TheueWhat Does That Mean?
Your Guide to Common Financial and Real Estate Terms
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The liquidation of a financial obligation, such as paying off your mortgage in regular installments over the specified term of the loan. Each month the amount of interest you pay decreases and the amount you pay toward the principal increases.
ARM (Adjustable Rate Mortgage)
A mortgage in which the interest adjusts periodically. For example, a 5/1 ARM would adjust annually after the first five years.
A written opinion of your home’s value given by a professional appraiser. Usually based on an evaluation of comparable properties in the neighborhood. Learn more about appraisals here.
APR (Annual Percentage Rate)
This is NOT the interest rate on your mortgage. It is a rate created according to a government formula designed to reflect the actual annual cost of borrowing. It is always slightly higher than the stated interest rate. The APR includes the interest rate, points, broker fees and certain other charges the borrower is required to pay.
A home sold “as-is” may have cosmetic or structural defects. While the price is often lower, the seller will typically not be willing to make any repairs to the property.
According to a public tax assessor, the value of your property for purposes of computing your property taxes.
If a buyer is interested in purchasing a home already under contract, that buyer may submit a “backup offer.” Should the original deal fall through, the backup offer would become the primary offer on the property.
A legal procedure whereby individuals can restructure or relieve themselves of debts. Filing for bankruptcy could affect your ability to obtain a mortgage or other types of credit at a favorable rate.
BPO (Broker Price Opinion)
An estimate of value as determined by a real estate broker or other qualified professional. Not the same as an appraisal.
You make half your mortgage payment every two weeks instead of a whole payment once a month. So instead of making twelve monthly payments each year, you make thirteen. The extra payment goes to reduce your principal, which allows you to pay off your mortgage much faster.
A real estate professional licensed to help clients buy and sell real estate. In some states, brokers have more training than real estate agents. In other states, brokers are synonymous with agents. In both instances, a broker must be licensed and meet continuing education requirements.
The licensed real estate agent or broker who represents the property buyers.
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Covenants, conditions, and restrictions. These are rules, usually instituted by a homeowner’s association or planned community. These guidelines establish the rights and obligations of the property owners.
Adjustable Rate Mortgages have variable interest rates, which are usually limited to certain amounts and time periods, such as how much the loan may adjust over a six month period, an annual period, and over the life of the loan. These limitations are known as “caps.”
When you refinance your mortgage at a higher amount than what you currently owe with the intention of taking money out for personal use, it is referred to as a “cash-out refinance.”
A title that is without defects, free of liens or legal questions as to who owns the property.
The formal process in which everyone involved in a real estate transaction conclude the details and sign documents related to a sale or mortgage. Learn more about the closing process and the associated fees here.
There are two types of closing costs: “non-recurring closing costs” and “pre-paid items.” Non-recurring costs are any items which are paid just once in the process of buying the property or obtaining a loan. “Pre-paids” are items which continue or recur over time, such as property taxes and homeowners insurance. A lender must provide you as a borrower with a written Good Faith Estimate of such costs, which they must issue to you within three days of receiving your loan application.
Cloud on Title
A claim, lien or any condition which interferes with clear title to a property until it is disproved or eliminated.
Realtors, loan officers, title representatives, attorneys, escrow representative, and others involved in real estate transactions earn commissions for their work. Commissions come out of the fees paid by the seller or buyer as part of the purchase transaction. Realtors generally earn the largest commissions, followed by lenders, then the others.
Usually referred to as “comps,” these are recent selling prices of similar properties located in a similar market.
Any condition that must be met before a contract is legally binding. For example, the purchase of a home may be contingent on the buyer selling his or her current residence. Home buyers often include a contingency that specifies that the contract is not binding until there is a satisfactory home inspection report from a licensed home inspector.
The property is owned outright (without an existing mortgage) or the current mortgage is below the market indicated price. Non-conventional properties include foreclosures, short sales, or probate-related properties.
Days on Market (DOM)
The number of days from the date the property posted on the MLS to the date the buyers closed on the property.
Debt-to-Income (DTI) Ratio
The number used by lenders to determine affordability for loan applicants. Higher debt-to-income ratios indicate a greater risk for lenders, and could result in higher interest rates or lower maximum mortgage amounts.
The legal document transferring title to a property.
Failure to make the mortgage payment when it is due. For first mortgages, if a payment is 30 days past due, the loan is considered to be in default.
The decrease in the value of a home over time. This might be based on wear and tear, market conditions, or buying trends in an area.
The amount of money a buyer puts down at closing towards the total price of the home. Typically represented by a percentage of the total home price. FHA loans typically require about 3 percent down, while many conventional loans require 20 percent of the home’s value down before closing. Failing to meet these percentages could result in monthly insurance fees.
The period of time between agreeing to purchase a property and the closing date, when the buyers can thoroughly examine the property and the surrounding area. Due diligence includes tasks like home inspection, title searches, and receiving HOA rules and regulations. Typically, the agents, lenders, and title companies take care of most of the due diligence on a residential property.
Due on Sale Clause
A provision in the mortgage that allows the lender to demand repayment in full if you sell the property.
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A deposit you would make as a potential home buyer to show that you are serious about buying the house. This amount varies depending on the home.
The right of another entity to use your land for a given purpose. Common easements include the right for utility companies to access your land, or an easement to access your property via another landowner’s driveway. All easements are mentioned in the title report.
The difference between what you owe on your mortgage and the fair market value of your home.
Situation in which an impartial third party acts as an agent for both buyer and seller or for both borrower and lender. This agent carries out instructions, delivers papers and documents, and disburses funds.
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Fair Credit Reporting Act
A consumer protection law which regulates the information that credit reporting agencies can disclose and outlines procedures for correcting errors on your credit report.
Fair Market Value
The highest price that a buyer would pay, and the lowest price a seller would accept.
FNMA (the Federal National Mortgage Association) is a Congressionally chartered, shareholder-owned company that is the nation’s largest provider of home mortgages.
A mortgage that is insured by the Federal Housing Administration (FHA), an agency of the Federal government. Both FHA and VA-insured loans are generally referred to as “government loans.”
FHA 203K Rehab Loan
A loan offered to buyers who are fixing up a property. This combines a mortgage loan with a loan to help pay for repairs and renovations to the property.
The loan that is in the priority position among all loans recorded against a property. The first mortgage holder will always be paid first when a property is sold.
A mortgage in which the interest rate does not change during the entire life of the loan.
Insurance in addition to homeowner’s insurance that protects against water and flood damage to a property. If a home is in a known flood zone, mortgage lenders may require the borrower to hold flood insurance.
If your mortgage is in default, you lose your ownership rights, usually through a forced sale of your property at a public auction. The proceeds of the sale are then applied to your mortgage debt.
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A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Mortgages that are not government loans are known as conventional loans.
A written document that transfers title to real property from one person to another.
A person who acquires an interest in real property by deed, grant or other written document.
A person who transfers an interest in real property to another person by written document.
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Home Equity Line of Credit (HELOC)
A mortgage loan, usually in line behind the first mortgage. It allows you as a borrower to obtain cash against the equity in your home, up to an amount set by the lender.
Buyers often include a satisfactory home inspection as a contingency when they make an offer. A licensed professional evaluates the structural and mechanical condition of a home and provides a report.
Homeowners’ Association (HOA)
A nonprofit members’ organization that manages the common areas of a planned unit development (PUD) or condominium.
An insurance policy, often requested by homebuyers, that will cover repairs to items in the home that might break down within the first year after purchase. The buyer usually expects the seller to pay for this coverage as a condition of the sale.
HUD-1 Closing Statement
Provided by the Department of Housing and Urban Development (HUD). Also called a “settlement sheet.” This document provides an itemized listing of the funds that are paid by both the buyer and seller at closing. These items include real estate commissions, loan fees, points, and initial escrow (impound) amounts. The totals at the bottom of the HUD-1 statement show the seller’s net proceeds and the buyer’s net payment at closing.
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The cost you pay to borrow money. It is the payment you make to a financial institution for the money it has loaned to you.
See “home inspection” above.
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Ownership where each party owns the whole property; ownership is not divided or separate. In the event that one party dies, the surviving partner owns the property in its entirety.
A decision made by a court of law requiring the repayment of a debt. The court may place a lien against the debtor’s property as collateral for whomever the judgment is owed to.
A loan that exceeds government (Fannie Mae and Freddie Mac) loan limits, currently at $417,000. This is also sometimes called a nonconforming loan. Freddie Mac and Fannie Mae loans are called conforming loans.
In most cases, the homeowner owns the physical building and the land underneath. However, in some cases (such as with modular homes), the buyer owns the structure only and leases the land from the landowner.
A penalty imposed by the lender if a borrower fails to make a scheduled payment on time, usually within 15 days of the due date.
An alternative that allows home buyers to lease a property with an option to buy it within a specified period of time. Each month’s rent payment may include an additional amount which can be applied toward the down payment on a specified price.
The London Interbank Rate is an index used to determine changes in the interest rate for adjustable-rate mortgages It is based on the average interest rate at which international banks lend to or borrow funds from the London Interbank Market.
A legal claim against a property that must be paid off when the property is sold. A mortgage is considered a lien, but a lien may also be placed by a mechanic or contractor who has done work on the property and not been paid.
For an ARM (adjustable-rate mortgage) (ARM), the cap is a limit on the amount that the interest rate can increase or decrease over the life of the mortgage.
The price listed on the MLS for a home. This price is agreed upon by the sellers and the listing agent, often decided based on current market trends and comparable sales.
A sum of borrowed money that is generally repaid with interest.
The relationship between the loan amount and the value of the property, expressed as a percentage of the property’s value. For example, if your home is worth $100,000 and you have an $80,000 mortgage, your LTV is 80%.
An agreement by lender to guarantee the borrower a specified interest rate for a certain amount of time (the lock-in period) at a certain cost.
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The current value of your home based on what a purchaser would pay, sometimes determined by an appraisal.
The date on which the principal balance of your loan becomes due and payable.
MLS (Multiple Listing Service)
A clearinghouse where real estate brokerage firms who are members regularly and systematically exchange information on real estate property listings. They also share commissions with members who locate purchasers. Local real estate associations typically operate the MLS any geographic area. Because of the Internet, the MLS system is now available nationwide through the portal, www.mls.com.
A situation in which a lender will agree to modify the terms of your mortgage without requiring you to go through the refinance process. This might include changes to the interest rate, loan balance, or loan term.
A loan that uses your home as collateral. In some states, the term mortgage is also used to describe the document you sign to give the lender a lien on your home. It also may be used to indicate the amount of money you borrow, with interest, to purchase your house. The amount of your mortgage is usually the purchase price of the home minus your down payment.
A financial professional who originates loans by bringing borrowers and lenders together. Mortgage brokers generally have pre-established relationships with a number of different financial institutions and know how to match up lenders and borrowers successfully.
Insurance that protects lenders against losses caused if a borrower defaults on a mortgage. Lenders typically require MI if the borrower’s down payment is less than 20 percent of the purchase price.
A property containing multiple individual units owned or rented by multiple parties. Apartments, condos, and townhomes are all examples of multi-family properties.
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An increase in the balance of a loan caused by adding unpaid interest to the loan balance; this occurs when the payment does not cover the interest due.
The total amount a seller receives after the sale of a property after closing costs, broker fees, and other associated costs.
The value of your assets, including real property, personal property and cash, minus your total liabilities.
Also called new builds. A home recently built (or built at the request of the buyer) that has not been previously occupied.
You may hear commercials where lenders offer loans that you can get for “no cost.” You should ask if this means there are no “lender” costs associated with the loan, or if it also covers the other costs, such as title insurance, escrow fees, settlement fees, appraisal, recording fees, or notary fees. These are fees you would normally pay when you are buying a home or obtaining a loan, but they are not charged directly by the lender.
Most lenders offer loans with “no points.” However, the interest rate on a “no-points” loan is generally a quarter percent higher than on a loan where you pay one point up front.
A legal document that obligates you repay your mortgage at a certain interest rate and over a specified period of time, such as 15 or 30 years.
Notice of Default
A written notice you receive from your lender indicating that you are in default on your loan and that they may take legal action.
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A formal bid to purchase a home made by a prospective home buyer to the home seller.
A public event where the seller’s Realtor invites people to view the property. You don’t need to have a Realtor in order to attend an open house.
An amount paid to a lender that covers the costs of processing a loan application. Generally stated as points–one point is one percent of the total mortgage amount.
In loan documents, this term indicates that the property is your primary residence, not an investment or rental property.
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A payment that is less than the monthly amount due on a mortgage loan. Lenders often will not accept partial payment but may be willing to negotiate during economic hard times.
Referring to a home whose current owners have accepted an offer from sellers. The home is listed as “pending” until the deal has closed.
An acronym that stands for the four primary components of a monthly mortgage payment: Principle, Interest, Taxes, and Insurance. Your monthly payment to the lender generally includes all of these.
A point is one percent of the total amount of the mortgage.
Power of Attorney
A legal document that authorizes one person to act for another. A power of attorney gives someone complete or limited legal authority. For instance, a potential buyer might give a limited power of attorney to a loved one or a legal representative if the buyer lives out of state.
Generally means that a borrower has completed a loan application and provided financial documentation to a lender. The lender has reviewed the application and approved a specific loan amount. A pre-approval usually assumes what the interest rate might be when the loan closes, as well as estimates for property taxes, insurance and other costs. Pre-approval applies only to the borrower’s financial qualifications. Not the same as pre-qualification (see below).
Any amount that reduces the principal balance of a loan before it is due. You might pay off a mortgage because you sold the property, or because it went into foreclosure. In either case, prepayment means you paid the loan off before it was fully amortized. Some mortgages have a pre-payment penalty written into the loan documents.
A loan officer’s written opinion of your ability to qualify for a home loan. The loan officer will ask questions about your debt, income, and savings and may also review your credit report before writing such an opinion. Not the same as pre-approval (see above).
Price Per Square Foot
The list price divided by the total number of square feet in a home. Helpful when comparing homes for sale in a given area.
The interest rate that banks charge to their best customers. The media often widely publicized changes in the prime rate. Lender and financial institutions often use the index in some adjustable-rate mortgages and home equity lines of credit.
The amount of money you borrowed or the amount of your loan that you haven’t yet repaid to the lender. This does not include the interest you will pay to borrow that money.
Proof of Funds
Typically required of the buyer by the sellers to ensure the buyer has adequate funds for a down payment and other expenses. Financial statements, proof of line of credit, or money market statements are all examples.
PUD (Planned Unit Development)
A housing project or subdivision that includes common areas that are owned and maintained by a homeowners’ association and used by the individual PUD unit owners.
A written contract between the buyer and seller stating the terms and conditions under which a property will be bought and sold. This would typically include the sale price, down payment, earnest money deposit, financing, closing date, occupancy date, length of time the offer is valid, and any special contingencies.
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Formula used to determine whether you can qualify for a mortgage. There are two ratios: The “top” ratio is your monthly housing costs (principal, taxes, insurance, mortgage insurance, homeowner’s association fees) as a percentage of your monthly income. The “bottom” ratio includes housing costs as well as all other monthly debts, such as car payments and credit card debt.
A legal document transferring ownership of a property from one party to another. Once signed, the new owner assumes all financial responsibilities for the property.
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Lenders in some areas will require a test to determine if this toxic gas is present in the soil on your property. Radon can contribute to cancer and other illnesses.
A limit on the amount your interest rate on an adjustable-rate mortgage (ARM) can increase or decrease during the adjustment period.
A real estate agent, broker, or associate who is an active member of a local real estate board affiliated with the National Association of Realtors.
The public official who keeps transaction records that affect real property. Often referred to as a “Registrar of Deeds” or “County Clerk.”
When you obtain a new mortgage and use all or some portion of the proceeds to pay off the prior mortgage.
An agreement you make with a lender to repay delinquent installments or advances.
RESPA (Real Estate Settlement and Procedures Act)
This Federal law requires lenders to provide you as a borrower with a list of costs related to your loan prior to closing. The lender must also provide information during the life of your loan about servicing and escrow accounts. RESPA prohibits kickbacks and unearned fees in the mortgage loan business.
Right of First Refusal
An agreement that requires a property owner to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.
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An arrangement where a seller deeds property to a buyer for some financial consideration, and the buyer simultaneously leases the property back to the seller.
A mortgage that has a lien position second or subordinate to the first mortgage.
A loan backed by property as collateral, such as a house or a car.
A financial firm that manages loan servicing activities, including collecting mortgage payments, paying the borrower’s taxes and insurance and managing borrower escrow accounts.
The process that occurs after the completion of a loan transaction. At this time, the mortgage documents are signed and then recorded, funds are disbursed, and the property is officially transferred to the buyer. In some places, this is referred to as closing or escrow.
A property listed for less than the amount owed on the mortgage. The lender must approve this process.
A property that is no longer under contract; the sale has closed and the property has transferred ownership.
The precise measurement of a property, made by a licensed surveyor, showing legal boundaries of a property and the dimensions and location of any improvements.
When the borrower contributes labor or services instead of cash to cover part or all of the down payment for the purchase of a property.
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Required in many parts of the country before sale of a property. This determines whether the home has termite infestation or termite damage.
A process by which a lender uses another party, usually known as a mortgage broker, to completely or partially originate, process, underwrite, close, fund, and/or package a mortgage.
TILA (Truth-in-Lending Act)
A Federal law requiring lenders to fully disclose, in writing, all the terms and conditions connected to a mortgage, including the annual percentage rate (APR) and other charges.
A document showing the right to, and the ownership of, property. A title or deed is sometimes shown to prove you have ownership of land.
An Insurance policy that protects both lenders and homeowners against legal problems with the title.
The process of checking public records to ensure that the seller is the legal owner of the property and to see if there are any liens or claims against the property.
Used to describe a home that is move-in ready.
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The process a lender uses to determine if a loan can be approved. It involves evaluating both the property itself and the borrower’s credit and ability to pay the mortgage.
Uniform Residential Loan Application
A standard form, used by all lenders when you apply for a mortgage. You will need to provide information about your income, assets, liabilities, and a description of the property you plan to buy, among other things.
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The Veteran’s Administration is an agency of the Federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans.
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A provision in a sales contract allowing the buyer to inspect the property being purchased immediately before the closing, usually within the 24 hours of closing.
A written guarantee of the quality of a property and the promise to repair or replace defects free of charge.
A contract that has expired, such as an agreement between a buyer/seller and a real estate agent or an offer to purchase or sell a property.
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