Welcome to REXtionary 101, where we explain real estate terms to help you better understand the home buying and selling process.
Adjustable-Rate Mortgage (ARM)
Also known as a variable rate mortgage, this type of mortgage will have both interest rates and payments that fluctuate throughout the lifetime of the loan. The interest rate and payment changes for this type of mortgage depend upon a corresponding financial index associated with the loan. When applying for this type of mortgage, you will be instructed how, when and why the rates will change.
An agent is a person who legally acts on behalf of another person or group. An agent may be given decision-making authority.
Amortization is the process of reducing or paying off a debt over a period of time by making regular payments of both interest and principal.
Annual Percentage Rate (APR)
The APR is the broader picture of the cost of borrowing money than the interest rate. The APR is a reflection of the interest rate as well as any points, mortgage broker fees and other charges the borrower pays to get the loan. This is usually higher than the interest rate.
An appraisal is an estimated valuation by an unbiased authorized person. In real estate, this is an unbiased professional opinion of the current market value of the property and home as of the date the appraisal is conducted.
An assessment is an official valuation of a property that is conducted to determine property taxes. The term also sometimes refers to the process of determining an assessed value of a property. An assessment is also how government bodies calculate the amount of property tax the owner has to pay.
An assumable loan is a financial arrangement when a buyer assumes responsibility for an outstanding mortgage and its terms from the current owner. The buyer is then responsible to pay off the unpaid balance of the original loan.
Back-End Debt-to-Income Ratio
The Back-End Debt-to-Income Ratio is the comparison of your monthly debt payments – such as housing-related expenses, credit cards, auto loans, student loans and/or personal loans – to your monthly income. This number gives lenders an idea of your monthly spending habits and is also used to gauge your creditworthiness.
A backup offer is made in acknowledgment of an existing offer and ensures a contract with the seller if that first offer falls through. It’s a legally binding contract that, if accepted by the seller, will put you next in line to purchase the home should the first buyer back out.
This is a type of mortgage that offers a low interest rate that remains at the same level for a short period of time – usually 5-7 years – with a large portion of the balance due at the end of the loan period. This can either be paid off in a single payment or it can be refinanced.
A balloon payment is typically the last installment of a secured loan and is larger than prior payments.
A buyer’s agent is a person who legally represents the buyer during the real estate transaction. A buyer’s agent is used to help guide home buyers through the process of purchasing a home. They can help a home buyer find the right property as well as negotiate offers.
An interest cap, also known as a ceiling, is how high an interest rate can increase on variable rate debt. An interest cap is often used in an adjustable rate mortgage to limit the amount of interest for the loan. They can also be used to help protect buyers from substantial rate increases and offer a ceiling for maximum interest rate costs.
A payment cap is often used in adjustable rate mortgages to limit the amount of a monthly payment increase.
A cash reserve is a requirement set by the lending institution for the amount of money a buyer must have on hand at the time of underwriting and closing. The most common cash reserve requirement is enough to cover two months of mortgage payments.
This is a form of credit that must be repaid in full by a specific date. A borrower repays the loan with a specific number of matching payments, which are generally made each month.
This is known as the last step of completing a real estate transaction and is when ownership of the home or property is turned over to the buyer by the seller. Closing is where you finalize all details of your real estate purchase and includes transfer of the deed, signing of a note and any allocation of funds needed to close the sale. This can also be known as a settlement.
These are costs that are not included in the purchase price of a property but must be paid to fund the cost of the transaction including insurance fees, survey fees, attorney’s fees, loan origination fee and mortgage points (also known as discount points). While these costs vary by location, they are expressed when a buyer submits a mortgage loan application.
Also known as a settlement statement or HUD-1 statement, this is an all-inclusive list of all fees the buyer and seller must pay to conclude the transaction.
Comparable Market Analysis
Completed during the appraisal process, a comparable market analysis finds similar properties with comparable characteristics to the property you are looking to purchase to determine how much that property is worth.
A type of living space that features a multi-unit structure consisting of individually owned units. When purchasing a condominium, the buyer is given an exclusive title to their unit, but shares title to common areas of the property, which can sometimes include parking lots, media centers or swimming pools.
A contract of sale is a legally binding agreement between the buyer and seller to state the terms and conditions of the sale.
A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, the loan is backed by private lenders, and its insurance is usually paid by the borrower.
This type of housing involves a property owned by an organization, sometimes a corporation or business trust entity, that in turn, sells shares of that property to residents in the form of a leasing agreement.
Sometimes referred to as a credit reporting agency, a credit bureau collects data from a consumer’s credit report based on information supplied by creditors, financial institutions, public records and businesses. A credit bureau collects data about you and your credit usage, including a list of current as well as past credit accounts, your payment history and if payments were made on time, as well as any negative details (missed payments, bankruptcies, foreclosures, collections or repossessions). The three credit bureaus include Equifax, Experian and TransUnion.
A credit bureau collects data about you and your credit usage, including a list of current as well as past credit accounts, your payment history and if payments were made on time, as well as any negative details (missed payments, bankruptcies, foreclosures, collections or repossessions) to create a credit report which includes a credit score. The score helps those granting credit to determine if you are a good credit risk. The bureau, however, does not offer credit; it only offers your credit information to potential lenders.
A credit limit is the maximum amount of money or credit that you can borrow or use. Limits are decided by banks, different lenders and credit card companies based on information related to your credit.
A credit report is a detailed record of your credit history compiled by credit bureaus. The credit bureaus receive extensive information about your credit history, including credit activity and your existing credit situation, including loan paying history and current status of any credit accounts. Your credit report is utilized by creditors to determine whether they grant you credit. Consumers are allowed to request one free credit report every 12 months from each of the three major credit bureaus.
A deed is a legal document that is used as proof of ownership for a piece of property. When real estate is given or sold to another party, a deed is used. Once the transfer of property is complete, the deed is filed with your local government and becomes public record.
A deed of trust is an agreement between the borrower, lender and a third party known as a trustee. In this type of agreement, the trustee will hold the deed of trust until the borrower pays off the debt to the lender. If the borrower defaults on the loan, the trustee will sell the property and assume the debt still owed.
Department of Housing and Urban Development (HUD)
HUD is a governmental agency responsible for the application and organization of national policies and programs for housing and urban development programs as well as enforcement of fair housing laws. Primary programs conducted by HUD include mortgage and loan insurance through the Federal Housing Administration; Community Development Block Grants; rental assistance for low-income households; and fair housing public education and enforcement.
Default is when a borrower fails to pay required payments in accordance with the terms of a loan. The borrower does this through failing to pay by the due date, missing payments or ceasing payments altogether. Defaulting on a loan can affect the borrower in the future through lower credit scores, higher interest rates on current debt or lessening chances of securing credit in the future.
This is when the borrower does not make payments as outlined in the loan agreement and the debt is then overdue.
Also known as mortgage points, discount points are a type of fee a borrower can purchase that lowers the amount of interest they pay on consecutive payments. One point equals 1% of the loan. For borrowers, they are usually eligible for a reduced interest rate in exchange for the advance payment.
A down payment is a portion of the purchase price that a buyer pays to the seller to close a sale. The money paid for a down payment does not come through a mortgage loan.
This is a clause in a mortgage loan that specifies the full amount of the loan may be called due, or repaid in full, if the sale or transfer of ownership of the property is used to secure the loan. In other words, if someone with a due-on-sale clause sells their home, they would have to pay the mortgage off first, and then they would receive any money leftover.
This is an amount of money a buyer puts down or deposits to the seller, to show their good faith of getting a mortgage to purchase the property.
An encumbrance is a claim made by a party against a property that they do not own. An encumbrance can affect the transfer of the property or curb its use until the encumbrance is resolved. They can include easements, liens or mortgages.
Equal Credit Opportunity Act (ECOA)
The ECOA is a federal law enforced by the Federal Trade Commission which prohibits lenders and creditors from credit discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
Equity is the difference between the amount of money your property is worth and how much money is owed on your mortgage. It is also known sometimes as the owner’s interest.
Escrow is when a third party holds a large amount of money or property for a short period of time, until an agreement or sale has been reached. When it comes to real estate, escrow is used during the purchase process when the buyer is required to put forth funds for a down payment. It is held in an escrow account for safekeeping until closing. Once the home is purchased, a portion of the buyer’s mortgage payment is paid into the escrow account to pay for home insurance as well as property taxes.
Fannie Mae is a private company created by the U.S. Government in 1938 to help secure stable and economical inventory of mortgage funds throughout the U.S. Operating under a congressional charter, it is a shareholder-owned company.
Federal Housing Administration (FHA)
The FHA is a U.S. government agency in the Department of Housing and Urban Development (HUD) that offers mortgage insurance for residential mortgages and outlines standards for construction and underwriting. Most loans are for homebuyers who may not be able to afford or qualify for a traditional mortgage loan.
Loans that are insured by the Federal Housing Administration. Often referred to as FHA or FHA-Insured Loans.
A first mortgage is the initial loan on a property. It supersedes any claim on a title of a property in case of a default.
A fixed interest rate is a rate that goes unchanged during the lifetime of the loan. It allows homebuyers to budget accurately with knowing their future payment amounts. For example, with a 30-year fixed rate mortgage, your interest rate will not change during the entire 30-year period.
This is the lowest interest rate in an adjustable rate mortgage.
Forbearance is when your mortgage lender opts to not take legal action although a mortgage payment may be late. The lender may allow you to briefly pay a lower amount for your mortgage or they may let you momentarily cease payments. If you choose to do either, you will still have to pay the amount owed later.
A foreclosure is a legal process where the mortgage lender tries to recoup the amount owed on a defaulted mortgage by reclaiming ownership and selling the property.
Created by Congress in 1970, Freddie Mac purchases residential mortgages on the secondary market and then sells them to investors as mortgage-backed security in the open market. They are also referred to as the Federal Home Loan Mortgage Corporation (FHLMC).
Front End Debt-to-Income Ratio
Also known as the housing ratio, this ratio is your mortgage-to-income ratio. To calculate it, take your monthly mortgage payments and divide by monthly gross income.
For Sale By Owner, or FSBO, is a phrase used to describe when a home is sold by the homeowner, with no help from a real estate agent or real estate broker.
Good Faith Estimate (GFE)
This form outlines the estimated costs a buyer will pay at or prior to closing, in accordance with local real estate procedures. The mortgage lender must distribute the GFE within three days of the acceptance of the mortgage loan application.
This type of fixed rate mortgage features increasing payments for a determined amount of time before it levels off.
This is the total amount of income prior to deductions which may include taxes, 401K contributions, Medicare or Social Security.
This is a type of insurance coverage that offers reimbursement for property loss or damage to the policy holder.
Home-Equity Line of Credit
A home-equity line of credit, also known as HELOC, is a revolving line of credit that uses your home as collateral. Like a credit card, you are given a credit limit. Oftentimes people use it for large expenses or to pay down high-interest rate loans such as credit cards. Often a HELOC has a low interest rate and in some cases may also be tax deductible.
This type of loan, also known as a second mortgage, is a loan for a fixed amount of money where your home is used for collateral. The loan is repaid by equal monthly payments over a determined amount of time, similar to your mortgage. If the loan is not repaid, the home can be foreclosed upon. The amount of the loan is determined by income, credit history and market value of the property.
This type of inspection involves a thorough review and evaluation of physical aspects of the home including electrical, plumbing, heating and cooling systems, appliances, roof, foundation and if the home is structurally stable. The home inspection takes place prior to the purchase of the home. In an offer, the contract should outline that the sale of the home is dependent upon the results of the home inspection.
Home or Condominium Owners’ Association (HOA)
A HOA is a nonprofit association that is responsible for the management of common areas and services of a planned unit development or condominium project. With condos, the HOA has no ownership interest in common areas while in a planned unit development it does.
Homeowner’s Warranty (HOW) Program
The HOW program is an insurance program through which participating builders provide homebuyers with a warranty on the workmanship and materials of a home, and warrant against major structural defects.
This is a type of document that certifies a property is as portrayed. An inspection is conducted by an appointed agent and may be accepted instead of a survey.
Often calculated as an annual percentage, interest is the amount of money paid to a lender periodically for using their money. Interest can also mean that there is a share or stake in property.
An interest rate is a proportion of an outstanding balance of a loan, usually determined as an annual percentage rate, that a borrower pays to the lender for borrowing money.
This type of loan, also known as a jumbo mortgage, is one that tops the limits set by the Federal Housing Finance Agency (FHFA). These types of loans are used to help finance properties that involve high-value homes that may not fit into conventional conforming loans.
This type of agreement allows those leasing a home to purchase the home during the term of the lease contract. In the contract, the purchase price of the home is detailed. A renter may also be required to give a deposit in exchange for the purchase option.
A lender is any financial institution or agency that allows you to borrow money, with the expectation that the money will be repaid.
A lien is a legal claim or right over a property until the debt owed is paid off or settled.
This fee is charged by lenders to draw up documents, conduct credit checks, audit and sometimes appraise property. It’s commonly stated as a percent of the It is usually stated as a percentage of the original loan.
Loan servicing is the handling of a loan, including collecting loan payments as well as oversight and disbursements of escrow accounts.
Loan-to-Value Ratio (LTV)
LTV, often expressed as a percentage, is the number lenders use to decide the amount of risk they’re incurring with a secured loan. The ratio is calculated by the loan amount and market value or sales price of a real property.
The number of days during which a borrower is guaranteed a certain interest rate and mortgage terms by the lender.
The market value of a property is the amount estimated of what the home would sell for by taking into consideration what it’s worth. The market value helps determine the listing or asking price of a home.
Homes that are factory built or prefabricated, such as a mobile home.
This is a type of loan that is used to finance a property. With a mortgage, the borrower promises to pay back the borrowed amount, plus an interest rate agreed upon by both parties.
A mortgage banker is a company, individual or firm that generates, sells and maintains loans guaranteed by mortgages on real property.
A mortgage broker is either an individual or a firm or individual who receives a commission for matching borrowers and lenders. The broker typically handles applications and will occasionally process loans, but typically does not use its funds for closing.
The name for the lender in a mortgage loan.
The name for the borrower in a mortgage loan who offers property as a guarantee for a debt.
Multiple Listing Service (MLS)
Created by REALTORS, the MLS is a detailed database of properties for sale or lease, which are compiled by collaborating real estate brokers.
Your net income is the amount of money you receive post-tax withholdings.
Open-Ended Credit (Non-Installment or Revolving Credit)
This is the amount of credit that can be borrowed again and again, so long as the payments are regularly made and follow the terms set forth by the bank. An example of open-ended credit would be a home equity line of credit (HELOC).
This is an acronym for Principal, Interest, Taxes and Insurance. The majority of residential monthly mortgage payments include each of those items.
A point is equivalent to 1 percent of the dollar amount of a mortgage loan. Through the payment of points, some lenders allow borrowers to lower the interest rate of the loan. They can also be paid by or split between the buyer and seller.
A pre-approval happens when a potential buyer completes a mortgage application with a lender, offering documentation for the lender to do a full comprehensive credit and financial background check. The lender will examine the buyer’s income, credit history, employment history, personal assets and debts. When a buyer receives a pre-approval, it is a sign of assurance for the seller that the buyer’s offer is valid. It also helps streamline the buying process when an offer is given.
A pre-qualification happens when a potential buyer offers information, such as income and assets compared to the buyer’s debt, to a lender who will then offer an estimate of how much the buyer can borrow. This is the step before pre-approval.
Prepaid items include recurring costs that are not directly associated with the purchase of the home itself. These types of costs include insurance, interest and taxes. These types of costs cannot be financed.
A prepayment penalty is usually specified in a clause in a mortgage contract stating that a penalty will be assessed if the borrower significantly pays down or pays off the mortgage before term, usually within the first five years of committing to the loan. The penalty is sometimes based on a percentage of the remaining mortgage balance, or it can be a certain number of months’ worth of interest. Prepayment penalties protect the lender against the financial loss of interest income that would otherwise have been paid over time.
The principal is the original sum of money borrowed without interest. The interest is then charged on the unpaid amount of the loan. It can also mean the balance of a loan and does not include interest.
Private Mortgage Insurance (PMI)
This type of insurance is sometimes required when a borrower has a down payment of less than 20%. Most lenders require this type of insurance in that type of situation, as it protects the lender and not the borrower. The insurance protects the lender if the borrower defaults on the mortgage loan.
Property tax is a tax paid to local and state governments for owning property in their territory.
A qualification ratio is utilized by mortgage lenders to decide if a borrower is able to obtain a mortgage loan. The ratio documents the portion of either debt to income or housing expense to income.
Real Estate Settlement Procedures Act (RESPA)
Regulated by the Consumer Financial Protection Bureau (CFPB), RESPA was created by Congress to require disclosure of the complete settlement cost to the homebuyer and seller.
Real property is a term that applies to land and any structure that may be attached to it.
Often used when lower interest rates are available, refinancing can be defined as paying off a debt with a new loan or mortgage, but the same piece of property is used as collateral.
A loan that is offered through the U.S. Department of Agriculture (USDA), the Rural Housing Service provides home mortgage programs for rural residents of low-to-moderate income to aid them in the purchase, construction or repair process.
A second mortgage is a lien on a property that is second to the original loan which supersedes it. An example would be a home equity loan where you borrow equity to help pay off other debts, but it must be paid back.
This is a debt where a piece of property or home is held as an asset to help ensure the debt is paid. If the debt goes unpaid, the lender can reclaim the property.
An agent who legally represents the buyer during the real estate transaction.
This type of housing is assembled on site, and may involve pre-fabricated pieces.
A spending plan is a money management guide you can utilize to keep track of income and expenses to ensure they are in line with your budget. The plan can guide you in adjusting to keep your expenses in check.
A title is a legal way to say you have ownership of a property or rights to the property. In real estate, a title details the history of ownership and transfers of a property. Titles can be attained through purchase, inheritance, gift or foreclosure of a mortgage.
This type of insurance is required by a lender when a mortgage loan is used to buy a property. It is purchased by the homebuyer to help protect the lender’s interest in the property until the mortgage is paid off. It also helps insure ownership rights of the property.
A townhouse is a multi-floor home with conjoined units - usually sharing a common wall with another home, but each unit is owned separately and has its own entrance.
A trust is a type of fiduciary relationship where another party is given the right or authority to handle the title of a property for the beneficiary.
Underwriting for mortgages is completed by a financial expert, or underwriter, who analyzes the risk involved for the lender when a buyer applies for a mortgage loan. The underwriter will investigate and analyze a buyer’s income, assets, debt and property details to determine approval for the mortgage loan. They will also examine the buyer’s capability and compliance to repay the loan.
Upfront costs include costs that a buyer pays prior to closing on the home. The costs will likely include appraisal fees, credit report fees, hazard insurance, flood insurance or other inspection fees.
This type of a mortgage loan is offered through private lenders, including banks and mortgage companies, but a portion of the loan is guaranteed by the U.S. Department of Veterans Affairs. The loans are open to both eligible veterans and current servicemembers.
Sometimes known as an adjustable or floating rate, a variable interest rate is an interest rate on a loan that fluctuates based upon an economic indicator. They are often based upon an economic index such as the prime interest rate, Treasury Bill rate, or the Federal Funds rate, and when that changes, so does the interest rate on the loan. This can lead to a borrower spending more to pay off the loan than originally expected.