be aware of. If there are any others you would like to discuss, please just let me know .
Mortgage Pre-qualification & Pre-approval Can Smooth the House Buying Process
reprinted courtesy of Our Family Place
Why get pre-qualified and then pre-approved for a mortgage before you begin your search for a home? Because there are three people who will benefit from your pre-approval: You, your agent, and the seller from whom you eventually buy a home!
You
The most important beneficiary, of course, is you. One of the most common questions new homebuyers ask goes something along the lines of "Please let us know how much house we can afford." We're stumped! Why? There are simply too many variables--credit history, income, debt, special mortgage programs and variations in qualifying guidelines between different mortgage types--to answer that question. The only sure way of getting the question answered is through pre-qualification. The mortgage pre-qualification step is a relatively simple one, but it is an important one. It begins the process of formally applying for a mortgage, and it gives everyone involved--especially you--a clear sense of the direction they should be headed.
Your Agent
By knowing what your financial parameters are, your Agent can spend more time looking for houses that "fit" and less time pursuing dead ends. No matter how much you might want a 4000 square foot home for $275,000, if your qualifications say $125,000, your qualifications say $125,000. When it comes to mortgages, "yes, but" doesn't carry much weight!
The Seller
Want to strengthen your bargaining position? Get pre-qualified. Want your offer to stand out in a case of multiple offers for the same house? Get pre-qualified. Look at it from the seller's perspective. If you had two offers on the table for your house, one from a fully pre-qualified buyer and the other from an "I'll get around to that soon" buyer - to which offer would you devote the most attention? Even if the pre-qualified buyer's offer was $1000 less, would you take the chance on the buyer that perhaps may not be qualified? When it comes to a seller evaluating offers, "a bird in the hand..." definitely applies.
It is important to remember that the amount of mortgage you will qualify for is the maximum. It is the amount that the lender feels you can afford, but it is not necessarily the amount that you want to pay. It sometimes is advantageous to be conservative here. For example, if you qualify for a $100,000 mortgage and you have $15,000 available in cash for down payment and closing costs, you are qualified to buy homes with a maximum selling price of $115,000. So as to not push yourself to the limit, you may want to look at homes that sell in the $100,000 to $110,000 range. Too many buyers simply rush off to the $115,000 level and some find themselves strapped when it comes time to purchase necessary items (such as draperies, additional furniture and lawn and garden tools, for example) or when they forget to factor in increases in monthly expenses (for example utilities and maintenance and repair costs).
Different Type Mortgages
Understanding Different Types of Loans
Today's homebuyer has more financing options than have ever been available before. From traditional mortgages to adjustable-rate and hybrid loans, there are financing packages designed to meet the needs of virtually anyone. While the different choices may seem overwhelming at first, the overall goal is really quite simple: you want to find a loan that fits both your current financial situation and your future plans. Though this article discusses some of the more common loan types, you should spend time talking with different lenders before deciding on the right loan for your situation.
General categories of loans
Most loans fall into three major categories: fixed-rate, adjustable-rate, and hybrid loans that combine features of both.
Fixed-rate mortgages
As the name implies, a fixed-rate mortgage carries the same interest rate for the life of the loan. Traditionally, fixed-rate mortgages have been the most popular choice among homeowners, because the fixed monthly payment is easy to plan and budget for, and can help protect against inflation. Fixed-rate mortgages are most common in 30-year and 15-year terms, but recently more lenders have begun offering 20-year and 40-year loans.
Adjustable-rate mortgages (ARM)
Adjustable-rate mortgages differ from fixed-rate mortgages in that the interest rate and monthly payment can change over the life of the loan. This is because the interest rate for an ARM is tied to an index (such as Treasury Securities) that may rise or fall over time. In order to protect against dramatic increases in the rate, ARM loans usually have caps that limit the rate from rising above a certain amount between adjustments (i.e. no more than 2 percent a year), as wel l as a ceiling on how much the rate can go up during the life of the loan (i.e. no more than 6 percent). With these protections and low introductory rates, ARM loans have become the most widely accepted alternative to fixed-rate mortgages.
Advantages and Disadvantages of Fixed and ARM Mortgages
Advantages – Fixed
Since you know what your payment will be for the life of the loan, you can budget more easily
No possibility of an interest rate change making your mortgage payment suddenly unaffordable
No anxiety over interest rate fluctuations
Disadvantages – Fixed
More income needed to qualify because of higher initial mortgage rate
If interest rates decrease appreciably, it will be necessary to refinance to get a lower payment
Advantages – ARM
Lower initial interest rate and therefore lower monthly payment
If interest rate declines, your payment will also decline
Easier to qualify for due to lower initial interest rate and payment amount
Disadvantages – ARM
If interest rate increases, your payment will also increase
A large increase in interest rates - and payment - could make your house unaffordable
Terms: 15, 20 or 30 years
You will probably want to shoot for the shortest term that is comfortable (and for which you will qualify).
The interest savings are enormous as the term decreases. Always make a comparison between a 15 year term payment and a 30 year term payment. The difference is often surprisingly smaller than anticipated.
HINT: If you can't qualify for a shorter term try to add at least the amount of 1 additional payment per year - this will knock nearly 10 years off a 30 year loan.
Hybrid loans
Hybrid loans combine features of both fixed-rate and adjustable-rate mortgages. Typically, a hybrid loan may start with a fixed-rate for a certain length of time, and then later convert to an adjustable-rate mortgage. However, be sure to check with your lender and find out how much the rate may increase after the conversion, as some hybrid loans do not have interest rate caps for the first adjustment period. Other hybrid loans may start with a fixed interest rate for several years, and then later change to another (usually higher) fixed interest rate for the remainder of the loan term. Lenders frequently charge a lower introductory interest rate for hybrid loans vs. a traditional fixed-rate mortgage, which makes hybrid loans attractive to homeowners who desire the stability of a fixed-rate, but only short time.
Balloon payments
A balloon payment refers to a loan that has a large, final payment due at the end of the loan. For example, there are currently fixed-rate loans which allow homeowners to make payments based on a 30-year loan, even thought the entire balance of the loan may be due (the balloon payment) after 7 years. As with some hybrid loans, balloon loans may be attractive to homeowners who do not plan to stay in their house more than a short period of time.
Time as a factor in your loan choice
As discussed, the length of time you plan to own a property may have a strong influence on the type of loan you choose. For example, if you plan to stay in a home for 10 years or longer, a traditional fixed-rate mortgage may be your best bet. But if you plan on owning a home for a very short period (5 years or less), then the low introductory rate of an adjustable-rate mortgage may make the most financial sense. In general, ARMs have the lowest introductory interest rates, followed by hybrid loans, and then traditional fixed-rate mortgages.
FHA and VA loans
U.S. government loan programs such as those of the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA) are designed to promote home ownership for people who might not otherwise be able to qualify for a conventional loan. Both FHA and VA loans have lower qualifying ratios than conventional loans, and often require smaller or no down payments. Bear in mind, however, that FHA and VA loans are not issued by the government; rather, the loans are made by private lenders but insured by the U.S. government in case the borrower defaults.
How Much Can you Afford
How Much Can You Afford?
Understanding how much you can afford is one of the most important rules of home buying. Depending on your individual situation, your budget can affect everything from the neighborhoods where you look, to the size of the house, and even what type of financing you choose. Bear in mind, however, that lenders will look at more than just your income to determine the size of the loan. Likewise, you may find that there are some creative financing options that can help boost your purchasing power.
Loan prequalification vs. preapproval
One of the best ways to determine your budget is to have your real estate agent or lender prequalify you for a loan. Prequalification is different from preapproval, because it is only an estimate of what you'll be able to afford. On the other hand, preapproval is a more formal process where a lender examines your finances and agrees in advance to loan you money up to a specified amount. What factors are important to lenders? Banks and lending institutions will use several criteria to determine how much money they'll agree to lend. These include: your gross monthly income, your credit history, the amount of your outstanding debts, your savings--or the amount of money you have available for a down payment and closing costs, your choice of mortgage (i.e. 30-year, FHA, etc.), current interest rates.
Lenders also use your financial information to figure out two, very important ratios: the debt-to-income ratio and the housing expense ratio. Debt-to-income ratio: Many lenders use a rule of thumb that the amount of debt you are paying each month (car payment, student loan, credit card, etc,) shouldn't exceed more than 36 percent of your gross monthly income. FHA loans are slightly more lenient. Housing expense ratio: It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to 33 percent of your gross monthly income. Down payments make a difference. If you can make a large down payment, lenders may be more lenient with their qualifying ratios. For example, a person with a 20 percent down payment may be qualified with the 33 percent housing expense ratio, while someone with a 5 percent down payment
is held to the stricter 28 percent ratio.
Other ways to improve your purchasing power.
Gifts: If you're having trouble saving money, many lenders will allow you to use gift funds for the down payment and closing costs. However, most lenders require a "gift letter" stating the gift doesn't have to be repaid, and will also require you to pay at least a portion of the down payment with your own cash.
Negotiating Closing Costs: Through negotiation, some sellers may agree to pay all or most of your closing costs (for example, if you agree to meet their full asking price). If you choose to try this, make sure to ask your real estate agent for advice.
Loan Programs. Many local governments have special loan programs designed to help first-time homebuyers. Loans may be available at reduced interest rates, or with little or no down payments. Check with your local housing authority for more information.
Loan Types. Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial interest rates. Others opt for 30-year loans because they have lower monthly payments than 15-year loans. There are significant differences between different loans, so make sure to discuss the pros and cons of different loans with your agent or lender before making a decision.
Closing Costs
The bundle of fees associated with the buying or selling of a home are called closing costs. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable or dictated by local custom.
Buyer closing costs
When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees vary according to several factors, including the type of loan they applied for and the terms of the purchase agreement. Likewise, some of the closing costs, especially those associated with the loan application, are actually paid in advance.
Some typical buyer closing costs include: The down payment Loan fees (points, application fee, credit report), Prepaid interest Inspection fees, Appraisal Mortgage insurance, Hazard insurance, Title insurance, Documentary stamps on the note.
Seller closing costs
If the seller has not yet paid for the house in full, the seller's most important closing cost is satisfying the remaining balance of their loan. Before the date of closing, the escrow officer will contact the seller's lender to verify the amount needed to close out the loan. Then, along with any other fees, the original loan will be paid for at the closing before the seller receives any proceeds from the sale.
Other seller closing costs can include: Broker's commission, Transfer taxes, Documentary Stamps on the Deed,
Title insurance, Property taxes (prorated).
Negotiating Closing Costs In addition to the sales price, buyers and sellers frequently include closing costs in their negotiations. This can be for both major and minor fees. For example, if a buyer is particularly nervous about the condition of the plumbing, the seller may agree to pay for the house inspection. Likewise, a buyer may want to save on up-front expenditures, and so agree to pay the seller's full asking price in return for the seller paying all the allowable closing costs. There's no right or wrong way to negotiate closing costs; just be sure all
the terms are written down on the purchase agreement.
Prorations
At the closing, certain costs are often prorated (or distributed) between buyer and seller. The most common prorations are for property taxes. This is because property taxes are typically paid at the end of the year for which they were assessed. Thus, if a house is sold in June, the sellers will have lived in the house for half the year, but the bill for the taxes won't come due until the following year! To make this situation more equitable, the taxes are prorated. In this example, the sellers will credit the buyers for half the taxes at closing.
Prepare for Closing Day!
reprinted courtesy of Our Family Place
After the search for a home is done, the negotiations have been completed, the house has been inspected, and the mortgage has been applied for and committed to, the focus suddenly turns to the Closing, Settlement, or Escrow as it is known in some localities. For simplicity, we will refer to the process when it all comes together and you finally own the home as Closing. An understanding of the elements of and players in the closing, as well as a concise preparation for it, will eliminate many nervous hours as the day approaches.
What is involved?
It is the proverbial "signing on the dotted line:" the process of which will put the title to the house in your name, verify homeowners' insurance on the property, commit in writing to the terms of the mortgage, and usually, put the keys to the house in your hands. In general, you will leave the closing and go to your new home as a homeowner. The weeks and months of anticipation are all settled in the short amount of time that you spend at the closing.Closing procedures will vary from locality to locality. In some areas, the buyers and sellers (as well as their Real Estate Agents) will all attend the closing. In other areas, only the buyers will be present. The closing will take place at the office of an Attorney, a Title Company, or an Escrow Company (again, there is some variance here based on your local laws and tradition). In general, though, the closing will be attended by all the buyers involved and their Real Estate Agent, as well as the Closing Agent, who has reviewed all of the components of the house sale and who is the one who will say "sign here" more times than you have ever heard in your life.
What forms are involved?
Although there may be additional documents involved, the primary items which are dealt with at the Closing are:
- The Settlement Statement, The Contract, The Loan Papers, Title Insurance, Homeowners' Insurance, The Title or Deed
- The Down Payment and Closing Costs
The Closing is your final opportunity to make certain that everything related to the purchase of your home is correct. It is important, therefore, that you do adequate preparation prior to the day of Closing. Although your Agent will most likely review all of the items needed with you, it is a good idea to have the right information in case you need to handle it on your own.
What items will we need?
The following are the most important items that you will need prior to or at closing and some hints regarding them:
A Closing cost estimate
This should first be given to you by your Agent at the time of the contract, and then given to you by the Lender, a Good Faith Estimate, shortly after the application for the loan. This should give you a reasonably close estimate of funds you will need at the time of closing.
Homeowners' Insurance Policy
This must be secured prior to the date of closing.
Settlement Statement
You should have a copy of the Settlement Statement before the date of Closing. Generally this will not be available until one or two days prior to the actual Closing, but it is important to have it because it gives you the total amount of cash you will need at Closing and also how those various funds will be dispersed. In addition, it gives you an opportunity to iron out any discrepancies prior to sitting down at the Closing table. Your Agent should also have a copy for review.
Certified Funds
On the day of closing you will need certified funds for closing costs and down payments. This is an important reason for needing a copy of the Settlement Statement a day or two in advance--so you know the amount of funds needed and so that any problems can be handled in advance. By making adequate reparations in advance, you will be far less likely to have awkward surprises when everyone (especially you!) is ready for closing.
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