Real Estate Terms Defined
Preparing for a home purchase can be confusing, and all the industry-specific terms can make it that much harder to understand things. We’ve compiled the most common terms into a handy glossary to help make the process easier for you. Let us know how we can help you on your search!
Adjustable-rate mortgage (ARM)
a mortgage with an interest rate that increases and decreases throughout the term of the loan. The changes in interest rate occur due to various factors and at different time intervals depending on the type of ARM. There are more than a few different types of ARMs, including the 7/1 ARM and the 5/1 ARM. With a 7/1 ARM a fixed interest rate is set for the first 7 years, then fluctuates periodically for the remainder of the loan term. An ARM is helpful during a period of low interest rates, but typically only with loans that have a longer fixed-rate period, like the 7/1 ARM. These loans can be risky, so be sure to weigh the options with your realtor and mortgage broker.
The appraised value of a property is the determined value at a specific point in time and must be calculated by a licensed appraiser. An appraisal is typically required by the lender to obtain a mortgage for the property.
Closing is the most exciting part of the home-buying process, when the sale of the property actually takes place and everything is put on paper. The buyer’s and seller’s teams come together and sign all the required paperwork, and typically receive the keys to the property. Closing costs are the fees the seller and buyer pay to complete the sale of the property. The costs paid at closing usually fall somewhere between 2 percent and 7 percent of the property’s sale price. Closing costs vary depending on location of sale, local real estate laws, and terms of the sale.
Comparative market analysis
A CMA is a helpful resource for buyers just starting their home search. The report is typically prepared by a real estate agent to help a buyer understand what the current market prices are for the type of property they are looking to buy, specifically in the area they are looking to buy.
A down payment is an upfront payment required to receive a mortgage loan. This payment is a percentage of the total price of the property being purchased. The percentage depends on the terms of the loan and the amount a buyer can pay at the time of purchase. The more you pay up front, the lower your monthly payments will be. The traditional down payment amount is 20%, but there are programs to assist first-time home buyers and veterans; read more about that below.
Down Payment Assistance
Many people are unaware of the first-time homebuyer grants and programs that exist. If your credit score qualifies, you have good employment history, but don’t think you have a 20% down payment required with a traditional mortgage, there are programs that can help you. The National Homebuyers Fund is one of the best ways for people lacking the capital to receive help in the form of a non-repayable grant for up to 5% of the loan amount. There are many other ways to help you get there. We will be writing more on this in the future, so be sure to check back or reach out to RNP to learn more and help you determine if you qualify!
Dual agency occurs when a single real estate agent represents both the home buyer and seller in the sale and purchase of a property. This is completely legal, but be sure the agent is keeping your best interests in mind and not the seller’s. Reach out to us and make sure you are getting the best out of your deal!
Earnest money, also known as a ‘good faith deposit’, is a relatively small sum of money a buyer pays to the seller at the time of entering a contract and prior to finalizing the necessary steps to finalize a sale. The primary reason this is paid is to ensure the buyer is serious about purchasing the contract and to avoid wasting time.
Equity is the total value of a property after subtracting the total amount money owed on a loan and any other liabilities. Knowing how much equity you have on your property is a key component when looking to buy a second property and helps a buyer determine their budget when purchasing an additional property or for a move.
Escrow is a contract held by a third party to manage the payment of funds between a buyer and seller. Escrow protects all parties from fraud and helps ensure all parties meet the requirements of the sale.
FHA & HUD
The Federal Housing Administration or FHA is a government agency that sets standards for and insures loans made by lenders and banks. The Department of Housing and Urban Development or HUD is another government agency that is more focused on the people behind the home purchases by helping to revitalize community development and promote home ownership, especially for economically disadvantaged populations.
A fixed-rate mortgage is the most common type of loan. With this type of loan the interest rate stays the same until the loan is paid off.
A homeowners association (HOA) fee is set amount of money that is paid monthly by all owners in a condominium building. This fee is factored into the loan amount and is required to maintain, repair, and update the building. HOA fees are typically only required for condominium purchases, but are sometimes also required for townhomes.
A home warranty is a service contract that helps home-buyers factor in the cost of future repairs. The contract is typically done through a third-party company and is similar to an insurance policy, but not the same.
An inspection is a necessary component for most home purchases, and a very helpful resource prior to committing to purchasing a home. A certified inspector will evaluate all the parts of a property to ensure any problems with the home are identified and addressed prior to finalizing a sale.
A lien is a debt hold on a property resulting from an outstanding debt, lawsuit, or settlement against the owner of the property. A lien usually serves as a sort of assurance that the owner of the property repays the amount owed, as not paying it could mean a loss of the property.
A mortgage broker is a sort of middle-man or middle-woman that brings together borrowers and mortgage lenders to find a mortgage that works for both.
During a home search, you will come across property listings that are flagged as contingent, meaning that another buyer has submitted an offer on the property and it has been accepted by the seller. Since there is still a chance the deal will fall through, these listings are still active on the MLS system. However, if both the buyer and seller meet all stipulated requirements and decide to move forward with the sale, the status will change to pending contract meaning the property purchase is in the final stages and will likely be removed from the active listings list not long after.
Private mortgage insurance or PMI is a payment required when a mortgage borrower makes a down payment of 20 percent or less. PMI typically costs anywhere between 0.5 and 1 percent. For every $100,000 that’s $1,000 extra that you will have to pay as part of your mortgage payments.
Prequalification or preapproval is a term that is used to verify whether or not a potential home-buyer meets the financial requirements of buying a property prior to starting a home search. The evaluation takes into account the applicant’s income, debt, and credit score and informs the borrower of how much they can borrow and what types of loans they qualify for. Most real estate agencies can assist you with this step.
Realtor/Real Estate Agent/Listing Agent
A realtor or real estate agent are people licensed to sell real estate property. They are basically the same thing, but a realtor is also a member of the National Association of Realtors. A listing agent is a real estate agent that has listed a property on the MLS system and is working with the buyer to sell them home.
Refinance happens when a borrower decides to change their mortgage lender and/or terms in a way that typically favors them and saves them money long-term. The new loan pays off the old loan and loan payments are reset to factor the new interest rates and outstanding debt. Many people choose to refinance to take advantage of lower interest rates or to help with other financial changes or difficulties.
Real estate owned or REO is a type of property that is technically owned by a lender and not an individual. These types of properties are typically sold at foreclosure auctions at a significantly lower price than traditional homes for sale.
A short sale occurs when a property sells for less than the amount owed on the property by the previous owner. Short sales help the prior owner of the property to avoid foreclosure or bankruptcy.
A title is a document that verifies that a person has ownership of a property. Title insurance protects buyers in the chance that there is an issue with the title transfer after a sale is finalized.