Real Estate Glossary
Appraiser: A professional who inspects a property and compares it to similar properties to determine its value.
Appreciation: Expressing gratitude to your agent is always a good thing. But in real estate this term means something entirely different. In this context, it means an increase in value of your property as affected by external economic factors. For example, a person buys a home for $185,000 and, without doing any additional work on the home, sells it two years later for $215,000. The property would have "appreciated" by $30,000.
Buyer Due Diligence: A buyer is granted a certain amount of time, negotiated by his/her agent, to investigate the home/property in order to determine if there are any serious concerns. During this time period a buyer can cancel the contract without any loss of earnest money.
Buyer's Market: This market condition happens when there are too many homes on the market and not enough buyers. So, the sellers cater to the buyers by dropping their prices and/or offering to pay closing costs (see "Closing Costs").
CC&Rs (Covenants, Conditions and Restrictions): These are the rules set forth by the various Homeowners Associations (see "Homeowners Association") that govern certain planned communities. The CC&Rs describe the requirements and limitations of what you can and cannot do with your property (e.g. whether or not you can put in a fence, have a pet, add on a shed, and so on.) The main goal of the CC&Rs is to protect, preserve, and enhance property values in the community. Be sure you read these carefully before you buy a property that has CC&Rs.
Closing Costs: Closing costs usually add up to about 3% of the amount of your loan. If you are paying in cash your closing costs will be minimal (your title company can give you a good estimate). Closing costs are the fees you will pay to the following entities:
- Title company - for recording fees, title insurance, etc.
- The lender - for doing the work on your loan.
- Appraiser - for determining the property's value.
Closing on the Home: This term is often confused with Settlement (see Definition). Closing refers to the final transfer of the ownership of a house from the seller to the buyer. It occurs after all the terms of the contract have been met, payment has been received and the deed has been recorded.
Comparative Market Analysis (CMA): Also referred to as 'comps.' This is a report of similar homes in the area (usually within several miles) that were recently sold or are currently on the market. Though not as accurate as an appraisal, it will give you a "ballpark figure" of what the home that you are buying or selling is worth. Your real estate agent should provide this free of cost.
Concessions: Nope, these aren't refreshments for sale at the ballgame. Concessions are discounts or benefits offered (usually by the seller) to help lock in a real estate deal. These could include such things as cash back to the buyer, a reduction in sales price, or including a refrigerator. Most of the time concessions involve the seller agreeing to pick up a portion or all of the buyer's closing costs.
Conventional Loan: A conventional mortgage or conventional loan is any type of home buyer's loan that is not offered or secured by a government entity, such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the USDA Rural Housing Service. A conventional loan is available through a private lender (banks, credit unions, mortgage companies) or the government sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Credit Report: A credit report is a summary of your financial dealings in paying your debts and other bills. This is not the same thing as a credit score.
Credit Score: A credit score is a three-digit numerical grade that is used to reflect your "credit worthiness." Although different types of credit scores exist, the FICO score is most common. FICO scores range from 300 to 850. The higher your score, the more likely lenders will be to trust that you'll pay back a loan.
Debt-to-income ratio (DTI): is the percentage of your monthly income that goes toward paying debts. Lenders typically prefer a DTI of 43% or lower, although some may allow a higher ratio for borrowers with excellent credit.
Down Payment: This is the amount of money required by the lender that you must pay up front to help qualify for a loan. A common misunderstanding is that the buyer must have at least 20% of the home price to put down on a loan. An FHA loan requires only a 3.5% down payment. And many conventional loans require only 5% down.
Dual Agency (aka Limited Agency): This term means that your agent is representing both sides of the
transaction. He/she represents both you and the seller. Why would he/she do that? To collect the commission on both sides of the transaction. Although it often works without problems we're not in favor of dual agency. Would you want a lawyer to represent you in a traffic accident if he is also representing the other party? We see it as a potential conflict of interest.
Earnest Money: An amount of money committed by the buyer to show the seller that he/she is earnest (serious) about the purchase. It is usually paid by check and is given to the buyer's real estate agent, who passes it on to the agent's brokerage. The check is cashed and held in escrow by the brokerage. The money goes toward the purchase of the home. This money can be lost to the seller if the buyer cancels the contract after certain deadlines have passed. But a good agent will do his/her utmost to guide you and prevent you from losing your earnest money.
Easement: The legal right granted to a person or entity to use someone's land for a specific purpose. For example, a utility company might have the right to dig on the property.
Escrow: Escrow is a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met – such as the fulfillment of a purchase agreement. When buying a home, an escrow account will be set up to hold the "earnest money" deposit. The good faith deposit will sit in the escrow account until the transaction closes. Also, after you purchase a home, your mortgage lender will establish an escrow account to pay for your taxes and homeowners insurance.
Exclusive Buyer Agent: This is an agent who has an allegiance only to you. His/her main job is to get you the best home at the best price. And here's the good news: You don't have to pay for his/her services. Really! The buyer's agent receives a commission from the seller - not from the buyer.
Exclusive Buyer-Broker Agreement: There is a wide variety of buyer broker agreements used throughout the United States. The most common buyer-broker agreement is between home buyers and real estate brokers (the owner of the agent's brokerage). This agreement outlines the obligations of the broker, the broker-agent relationship, and the responsibilities of the buyer for a specific time period (usually 3 to 6 months). With an "exclusive" agreement, the buyer cannot hire another broker to assist in the transaction. The agreement also lists the commission to be paid to the broker-even if the buyers find the house on their own. Make sure you read the agreement carefully and understand the terms and conditions.
Federal Housing Administration (FHA): The Federal Housing Administration is a United States government agency that sets standards for home construction and insures home loans made by banks and other private lenders.
Federal Housing Administration (FHA) Loan: This is a loan that is not provided by the federal government but is insured by the federal government, in case the home owner defaults on the loan. These loans tend to be at alower interest rate because the government is insuring them. Popular with first-time homebuyers, FHA home loans require lower minimum credit scores and down payments than many conventional loans. FHA borrowers pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
Fiduciary Duties: When a real estate agent acts as an agent for a buyer or seller, he/she becomes a "fiduciary." With this relationship come certain legal duties, called "fiduciary duties," where the agent is expected to always act in the best interests of the client. Some of these duties included confidentiality, loyalty and obedience to the client.
Home Inspection: A buyer is NOT required to get an inspection of the home he/she is getting ready to purchase. But it is VERY UNWISE to skip this expense! The buyer pays for the inspection, usually at a cost of
$200 to $400. But this inspection can save THOUSANDS OF DOLLARS by having an inspector determine critical issues BEFORE you buy the home. A good home inspection company will provide a report with photos of all areas of concern. The inspector should review this report with you, over the phone or in person, immediately after he has finished.
Homeowners' Association (HOA): This is a non-profit organization consisting of the homeowners who live in a planned community. The HOA makes and enforces rules for the properties within its jurisdiction. The purpose of the HOA is to protect the value of each other's property and to provide services to those in the community. If you purchase property within an HOA, you will be required to agree to abide by the CC&Rs (see Definition). Be sure to read them carefully prior to your purchase. Most HOAs charge a monthly fee that you will be required to pay to receive the services offered (e.g. lawn care, snow removal, water, and sewer). Some HOAs can be very restrictive about what members can do with their properties. The HOA Board consists of members from the planned community who are elected to serve, without pay, to manage the financial affairs and enforce the CC&Rs.
Home-owners Insurance:Homeowners insurance is a type of property insurance that covers losses and damages to an individual's residence, along with furnishings and other assets in the home. It also provides liability coverage against accidents in the home or on the property. A standard homeowners insurance policy typically includes four essential types of coverage:
- Structure of your home: This covers damages to the home and attached structures, such as a garage or deck, in the event of covered disasters like hurricanes, fire, or hail.
- Personal belongings: If your possessions are damaged or stolen, this part of your policy pays to repair or replace them.
- Liability protection: This covers you against lawsuits for bodily injury or property damage that you or your family members cause to other people. It also pays for damage caused by your pets.
- Additional living expenses (ALE): If you can't live in your home due to covered damages, this pays the additional costs of temporarily living elsewhere.
Homeowners can also purchase additional coverage for items such as jewelry, fine art, or other collectibles whose value may exceed the limits in the standard policy. Flood and earthquake damage are typically not covered by standard policies and may require separate insurance. The cost of homeowners insurance can vary based on the location, size, and contents of the home, as well as the homeowner's creditworthiness and chosen deductible.
Home Warranty: Typically, this is a one-year policy, paid for by the seller. It insures the home's crucial systems (plumbing, electrical, heating and AC) against failure. Depending on the comprehensiveness of the policy, it may also insure for the repair or replacement of such items as the oven, dishwasher, garbage disposal, and refrigerator. Buyers have the option to extend the warranty for additional years at their own expense.
Interest: This is the amount of money the lender charges you for borrowing money. When you get a mortgage, your interest payment is calculated as a percentage of the total loan amount. Let's say you have a 30-year $200,000 loan with a 4% interest rate. Your month to month payment would amount to about $955. Part of that monthly payment would go toward paying back what you borrowed, the "principal,", and the rest would go toward interest. Over 30 years, you would end up paying back not only $200,000, but an extra $143,739 in interest.
Interest Rate: This is the ,percent that the lender charges you on the money you have borrowed to purchase the home. Check with several lenders to see what their interest rates are. They can vary considerably.
Lien: This is a notice attached to a property stating that a creditor is owed money. For example, if the homeowner never fully pays a contractor for finishing the basement, the contractor can put a lien on the property. It gives the unpaid party a legal claim to a portion of the property. Typically, the owner is not able to sell or refinance a property until a lien is cleared.
Loan-to-Value (LTV): Loan-to-Value or LTV is the percent of money you're borrowing of the home's value. If the home is valued at $500,000 (as determined by an appraiser) and you're borrowing $400,000, your loan to-value is about 80%.
Low Ball Offer: This means you are offering MUCH lower than you should for the price of the home. Don't go there. A low ball offer usually makes the sellers and their agent angry. Don't try to take advantage of the other party. Go for "win-win" transactions. Work to make it fair for both parties. You'll sleep better and make lots more friends.
Multiple Listing Service (MLS): This is online service that contains all the specifics about a home, including price, address, age, square footage, number of bedrooms, number of baths, etc. Only homes listed by real estate agents are entered in the MLS. A real estate agent pays a monthly fee to belong to this service, so homes that are not represented by an agent (e.g. for sale by owner) are not included in the MLS.
Mortgage Brokerage: This is an independent company that works with numerous lenders throughout the country. It is not a bank or a credit union. Mortgage brokerages do not fund the loan but seek to match the buyer with lenders who best match the buyer's situation (e.g. good credit, bad credit, etc.).
PITI: This is an abbreviation pertaining to a mortgage. It refers to the Principal (amount borrowed), Interest, property Taxes, and homeowners' Insurance.
Points: Mortgage points are also known as discount points. These are fees paid to the lender in exchange for a reduction in the interest rate. One point costs 1% of your mortgage amount (i.e. $1,000 for every $100,000).
Pre-Approved: Pre-approved is similar to pre-qualified. However, pre-approval usually requires more documentation and verification of your income, assets, and debts. It's a higher level of qualification. And it often requires a credit check, which will result in a hard inquiry (one that affects your credit score) on your credit report.
Pre-Approval Letter: This is a letter created by your lender that states how much money you have been approved to receive in the purchase of your home. The letter can be sent to you or your agent. Many sellers will require a pre-approval or pre-qualification letter.
Pre-Qualified: This is sometimes confused with "pre approved." It is not the same thing. Pre-qualification is a similar process to pre-approval but requires less documentation.
Principal: This is the amount of money you borrow to buy your home. If you purchase a $500,000 home with a 10% down payment of $50,000, your principal is $450,000. This is the amount you will need to pay back, plus interest.
Private Mortgage Insurance (PMI): Private mortgage insurance is a monthly insurance premium paid by the buyer to the lender to protect the lender if the buyer is not able to pay the mortgage. Once the buyer reaches 20% equity in the home, the PMI should be discontinued. If not, call the lender and ask for it to be discontinued. If you put down at least 20% on your down payment, you will not be required to pay for PMI.
NOTE: Although you can cancel private mortgage insurance, you cannot cancel Federal Hoiising Administration insurance. You can get rid of FHA insurance by refinancing into a conventional loan.
Real Estate Agent: A real estate agent is a professional who has earned a real estate license in his/her state. Earning a license usually requires completion of a minimum number of classes and a test, though requirements vary by state. Agents work under the supervision of a broker.
Real Estate Broker: These brokers are usually managers or owners of a real estate agency and have agents working under them as salespeople. They must take additional real estate classes and pass a test. They also pay additional fees to maintain their state-issued broker license.
Realtor: A Realtor is a licensed real estate salesperson who belongs to the State and National Association of Realtors®. Realtors are held to a higher ethical standard than licensed agents and agree to adhere to a Code of Ethics. All Realtors are real estate agents but not all real estate agents are Realtors.
Seller Disclosures: A document with a series of questions the seller must answer to disclose (reveal) any significant problems that once existed or currently exist on the property.
Seller's Market: A seller's market occurs when the demand for homes exceeds the available supply. Because the number of homes is limited, the sellers often receive multiple offers - which cause the home cost to rise.
Settlement: This is often confused with CLosing (see Definition). Settlement takes place when both parties sit down with their title companies or attorneys and sign the documents that will transfer the property from seller to buyer upon closing.
Short Sale: The word "short" has nothing to do with time. It refers to owners who "come up short" on the money they owe on their home. Specifically, the owners owe more on their mortgage than the home is currently worth. For example, when the real estate "bubble" burst in 2007-08, many homeowners found their home value had dropped below what they owed on their home. A short sale occurs when a homeowner's lender allows the homeowner to sell the house for less than the amount owed on the mortgage. No matter what you've heard, buying a short sale home can be a long and complicated process.
Title: People often confuse the term "title" with "deed." A deed is a legal document used to confirm the ownership rights to a property. It is written document signed by both the buyer and the seller. The title is not a document but rather a concept that states you have the rights to a property.
Title Company: A title company plays a critical role in the purchase/sale of a home. The title company:
- Conducts a title search to see if the seller is the legitimate owner with the rights to sell the property
- Determines if there are any liens against the property (unpaid taxes, HOA fees, etc.)
- Issues title insurance for the buyer and lender, protecting them against any claims with the property.
- Obtains signatures on all of the closing documents.
- Receives and distributes payments relating to the transaction.
- Insures that the necessary documents have been prepared and recorded to transfer title to the new owner.
- The final closing for a home is typically held at the office of the title company. Different states and areas vary as to whether the seller or buyer (or both) select and pay for title company services. Your real estate agent can answer questions regarding the policy in your area.
Title Insurance: This is an insurance policy purchased by the buyer through the title company that protects the buyer if any party claims to have ownership in the property the buyer has just purchased.
Title Commitment: Prior to the issuance of title insurance (see Definition), an extensive title search is made of public records regarding the history of ownership of a property, including liens (see Definition), encroachments (see Definition) and encumbrances (see Definition). The title commitment is exactly what it says: a commitment to provide title insurance to the lender and the buyer under the terms described. The title commitment also outlines the conditions and any exceptions that will impact the title insurance policy.