Patty Knaggs Real Estate 101: The Home Buyer's Dictionary
Chances are, if this is your first time buying a home, there are new phrases and terms you’ve heard and you’re not entirely sure what they mean. This is an important, and sometimes stressful, time in your life - a home will most likely be your largest purchase! Therefore, it’s imperative to not only be in the know, but also feel at ease with the process. When you have Patty Knaggs as your agent, she's there to help you every step of the way, but most buyers find it empowering to have insight into the entire transaction by doing their own research. For that reason, we’ve created this mini home buyer's dictionary to explain many of the basic terms you may encounter during the process.
Adjustable-rate mortgage (ARM) - A mortgage in which the interest rate is adjusted periodically according to a preselected index.
Annual percentage rate (APR) - A yearly percentage rate that expresses the total finance charge on a loan over its entire term. The APR includes the interest rate, fees, points and mortgage insurance and is therefore a more complete measure of a loan's cost than the interest rate alone. The loan's interest rate, not its APR, is used to calculate the monthly principal and interest payment.
Appraisal - A report made by a qualified person setting forth an opinion or estimate of property value. The term also refers to the process by which this estimate is obtained.
Appreciation/depreciation - "Appreciation" refers to the increase in a property's value, except for inflation. A decrease in the value of a property is called "depreciation”.
Assessed value - The value that a taxing authority places on real or personal property for the purpose of taxation.
Backup Offer - when a home seller has already accepted an offer from a buyer, but is still accepting offers from other buyers. Sellers usually state that they are accepting backup offers if they think the current offer may fall through.
Capital gains - Used for tax purposes, this is the capital gain you make when you sell your home. For example, if you purchase a property for $100,000 and sell it some years later for $150,000, your capital gain is $50,000.
Closing - The consummation of a real estate transaction. The closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to complete the sale and loan transaction.
Closing agent - Usually an attorney or title agency representative who oversees the closing and witnesses the signing of the closing documents.
Closing costs - The costs paid by the mortgage borrower (and sometimes the seller) in addition to the purchase price of the property. These include the origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, survey, and prepaid items such as tax and insurance escrow payments.
Commission - Compensation for negotiating a real estate or loan transaction, often expressed as a percentage of the selling price or loan amount.
Commitment letter - A formal offer by a lender stating the terms under which it agrees to loan money to the buyer.
Comparable market analysis (CMA) - A written analysis of properties having similar characteristics currently being offered for sale as well as comparable houses sold in the past six months. This enables you to determine if you are paying market value for a property, and to identify whether market prices are rising or falling.
Contingent - an offer on a home has been made and the seller has accepted it, but the finalized sale is contingent upon certain criteria that have to be met, such as appraisal, home inspection and mortgage approval.
Conventional loan - A mortgage not obtained under a government insured program (such as FHA or VA).
Credit report - A report detailing an individual's credit history, from the three major credit bureaus- Equifax, Transunion, and Experian. This may also include your FICO score.
Debt-to-income ratio - A formula lenders use to determine the loan amount for which you may qualify. Also known as the "backend ratio.” Guidelines may vary, depending on the loan program.
Down payment - Money paid to make up the difference between the purchase price and the mortgage amount.
Down payment assistance programs - Gift funds offered to qualified home buyers to be used toward down payments and closing costs. These programs are often administered by local non-profit foundations.
Equity - The ownership interest; i.e. portion of a property's value over and above the liens against it.
Escrow account - A holding account for the amount a mortgage borrower pays each month and which the lender uses to pay for the borrower's taxes, other periodic debts against the property, homeowner's insurance and, if applicable, mortgage insurance.
Fixed-rate mortgage - A mortgage in which the interest rate and payments remain the same for the life of the loan.
Float the rate - This term is used when a mortgage applicant chooses not to secure a rate lock, but instead allows the note rate pricing to fluctuate until the applicant decides to lock in, usually no later than five days prior to closing.
Foreclosure - A legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower's debt. The foreclosure process can be lengthy, and homes in foreclosure have pros and cons in regards to the purchasing process.
Flood insurance - a policy separate from homeowners insurance, backed by FEMA, that covers floods and mudslides that affect two or more properties, or two or more acres. If you are located in a high-risk area, your mortgage company may require you to purchase a policy before closing.
Front-end ratio - Also known as the housing expense-to-income ratio, it compares your proposed monthly house payment to your total household gross monthly income.
Funding fee - The amount charged on VA mortgages to cover administrative costs.
Good faith estimate (GFE)- A document which tells borrowers the approximate costs they will pay at or before settlement, based on common practice in the locality. Under requirements of the Real Estate Settlement Procedures Act (RESPA), the mortgage banker or mortgage broker, if any, must deliver or mail the GFE to the applicant.
Government loan - A mortgage insured by a government agency, such as FliA, VA, Farmers Home Administration (FHA), or a state bond program. The loans are generally made by private lenders.
Homeowners insurance (aka hazard insurance) - A real estate insurance policy required of the buyer protecting the property against loss caused by fire, some natural causes, vandalism, etc. Also includes personal liability coverage. Homeowner’s policies do not cover flood.
Home inspection - A thorough evaluation and written report of a property’s condition both inside and out. The inspection is valuable in locating any problems in a property and helps determine the extent of renovation needed.
HUD settlement statement - A standard form used to disclose costs at closing.
Index - A published interest rate, such as the prime rate, LIBOR, T-Bill rate, or the 11th District COFI. Lenders use indexes to establish interest rates charged on mortgages or to compare investment returns. On ARMs, a pre-determined margin is added to the index to compute the interest rate adjustment.
Interest rate - The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
Interim interest - The interest that accrues, on a per diem basis, from the day of closing until the end of the month.
Loan conditions - These are terms under which the lender agrees to make the loan. They include the interest rate, length of loan agreement, and any requirements the borrower must meet prior to closing.
Loan payment reserves - A requirement of many loan programs that, in addition to funds for the down payment and other purchase related costs, you have saved enough money to cover one or two months of mortgage payments after your closing.
Loan settlement - The conclusion of the mortgage transaction. This includes the delivery of a deed, the signing of notes, and the disbursement of funds necessary to the mortgage loan transaction.
Loan-to-value(LTV) - The ratio between the amount of a given mortgage loan and the lower of sales price or appraised value.
Margin - The set percentage the lender adds to the index rate to determine the interest rate of an ARM.
Mortgage - A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.
Mortgagee -- The lender on a mortgage transaction.
Mortgagor - The borrower in a mortgage transaction who pledges property as security for a debt.
Mortgage originator - The person responsible for collecting the completed application and all supporting documents before the entire loan packet is submitted to underwriting. Sometimes called a loan officer, account executive or sales representative.
Multiple listing service (MLS) - A computer-based service for real estate agents that provides descriptions of most of the properties listed for sale in an area.
Nonconforming loan - Conventional home mortgages not eligible for sale and delivery to either FNMA or FHLMC because of various reasons, including loan amount, characteristics or underwriting guidelines.
Note - A general term for any kind of paper or document signed by a borrower that is an acknowledgment of the debt and is, by inference, a promise to pay. When the note is secured by a mortgage, it is called a mortgage note and the mortgagee (lender) is named as the payee.
Origination fee - The amount charged for services performed by the company handling the initial application and processing of the loan.
Points - A one-time charge by the lender to increase the yield of the loan; a point is 1% of the amount of the mortgage.
Preapproval - A written letter from a lender, subject to a property appraisal and other stated conditions, that lets you know exactly how much property you can purchase.
Prepaids - Closing costs related to the mortgage loan which are collected at or before loan closing - including per diem prepaid interest and initial deposits of monthly escrows of taxes and insurance.
Principal - The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.
Private mortgage insurance (PMI) - Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default.
Processing - The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.
Rate cap - The limit of how much the interest rate may change on an ARM at each adjustment and over the life of the loan.
Rate lock - The borrower and the lender agree to protect the interest rates, points, and term of the loan while it is processed.
Real estate agent - A salesperson, usually licensed by the state and supervised by a broker. Agents work solely on commissions earned by selling properties.
REALTOR - A real estate agent who is a member of a local real estate board and affiliated with the National Association of Realtors.
Return on investment (ROI) - The percentage of capital gain that you make on an investment. For example, say you invest $1,000 into a property, and a year later it is worth $1,500. Your ROI equals the profit ($500) divided by the initial investment ($1,000) or 50%.
Title insurance - An insurance policy that protects a lender and/or buyer (only if homebuyer purchases a separate policy, called owner's coverage) against any loss resulting from a title error or dispute.
Truth-in-lending statement - A full disclosure of credit terms using a standard format required by Federal law. This is intended to facilitate comparisons between the lending terms and financial institutions.
Underwriting - Analysis of risk,, determination of loan eligibility, and setting of an appropriate rate and terms for a mortgage on a given property for given borrowers.