Real Estate Terms Defined for the Non-Realtor:
Annual Percentage Rate (APR): the actual cost of borrowing money. it will be higher than the quoted interest rate because it includes four factors: the interest rate, loan origination fees, loan discount points and other credit costs.
Appraisal: or property valuation, or land valuation, is the process of forming an opinion of value for real property (usually market value). Location of the house plays a key role, but so do upgrades. Appraisal reports form the basis for mortgage loans. Sometimes an appraisal report is used to establish a sale price for a property.
Some countries require appraisers to have a license. Usually, the real estate appraiser has the opportunity to reach 3 levels of certification: Appraisal Trainee, Licensed Appraiser and Certified Appraiser. The second and third levels of license require no less than 2000 experience hours in 12 months and 2500 experience hours in no less than 24 months respectively.
Attorney Fee: In North Carolina, home buyers require the services of a real estate attorney to handle the transaction settlement process. An attorney may charge a flat rate for settlement service or an hourly rate. Attorney duties typically include contract review, title search, document preparation and a variety of other services.
Cash Flow: What’s left after you pay all the bills, including groceries and debt payments.
Closing Costs: Origination Fee, Appraisal, Flood Determination, Attorney Fee, Title Insurance, Homeowner’s Insurance, Mortgage Insurance, Interest, Interim Interest, Pro-rated Property Taxes, and a Home Warranty Fee are all included in Closing Costs.
Credit Score: is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report information typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. A credit score is primarily based on credit report information, typically from one of the three major credit bureaus: Experian, TransUnion, and Equifax. Income and employment history (or lack thereof) are not considered by the major credit bureaus when calculating credit scores.
Debt-to-Income Ratio: a lender’s gauge of a borrower’s ability to make the monthly payments on a loan, based on the percentage of a borrower’s monthly income that goes to debt payments. Best practice: keep your total housing cost to no more than 25% of income.
Down Payment: the initial upfront portion of the total amount due. Usually given in cash at closing. A loan or the amount in cash is then required to make the full payment.
The main purposes of a down payment are to ensure that the lending institution has enough capital to create money for a loan in fractional reserve banking systems and to recover some of the balance due on the loan in the event that the borrower defaults. In real estate, the asset is used as collateral in order to secure the loan against default. If the borrower fails to repay the loan, the lender is legally entitled to sell the asset and retain a portion of the proceeds sufficient to cover the remaining balance on the loan, including fees and interest added. A down payment in this case reduces the lender’s risk to less than the value of the collateral, making it more likely that the lender will recover the full amount in the event of default.
The size of the down payment thus determines the extent to which the lender is protected against the various factors that might reduce the value of the collateral, as well as lost profits between the time of the last payment and the eventual sale of the collateral.
Furthermore, making a down payment demonstrates that the borrower is able to raise a certain amount of money for long-term investment, which the lender may desire as evidence that the borrower’s finances are sound, and that the borrower is not borrowing beyond his or her means.
If the borrower is unable to pay off the loan in its entirety, he/she forfeits the down payment amount.
Due Dilligence: is the buyer’s opportunity to further investigate the property and the transaction as described in the Offer to Purchase form within a period of time agreed to by the seller and buyer. The buyer will want to inquire about anything bearing on a decision to either move forward with the contract or to terminate it. Some common considerations of the “Due Diligence” period are; home, pest, and septic inspections, property survey, appraisal, title search, loan qualification and application, repair negotiation, etc. The buyer has until 5:00 PM on the expiration date of the due diligence period to terminate the contract for any or no reason at all. The due diligence fee is Non-Refundable. However, if the buyer terminates the contract during the due diligence period, the Earnest money deposit is refundable.
Deciding how much due diligence time is needed requires thinking about how long it will take to schedule appointments for inspectors to come out and inspect the home and how long it takes to review documents like the HOA rules and regulations. During the due diligence time the buyer is able to cancel the contract for any reason, or no reason at all. The good news is money is credited towards the purchase of the home at closing if the buyer proceeds to close and does not terminate.
Earnest Money: The buyer is showing the seller they are serious about buying the home. If the seller is unable to fulfill the contract the buyer will get the earnest money back. If the buyer is unable to fulfill the contract the seller can keep the earnest money. Earnest money is refundable if the contract is cancelled within the due diligence time period and is credited toward the purchase at closing if the sale goes through.
Escrow: In the U.S., escrow payment is a common term referring to the portion of a mortgage payment that is designated to pay for real property taxes and hazard insurance. It is an amount “over and above” the principal and interest portion of a mortgage payment. Since the escrow payment is used to pay taxes and insurance, it is referred to as “T&I”, while the mortgage payment consisting of principal and interest is called “P&I”. The sum total of all elements is then referred to as “PITI”, for “Principal, Interest, Tax, and Insurance”. Some mortgage companies require customers to maintain an escrow account that pays the property taxes and hazard insurance. Others offer it as an option for customers. Some types of loans, most notably Federal Housing Administration (FHA) loans, require the lender to maintain an escrow account for the life of the loan.
Flood Determination Fee: or flood certification, is used by the lender to find out if your property is in a flood zone. Flood certification requirements are set by FEMA with flood maps.
Companies that provide flood certifications, or flood certs, use the maps from FEMA. To provide the certification, these companies charge a fee which is passed on to you as part of your closing costs, usually around $10 to $20.
Gross Monthly Income: Your gross income is the amount of money you earn before anything is taken out for taxes or other deductions. For example, even though your monthly salary might be $3,500, you might only receive a check for $2,500. In that case, your net income would be $2,500, but your gross income is $3,500.
Home Inspection: is a limited, non-invasive examination of the condition of a home, often in connection with the sale of that home. Home inspections are usually conducted by a home inspector who has the training and certifications to perform such inspections. The inspector prepares and delivers to the client a written report of findings. The client then uses the knowledge gained to make informed decisions about their pending real estate purchase. The home inspector describes the condition of the home at the time of inspection but does not guarantee future condition, efficiency, or life expectancy of systems or components.
A home inspector is sometimes confused with a real estate appraiser. A home inspector determines the condition of a structure, whereas an appraiser determines the value of a property. In the United States, although not all states or municipalities regulate home inspectors, there are various professional associations for home inspectors that provide education, training, and networking opportunities. A professional home inspection is an examination of the current condition of a house.
Homeowner’s Insurance: is an insurance policy that protects you against losses occurring to your home, its contents, loss of use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.
Additionally, Homeowner’s insurance provides financial protection against disasters. A standard Home insurance policy insures the home itself along with the things kept inside. Typically, claims due to floods are excluded from coverage, amongst other standard exclusions (like termites). Special insurance can be purchased for flood insurance.
Home Warranty: A home warranty can act like a home service contract that covers the repair and/or replacement costs of home appliances, major systems such as heating and cooling, and possibly other components of a home, structural or otherwise. The home service contract generally covers home systems such as the home’s plumbing or electrical, and appliances like dishwashers that fail from old age/normal wear and tear. Coverage varies significantly across home warranty companies. Home warranty contracts do not cover all home repairs.
HVAC: Heating, ventilating and air-conditioning. This makes up a significant portion of any homeowner’s utilities.
Interest: is payment from a borrower to a lender of an amount above repayment of the principal sum (i.e., the amount borrowed), at a particular rate.
For example, a customer would usually pay interest to borrow from a bank, so they pay the bank an amount which is more than the amount they borrowed; or a customer may earn interest on their savings, and so they may withdraw more than they originally deposited. In the case of savings, the customer is the lender, and the bank plays the role of the borrower.
Interim Interest: interest that accrues from the settlement day to the beginning of the first mortgage period. For taxation purposes, most kinds of prepaid interest are expensed over the life of the loan.
Mortgage: is a payment of money from a borrower to a lender over a long period of time in exchange for ownership of a property. Mortgage can also be described as “a borrower giving consideration in the form of a collateral for a benefit (loan).”
Mortgage Application: A document submitted to purchase a real estate property. The mortgage application contains information about the property the potential borrowers want to purchase, such as its address, year built and price, as well as financial and background information about the borrowers themselves. Lenders and underwriters use the information submitted on the mortgage application to determine whether money should be lent to the applicants and if so, how much, for how many years and at what interest rate.
Mortgage Broker: acts as an intermediary who brokers mortgage loans on behalf of individuals or businesses. Traditionally, banks and other lending institutions have sold their own products. As markets for mortgages have become more competitive, however, the role of the mortgage broker has become more popular. In many developed mortgage markets today, mortgage brokers are the largest sellers of mortgage products for lenders.
Mortgage Insurance: is an insurance policy you have to purchase so your bank can feel secure about loaning you money to buy your house. It compensates lenders for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer.
Private mortgage insurance, or PMI, is typically required with most conventional (non government backed) mortgage programs when the down payment or equity position is less than 20% of the property value.
Borrower paid private mortgage insurance, or BPMI, is the most common type of PMI in today’s mortgage lending marketplace. BPMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The US Homeowners Protection Act of 1998 allows for borrowers to request PMI cancellation when the amount owed is reduced to a certain level. The Act requires cancellation of borrower-paid mortgage insurance when a certain date is reached.
Lender paid private mortgage insurance, or LPMI, is similar to BPMI except that it is paid by the lender and built into the interest rate of the mortgage.
Origination Fee: or activation fee, is a payment associated with the establishment of an account with a bank, broker or other company providing services handling the processing associated with taking out a loan. This fee is universal and mandatory.
An activation fee is typically a set amount for any account. However, an origination fee usually varies from 3.0% to 10.0% of a given loan amount, depending on whether the loan was originated in the prime or the subprime market. For example, an origination fee of 3% on a $200,000 loan is $6,000.
Pre-approved: People interested in buying a house can often approach a lender, who will check their credit history and verify their income, and then can provide assurances they would be able to get a loan up to a certain amount. This pre-approval can then help a buyer find a home that is within their loan amount range. Buyers can ask for a letter of pre-approval from the lender, and when shopping for a home can have possibly an advantage over others because they can show the seller that they are more likely to be able to buy the house. Often real estate agents prefer to work with a buyer who has a pre-approval, as it demonstrates that they are well-qualified to receive financing and are serious about buying a home. A pre-approval is based on the documentation the borrower supplies at the time of application, and any actual eligibility to receive the pre-approved loan depends on the terms and conditions of the pre-approval and ability to secure the loan before the pre-approval expires.
Pre-qualified: a maximum loan amount determined by a standard Debt-to-income ratio (DTI). The lender asks for the borrowers’ social security number, proof of employment, income and assets, weighed against the monthly payments being made on their current debts. This provides a general picture of their credit worthiness.
Pro-rated Property Taxes: property tax that accrues from the settlement day to the beginning of the first mortgage period. The tax is nearly always computed as the fair market value of the property times an assessment ratio times a tax rate, and is generally an obligation of the owner of the property. Values are determined by local officials, and may be disputed by property owners.
Title Insurance: is a form of indemnity insurance which insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. Title insurance will defend against a lawsuit attacking the title, or reimburse the insured for the actual monetary loss incurred up to the dollar amount of insurance provided by the policy.
There are two types of policies – owner and lender. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance (a loan policy) to protect their interest in the collateral of loans secured by real estate. Some mortgage lenders, especially non-institutional lenders, may not require title insurance. Buyers purchasing properties for cash or with a mortgage lender often want title insurance (an owner policy) as well. A loan policy provides no coverage or benefit for the buyer/owner and so the decision to purchase an owner policy is independent of the lender’s decision to require a loan policy.
Underwriting: Once the mortgage application enters into the final steps, the loan application is moved to a Mortgage Underwriter. The Underwriter verifies the financial information that the applicant has provided to the lender. Verification will be made for the applicant’s credit history and the value of the home being purchased. An appraisal may be ordered. The financial and employment information of the applicant will also be verified. The underwriting may take a few days to a few weeks. Sometimes the underwriting process takes so long that the provided financial statements need to be resubmitted so they are current. It is advisable to maintain the same employment and not to use or open new credit during the underwriting process. Any changes made in the applicant’s credit, employment, or financial information can result in the loan being denied.