Are you interested in real estate but don’t know where to start? If so, you have come to the right place. The best way to learn almost everything in real estate is to start with real estate definitions. You should focus on the real estate most used terms first and expand your knowledge in other areas later on. The more you learn the higher the chances you will make profitable real estate investments.
Real Estate Terms: Real estate’s most used terms (terms every real estate agent should know)
Whether you are a real estate agent, a real estate broker, a homebuyer, or a home seller, you should have a basic understating of real estate. Starting with real estate’s most used terms will be a wise choice. These terms will lay a solid foundation for your real estate journey and help you make well-educated decisions.
- What is real estate?
- What is real estate investing?
- Should you learn real estate terms?
- How to buy a house?
What is real estate?
Real estate is made of properties, land, and all-natural resources that come with it. These resources include but are not limited to water, minerals, etc. Real estate is grouped into three main types which include residential, commercial, and industrial.
Investors focus on different types of real estate depending on their business models and areas of interest. For example, one investor can focus on residential properties whereas another can simply focus on farmland.
What is real estate investing?
Real estate investing has a different meaning depending on who you ask. The term investing is used when a person or institution buys an asset with an intention of selling it later for a profit. In general, investing in real estate means that you buy a property and hold it or resell it later for a profit. Other activities that come with investing in real estate include but are not limited to management, marketing, renovations, etc.
For example, house flippers buy properties, renovate them, and then sell them for a higher price. On the other hand, landlords buy properties, hold them, and collect rent from tenants.
Why should you learn real estate terms (real estate’s most used terms)?
Regardless of the form of real estate you want to buy, you must have a solid understanding of real estate in general. You must know the rules of the game. Those who have knowledge hold the key to success.
Your success in real estate will depend on how much you know. The more you know the better. Real estate’s most used terms will be a good starting point. They will teach you how to buy properties, examine the market, and more importantly, help you learn the entire process of buying and selling properties.
As a real estate agent, for example, how will you answer your client’s questions if you don’t know much? After knowing the master list of most used real estate terms, you will feel comfortable about real estate processes and how to address issues that come with them.
How to buy a house?
The process of buying a property can be summarized into a few steps which are listed below.
- Gathering requirements: Make sure you have a good credit score, proof of income, a good debt-to-income ratio, improve your credit history, have some assets, etc.
- Have a down payment and closing fees: A down payment is important as it helps you reduce the cost of the mortgage and house in general. A 20% down payment is required for a conventional mortgage if you want to avoid mortgage insurance. Putting down more money will reduce your monthly payments and increase your chances of paying off the property much faster. Closing fees must be prepared as well. These are fees other than the down payment a buyer pays out of pocket at the settlement date.
- Securing a mortgage or having a huge bundle of cash: If you are paying with cash, you don’t need to worry about mortgage processes. However, if you are financing the purchase with a mortgage, you should secure a pre-approval letter as it shows buyers that you are a serious buyer and someone will most likely lend you money.
- Getting a real estate agent: An agent will guide you through the whole buying process. That is the agent will take you on property showings, give you guidance, negotiate prices, sign paperwork, etc. Treat a real estate agent as the one friend who makes sure that you do not settle for less or fall into a trap.
- Go through property showings (a lot of them): You must look at a ton of properties before you choose one of them. I mean the one that fits your needs the most. It is like finding a needle in a haystack.
- Evaluating a property you have chosen: After choosing a property you must submit an offer, go through an inspection, have it appraised, etc. Or you can be like other emotional buyers who skip inspection because they afraid of losing a beautiful backyard.
- Closing the Sale: This is where you sign all paperwork, submit the full payment, and receive the key if everything goes well.
You see, it is not hard to buy a property if you know what you are doing. So, why is so hard for many people to buy or invest in real estate? The quick answer: most people have no idea of how real estate works. They just have that 15% down payment and buy the first house they find because they picture their pets running in the backyard.
Usually, buyers outbid each other which leads to paying 30% even more than 40% above the asking prices. Later on, they find it difficult for the property to make money, appreciate, or afford their monthly mortgage payments. You know what happens next.
Each step listed above has other small steps involved and its own requirements. Knowing what goes into buying properties helps you prepare the best you can. Thus, making the whole process much easier and faster than average buyers.
If you want to know how to buy a house in more detail, read the following related article.
Related: How to buy a house step by step?
Real Estate Terms: A master list of essential real estate terms
As I promised you earlier, I will give you the ultimate list of real estate’s most used terms. The following paragraphs will cover a list of real estate terms that every real estate agent, broker, homebuyer, and seller should know. Give it a shot and good luck.
I made the list easier for you to navigate. If you don’t want to go through the whole list, click on each letter to learn the real estate terms associated with it.
A
Addendum
When buying or selling property, the terms of the sale will be included in the purchase and sale agreement. However, there are times when more information will be needed to accompany terms in the contract or help clarify those terms.
This is when the addendum comes in.
An addendum is a document that is added to the purchase and sale agreement to reinforce terms in the contract or add more terms to the original contract. These terms must be agreed upon by all parties involved in the contract.
Abandonment
The term abandonment is used to describe a situation in which the owner of a property/asset decides to leave it and never comes back to reclaim it. That is the owner abandons the property and gives up the rights to it intentionally.
Once the property is classified as abandoned, the previous owner can neither reclaim it nor decide who the property goes to.
Absorption rate
In order to understand how long it takes to sell houses in a particular area, important metrics must be used. One of the most used metrics is the absorption rate.
The absorption rate measures the rate at which houses are sold in a particular market at a given time. Some of the factors that affect the absorption rate include but are not limited to the number of houses listed on the market, the market condition, etc.
Abnormal transaction
When a property is bought at a price that does not reflect its value, the transaction is classified as an abnormal transaction. In order words, a mistake could have been made in the transaction. For example, it will be an abnormal transaction if a $400,000 house was sold for $4,000.
Active
An active status is a listing status that shows that the house is on the market and ready to be sold. With this status, buyers can visit the house and submit their offers. If a house is not yet ready to be sold or is on the market under different conditions, it will have a different listing status such as pending offer, off-market, sold, pending contingency, etc.
Active contingent
Active contingent a.k.a active with contingencies is a listing status that indicates that the seller has accepted an offer on the property. However, there are conditions that must be met before the sale is finalized. These conditions are referred to as contingencies.
Contingencies give the seller or buyer a legal option to walk away from the sale if they(contingencies) are not satisfied. Both the buyer and seller can have contingencies. For example, a seller can have a mortgage approval as a contingency. If the buyer of the property does not secure the loan commitment letter a.k.a mortgage approval letter at a given date, the sale will not go through.
At the same time, a buyer can have a home inspection as a contingency. If for example, the buyer discovers major structural problems during the inspection, he/she can walk away from the sale. You should consider using contingencies when buying or selling a property to avoid scams, loss of capital, or legal battles down the road.
Adjustable-Rate Mortgage (ARM)
The interest you pay on the mortgage comes in two forms which are the adjustable-rate mortgage (ARM) and a fixed-rate mortgage.
The adjustable-rate mortgage means that the interest rate will change during the duration of the mortgage. For example, if you have an ARM on a 30-year term, the interest on the loan will vary depending on the market. If the interest goes down, you will benefit. However, if the rate goes up, you could end up paying an interest that is higher compared to what you could have paid if you had a fixed interest.
Amortization
The term amortization is used when a buyer of a property pays off their mortgages in equivalent installments. A portion of the monthly mortgage payments covers the interest whereas the other portion goes toward the principal.
With amortization, a percentage of the monthly payments toward the interest will start high. This means that the percentage that goes to the principal will start small. Over time, the percentage that covers the interest will decrease as the percentage that goes to the principal increases.
The lender must recover a huge percentage of the money you borrowed fast enough in case you default on the mortgage. This is why a big chunk of your monthly payments goes to the interest in the first few years.
Amortization helps home buyers to build equity in their properties. That is the percentage that goes toward the principal becoming your equity in the house. You can later take this equity out through a home equity line of credit (HELOC) or other means. In addition, this equity helps homeowners during the mortgage refinancing process.
Annual Percentage Rate (APR)
When you go to the bank, credit union, or other lending institutions to borrow money, you will be classified as a debtor or a borrower. Once approved for the loan/mortgage, you will receive the amount you are looking for with a string attached.
Since the money you will be using is not yours, the lender will apply interest on the money you are borrowing. The interest must be paid off on top of the principal amount, fees, and charges. The interest on your mortgage/loan is known as the annual percentage rate(APR). So, the annual percentage rate(APR) is the interest you will pay on the money you borrowed and it is expressed as an annual percentage of the money you owe the lender.
Annual depreciation allowance
The term depreciation refers to the loss of value of assets such as a house/car, etc over time. For example, if you bought a house for $200,000 in 2012 and sold it for $150,000 in 2020, it will be easy to say that your house depreciated by $50,000 ($200,000-$150,000). In other words, the value of your house declined by $50,000 during the 8 years you owned it.
Although depreciation is not good for investors, there is a way investors (asset owners) can save money on their taxes due to the depreciation of their assets. Yes, the annual depreciation allowance can let you save money in taxes.
The annual depreciation allowance refers to the depreciation of an asset and how much of that depreciation you are allowed to write off on your tax return. That is, as an investor, you could deduct some of your assets’ depreciations from your tax returns. Hence, saving money even if your asset’s value went down.
Appraisal
The appraisal is the act of evaluating the value of the property. For example, if you are buying a house you will need to know its value before you submit your offer. At the same time, if you are selling a house, you will need to know how much your house is worth before you list it on the market.
Appraisals are conducted by appraisers. These are real estate professionals who have the skills, experience, and certifications to conduct home evaluations. The cost of an appraisal varies from one property to another and increases as the number of units increases. As noted by the home advisor, appraisals for single-family homes costs $340 whereas appraisals for multifamily properties cost between $600 and $1,500.
Appraiser
An appraiser is a professional individual or organization that specializes in evaluating the proper values of properties. Appraisers act as a third party and help home buyers and sellers to know an estimation of the home in question.
Appraised Value
An appraised value is the value of the property estimated by an appraiser. Some of the factors that will affect the appraised value include but are not limited to the age of the property, location, market conditions (seller’s market or buyer’s market), size of the property, etc.
Appreciation
Many investors favor assets that appreciate over time. You should do the same if you want to achieve financial independence.
The term appreciation refers to the increase in the value of an asset over time. For example, if you bought a house for $100,000 in 2010 and its value went to $200,000 in 2020, your property would have experienced an appreciation of $100,000 or $100%. Keeping your focus on properties that appreciate over time is one of the greatest ways to make money in real estate.
There are two forms of appreciation which are:
- Forced appreciation: This appreciation happens really fast and it is directly related to home improvement or renovations. For example, if you bought a fixer-upper for $50,000 and put in $30,000 in renovations, the value of the property could go to $120,000. In this case, you would have forced an appreciation of $40,000 ($120,000 -($50,000+$30,000)) on your property.
- Natural appreciation: This appreciation happens naturally. You just buy a property and hold it for a while. As the market goes up, the value of your property will increase as well. Hence, making money by just holding the property.
Another important term to remember is depreciation. If you guessed that depreciation is the opposite of appreciation, you are right. Depreciation refers to the loss of value of an asset over time. If you bought an asset for $10,000 and its value goes to $2,000, the asset would have lost $8,000 or 80% of its value.
Arm’s length transaction
An arm’s length transaction is a transaction in which a seller and buyer of the property have equal bargaining power. In order to come to the sale’s price (a mutual price that benefits both parties), a lot of bargaining is involved.
Assessed Value
Property values are evaluated in order to determine how much the owners must pay in tax. This job is conducted by an assessor who will be working on the behalf of county or city. The property value estimated during the property tax assessment is known as assessed value.
That is your property tax will be calculated based on the assessed value.
Related: Learn how you can reduce your property tax
Assessor parcel number (APN)
Every property in a county is represented by a unique number that is used for tax assessment. The official name of this number is the assessor parcel number (APN). Some cities, states, and counties used different names for APN. The most common names are property account number (PAN), tax account number (TAN), and finally, property identification number (PIN).
Assumable mortgage
Homebuyers without enough money to purchase the property with cash rely on mortgages. It takes a lot of effort and time to secure a mortgage approval letter. To avoid some of the mortgage processes, some homebuyers assume the responsibilities for the remaining mortgage balances on homes they are buying. That is, with negotiations between the buyer, seller, and current mortgage provider, the remaining mortgage balance, terms, and responsibilities are transferred from the seller to the buyer.
This type of mortgage is known as an assumable mortgage. So, an assumable mortgage is a mortgage that allows buyers to take over the responsibilities of unfinished mortgage payments on the house they are buying. This saves them money and time and makes the home buying process much easier.
As-is
As-is is a term used to describe that the property listed will be sold the way it was posted. That is, the buyer should not expect the seller to make any modification to the property before the sale is finalized. In addition, the seller will not be liable for any problems found after the sale is done. Usually, properties sold during auctions such as real estate owned (REO) are sold as-is.
Auction
When homeowners default on their mortgages, moneylenders take possession of the properties. Since lenders are not in the business of owning and selling houses, they will find a way to get rid of these properties as soon as possible. One of the fastest ways to sell these properties is through an auction.
An auction is a public event where properties and other assets are sold. This process is based on bidding and the person who makes the highest bid wins the property. During auctions, most properties are sold as-is. This means that the lending institution such as a bank or credit union will not do any modification to the property and will not be responsible for major issues found after the sale.
Average
Knowing exactly how much a property costs in a given neighborhood, city, or county is very difficult. Without knowing how much houses cost in an area, you will risk spending more money when buying or selling your house for less.
Statistical methods are used to understand property prices in a particular area. One of the most used metrics is the average. So, the average tells you how much a house costs in a given area. The average is the ratio of the sum of all properties sold in a particular market and the number of properties sold. This statistical metric gives a more precise value when home prices are close. That is an outlier will drastically change the average, and hence, give an inaccurate answer compared to reality.
If properties have a large range of prices, the median is used to find a more accurate value. The median is the middle price when all properties are organized in ascending order. That is to calculate the median, you will organize prices at which properties were sold for and then choose the middle number.
B
Backup offer
What would you do if you have accepted an offer from the buyer but are not sure if the sale will go through? For example, the buyer of your house must secure the mortgage or pay with cash. What if the buyer does not have cash and the chances of securing the mortgage commitment letter are slim? In this case, you can accept more offers from other buyers until the house is sold. These offers are known as backup offers.
A backup offer is a listing status that shows that the seller has accepted an offer. However, the seller is still taking more offers from interest buyers.
Balloon mortgage
Balloon mortgages are mortgages that let borrowers make little to no payments until the maturity dates. These mortgages are risky, and therefore, hard to qualify for. If there is a payment to be made, it will be the interest charges or the payment will be based on the terms of the mortgage.
Borrowers can take advantage of using money without enormous monthly payments. The downside is that the mortgage balance, interest, and charges must be paid off in full at the maturity date. Making a large payment at once can be impossible for many borrowers. For this reason, you must know your financial outlook and borrow only what you can afford to pay off.
Bill of sale
A bill of sale is a legal document that seals the sale between a buyer and seller. The bill confirms that the property in question has been transferred from the seller to the buyer. In addition, this sale will include details of the sale such as the name of the asset, the amount received, date, location, etc.
Bridge loan
A bridge loan is a short-term loan that helps investors, individuals, and businesses to meet their short-term financial obligations. A bridge loan is used for short-term expenses before securing a long-term loan.
Breach of contract
There are times when one party will fail to fulfill the terms and conditions of the agreement they signed. For example, a contractor can sign a contract to remodel a house within three weeks. If the contractor does not finish the house or decides to delay the project, it will be a breach of the contract.
In short, a breach of contract is a term used when one party does not fulfill the legal terms of their contract. A breach of contract can also be used in a situation where one party makes it impossible for another party to fulfill its promises.
Broker
A real estate broker is a licensed and professional individual or business that represents a seller of the property and eases the interaction between buyers and sellers. There are times when a broker can represent the buyer. Brokers are not the same as real estate agents. Real estate agents represent a buyer or a seller and earn a commission in return.
Broker Price Opinion (BPO)
Before a property is listed on the market, its value must be estimated. This job is done by real estate brokers and it is considered to be their opinion. Hence, the term broker price opinion or BPO for short.
BPO is not allowed in every state and some states prohibit charging for this service if it is allowed. Before providing an opinion to clients, a broker must have enough experience and or certification. Brokers estimate the value of houses using many methods such as comparing the property with similar ones sold in the same area, location, market trend, etc.
Buyer’s market
There are times when the number of properties available for sale will be much more than buyers at a given time. When this happens, buyers become picky as there will be more properties to choose from. This will create competition among sellers which will drive prices lower.
A market like this is known as a buyer’s market. In short, a buyer’s market is a market in which there is a surplus of properties available for sale compared to an available number of buyers. A buyer’s market is characterized by the following:
- The number of buyers will decrease(sometimes)
- The number of sellers will increase (sometimes)
- Houses are listed and sold for much less than their worth
- Properties stay on the market for a while
Buyer’s agent
A buyer’s agent is a licensed individual who represents the buyer of a property. The agent helps the buyers at every step of the process. Some of the tasks a buyer’s agent performs include but are not limited to property showings, paperwork, price estimations, research, negotiations, etc.
Building codes
Before the construction of the building begins, the design and construction must be approved by the local government, city, county, or all the above. The local government uses the building codes which is a set of rules that govern all construction activities in the area.
These rules vary from one county, city, or state to another, and the types of the building in question. In addition, the building codes are updated or changed over time due to many factors. For example, if an area suddenly experiences floods and unusual natural disasters, the local government can change the building codes to address these issues.
Built-ins
Built-ins represent everything that is permanently fixed on a real estate property. They(builtins) stay with the property when it is sold and they range from cabinets, appliances, fixed furniture, etc. These items save a lot of money to home buyers since they do not install new ones unless they need to upgrade them.
C
Cash-out refinance
After building enough equity in the house, a homeowner can refinance their mortgage for a lower rate or get cash out. Refinancing a mortgage is the process of replacing an existing mortgage with a new one in an attempt to lower the interest rate or pull some of the equity from the house to finance other projects.
A cash-out refinance is a type of mortgage refinance that results in more cash than the current mortgage balance. For example, if you owe your lender $20,000 on a $400,000 home, you can get more than $20,000 when you refinance your mortgage. This is because the equity you have in the house is big enough for your to qualify for a much higher amount.
Capitalization rate
The capitalization rate a.k.a cap rate is a metric used to estimate the returns on a real estate investment. Cap rate comes in handy when investors are assessing the profitability of a property before they make a purchase. This metric is also used to compare similar properties in the same area.
Certificate of occupancy
After building a new house or repurposing a property, it must receive a certificate of occupancy before anyone lives in it. This certification is provided by the local government and it confirms that the property has been built based on safety and professional standards. In addition, this certification confirms that all building codes and governing laws have been followed and the property is ready for people to occupy it.
Closing
Closing is the process of finalizing a real estate transaction. At the closing date, the buyer, seller, and their agents will be present. All documents related to the sale will be signed on this date and the full payment will be submitted. If everything goes well, the buyer will receive the key to the property a little after.
Closing Costs
Closing costs are fees and charges that must be paid when finalizing a real estate transaction/sale. These fees include but are not limited to:
- Title search
- Appraisal
- Origination
- Deed
- Survey
- Tax, Etc.
Closing disclosure
Before closing on the mortgage, your lender will give you a written notification that will explain the terms of the loan. This process is known as the closing disclosure. The borrower must review these documents and contact the lender for errors, concerns, or any other questions they have about the terms of the mortgage.
Commission
Homebuyers and sellers use real estate agents to help them navigate the complexity of real estate transactions. These agents do not work for free. By default, agents do not have a fixed salary. Instead, they receive a commission that is expressed as a percentage of the sale.
According to Opendoor, the average commission for a real estate agent is around 5-6% of the total sale of the property. This percentage is negotiable and both agents will share the commission based on the terms they agreed upon and their contributions to the sale.
Community Property
Married couples buy properties such as a house together. Since they bought and owned these properties together, the properties become community properties. Meaning that the husband and wife share equal rights on these properties. Community property does not necessarily have to be a house. Other assets such as cars, capital gain or capital loss, etc. all are community properties.
Coming soon
Coming soon listing shows that the property will soon be on the market for sale, usually, within three weeks. This listing gives sellers a chance to have an early exposure to the market before the property is officially listed. At the same time, interest buyers and real estate agents can put the property on their calendars and visit it as soon as it is posted.
Comparable
Before listing your house for sale, you must know its current value. This will help you choose the optimal listing price that will help you maximize return on investment (ROI) without pushing away interest buyers.
One of the commonly used methods when it comes to evaluating the value of properties as comparables. The comparables are similar properties recently sold in a particular area. Being similar means having approximately the same size, age, location, etc. These properties tell you how much you should expect to receive on a property. With this information, you will know how much to list your property for.
Comparative Market Analysis(CMA)
The process of estimating the proper value of a property is known as comparative market analysis. By using comparable (similar property sold in the same area) or properties listed on the market, one can tell how much buyers are willing to spend.
This analysis is usually conducted by real estate agents to help sellers with listing prices or buyers to avoid offering more than the value of the property. CMA also considers the current market condition and the location of the property.
Concession
Selling a real estate property takes a long time, endless negotiations, and sometimes frustrations. In order to have a successful sale, one of the parties involved in the sale can give a discount to the other party. These discounts are known as concessions.
For example, if a seller of a property is well-motivated, he/she can contribute a big chunk to closing costs. Concessions are common in real estate sales.
Condominium/Condo
There are many types and forms of real estate properties. One of the simplest ones is the condominium or condo for short. Condos are like apartments except that they are owned separately. These simple units are part of a huge complex that is managed by a homeowner association. The associate takes care of the renovation/cleaning, and maintenance of shared areas. In return, the owner of the units pays a monthly fee known as the HOA fee.
Contingency
When buying or selling a property, you must be careful as unforeseen events could prevent the sale from happening. Without proper protection from these events, the buyer or seller could end up losing money on the property. In real estate, these events/conditions are defined as contingencies.
A contingency is a particular condition that must be met in order to have a successful sale. For example, a buyer can use the home inspection as a contingency. This means that if the buyer found very serious structural problems or other related issues, he/she can walk away from the sale.
The seller can also use the mortgage as a contingency for the sale. Unless a buyer is paying with cash and has proof of it, how will you know if they will be able to afford your property? This is why a mortgage contingency can protect the seller in case a buyer fails to secure a mortgage commitment letter from the lender. Contingencies must be specified, clarified, and agreed up ahead of time to be valid.
Construction Loan
A construction loan is a loan that helps homeowners to finance their construction projects. These projects can range from simple renovations to building new homes. Construction loans are usually short-term, risky, and therefore, expensive due to high interests.
Conventional mortgage
A conventional mortgage is a mortgage that is not backed by a government institution like the Federal Housing Administration (FHA). These mortgages require a 20% down payment and are usually provided by private lenders and their terms are set by Freddie Mac and Fannie and Fannie Mae. A good credit score, proof of income, assets, good credit history, and many other factors are needed for a conventional mortgage.
Cooperative
Investing in real estate is very expensive as it requires a very high entry capital. That is why many people/investors combine their efforts and money to invest in profitable properties. All members then share profits and losses from their investments.
These investment groups are known as cooperatives. In short, a cooperative is a business or organization made of many members where the profits/losses are divided among its members. The shares each member receives from the cooperatives are proportional to their contribution. For example, an individual who contributed 50% of the cooperative money and other assets could receive 50% of all profits or losses.
Counteroffer
Bargaining is common in real estate. This is because sellers usually list their houses above their market values and sellers want to spend less money. During the bargaining process offers will be exchanged between a buyer and a seller. These offers are known as counteroffers.
In short, a counteroffer is an offer submitted in response to a previous offer. For example, if a seller reduced the price from $230,000 to $220,000, the buyer can increase his by a certain amount depending on how he/she feels about the reduced price. If the buyer first submitted $185,000 he/she can increase the offer to $200,000.
D
Debt
Debt is the money you owe a person, bank, or other lending institution. People usually get into debt by borrowing money to cover their financial needs. In return, the borrowed money must be returned at a given time together with interest and associated fees and charges.
For example, a homeowner can borrow money from a bank to buy a house. The borrower will then make monthly payments that cover the principal and interest until the house is fully paid off.
Debt comes in many forms and sizes. Some of the most common forms of debt are secured debt, unsecured debt, mortgages, revolving debts, and non-revolving debts.
Deed
A buyer will not have legal ownership of the property until a deed is signed and notarized. So, what is a deed? A deed is a legal document that transfers the title of the property from a seller of a property to the buyer.
Deed-in-lien
To understand what a deed-in-lien means, we need to understand two main parts that make up this term. The first term is a deed which is a legal document that transfers the title of a property from a seller to a buyer.
The second term is a lien which is a document that gives its holder legal ownership of the property in question. For example, if you borrowed money to buy a car and used the same car as collateral, the lender can legally take the car from you if you fail to pay off the loan.
By combining these two terms you get a deed-in-lien. So, a deed-in-lien is a term used when mortgage borrowers decide to transfer the title of the property to the lender without going through a foreclosure. This happens after defaulting on their mortgages. Instead of going through the conventional foreclosure route, the lender and borrower can negotiate and use a dead-in-lien. A deed-in-lien helps both parties financially and saves time. The remaining amount can be forgiven or paid off through installments.
Default
The hardest part about being a homeowner is not the house-hunting process. Instead, the ability to make required monthly payments until the house is fully paid is the hardest part of homeownership.
Nobody knows what will happen in the future, and therefore, a loss of a job can make it impossible to afford your monthly payments. If you cannot make your mortgage payments or find other financing methods, you will default on your mortgage. Defaulting on a mortgage is a fancy term used when mortgage borrowers fail to make their mortgage payments.
When a homeowner defaults on their mortgages, the lenders take their properties through foreclosures.
Debt to income(DTI) ratio
One of the most important criteria moneylenders consider is the debt-to-income ratio or DTI ratio of borrowers. This ratio compares how much debt you have in relation to your income. A higher ratio will indicate that you have more debt than your income.
Why does this ratio matter? Lenders need assurance that you can be able to pay off the money you are borrowing. The DTI ratio helps lenders determine how much money a borrower can afford to borrow and the likelihood to pay it off. Having a higher DTI ratio means that you already have too much debt, and therefore, it could be difficult for you to pay off extra debt since your income is already stretched.
Depreciation
When you buy a property and later sell it for less, it is said that you have lost money on the property. That is you have a negative return on investment. All assets except land lose value over time.
In short, depreciation is the loss of value of an asset over time.
For example, if you buy a house for $200,000 and sell it ten years later for $150,000, the house would have lost $50,000. In other words, we would say that the house depreciated ($50,000) over the course of 10 years.
Depreciation can occur naturally(slowly) as the asset wears and lose value or faster. A fast depreciation can occur, for example, if you buy a house and abandon it for nature to take over. Without maintenance and care, the house could be taken over by mice, termites, moisture, etc. This will reduce the value of the property much faster.
Discount points
There is a trick you can use and secure a lower interest rate on the mortgage. You can do this by purchasing discount points a.k.a mortgage points. Discount points are fees you will pay directly to the lenders in an effort to reduce the interest rate on the mortgage.
This money will be paid at the closing date. According to Bank Of America, one point will be equal to 1% of your total mortgage balance. For example, if you are buying a $200,000, 1 discount point will cost you $2,000 (1% of $200,000). If you want to purchase 2 discount points, you will need to give your lender $4,000 at the closing date.
The more points you purchase, the lower the interest on your mortgage will be. However, most lenders will have a limited number of discount points you can purchase.
Disclosure
One of the most important steps sellers and their representatives must take is to disclose defects/information about the property that can influence buyers’ decisions.
For example, if the house had a crack in a wall that was covered due to recent paintings, it would be unethical for sellers to hide this information from buyers.
In short, disclosure is the release of information/defects about a property that can influence potential buyers’ decisions. This helps buyers make educated decisions about their offers on the property. If not disclosed, hidden defects can lead to financial loss and legal battle following a real estate transaction.
Down payment
One of the biggest barriers in real estate is the down payment. This is upfront payment buyers make when they are financing the purchase of a home with a mortgage. The down payment varies depending on the type of mortgage a borrower is getting.
For example, a conventional mortgage requires a 20% down payment whereas an FHA loan requires as low as 3.5%. It is still possible to qualify for a conventional mortgage with a down payment under 20%. However, the borrower must purchase the mortgage insurance that will protect the lender if the borrower defaults on the mortgage.
The down payment will help you lower the cost of the mortgage and save you money over time. This is why the smartest way to save money on a home purchase is to have a higher down payment.
Related: Tips to save for a down payment?
Dual agency
When buying or selling a property, you will most likely use a real estate agent. By default, there are two agents (buyer’s agent and seller’s agent) in every real estate transaction. However, there are cases where one agent can represent both the buyer and seller of a property. This is known as dual agency.
The due agency is not allowed in every state due to conflicts of interest and untheatrical reasons. For example, an agent can trick a home buyer to buy a property for a much higher price than it is worth. This will increase the commission of the agent since they take home a percentage (5-6%) of the total sale. A successful dual agent is one who does not take any side involved in the transaction which is really difficult to do.
E
Earnest money deposit
What would you do if you want to buy a house but have not secured financing yet? One of the steps many homebuyers take is to put down earnest money or a deposit. This money shows their commitment toward buying the property. Once the earnest money is paid, the seller can agree to hold the property while the buyer is getting financing, appraisal, etc.
According to the American Family Insurance, the earnest money range between 1-2% of the total cost of the property. The seller of the property can keep the earnest money if the buyer fails to buy the property. However, there are cases where the money can be refundable. For example, if the home inspection is your contingency you could get your money back once the house does not pass the inspection.
Easement
An easement is a limited right a property owner gives to another person to use the property. For example, if your waterline must go through your neighbor’s yard, you can obtain a limited right from your neighbor to use part of the yard. Unless it is in writing, you cannot use more than you are given.
Another good example is when a landlord gives a tenant a limited right to use the land that comes with the property. If a tenant wants to garden on the land, he/she must obtain the rights from the landlord. The term of the easement will include the types of plants to be grown, animals allowed, how long, etc.
Encroachment
Encroachment is a term used when an owner of property builds an extension to their own property in a way that violates their neighbor’s rights. For example, many homeowners prefer to have fences around their properties. If a property is built in a way that extends in the neighbor’s property, conflicts will erupt. These conflicts are known as encroachments.
To avoid encroachments, surveys should be conducted to make sure that one does not extend their projects on someone’s property. Proper measures should be taken to manage encroachments when they happen.
Homebuyers should be careful when buying houses. If a property does not have proper limits that separate it from its neighbors, a survey should be conducted.
Equity
Equity is your total ownership of a property. For example, if your property is worth $200,000 and you still have a $50,000 mortgage, your equity will be $150,000. If you have $100% ownership in an asset, your equity will be the total value of the asset.
Escrow
When buying a property, you may be asked to put money in an escrow account. So, escrow is a term used when a third party holds the money in an account before it is transferred from the buyer to the seller of a property. This arrangement protects the money from either party until the terms of the transactions are complete.
F
Fair Market Value (FMV)
When selling a property or any other assets, the price at which you sell for it can be affected by many events in the market. For example, you could sell your house for less money because you are trying to avoid a foreclosure. In this case, we would say that the price you received was not fair because it was influenced by the pressure from your lender.
If you could be able to list your property on the market and sell it at a price that is not influenced by any events, it would be said that you received a fair market value (FMV). So, a fair market value is a price at which a property could be sold in an open market. For this price to be reached, some conditions must be met.
- Sellers and buyers must have enough knowledge of the assets in question
- There should be enough time to re-evaluate decision being made by any party
- Market or trade conditions should not dictate prices
- Each party should make a decision that is in their best interest
Federal Housing Administration (FHA)
The Federal Housing Administration or FHA for short provides insurance to loans and mortgages provided by FHA-approved moneylenders. These lenders include but are not limited to banks, credit unions, etc. FHA loans support single-family homes, multifamily homes, hospitals, etc.
FHA Loan/Mortgage
The FHA loan is a loan provided by FHA-approved lenders. FHA loans are less strict compared to conventional mortgages and they require a low credit score and down payment.
Fixed-Rate Mortgage (FRM)
Most home buyers get fixed-rate mortgages because their interest rates stay the same for the duration of the mortgages. The terms for these mortgages range from 10-30 years. However, the most popular ones are 15- year and 30-year fixed-rate mortgages.
Having a fixed interest rate means that you are set for the entire life of the mortgage. Should the interest rates go up after signing up, yours will stay the same. The downside of FRMs is that you will not benefit from lower interest rates unless you refinance your mortgage.
An alternative to fixed-rate mortgages is adjustable-rate mortgages (ARM). As the name suggests, an ARM is a mortgage whose interest rates vary over time. The downside of these types of mortgages is that you could pay more money if rates move up for a long time.
Fixer Upper
Fixer-uppers are properties that are Ok to live in but could use some renovations. Fixer-uppers usually cost less money compared to new constructions or renovated ones. The nature of renovations varies from one property to another. House hunters should be careful as some renovations can cost a fortune, especially those with structural problems.
Related: 74 Things to look for When buying a house
Flipping houses
Flipping, in general, is a term used when a person buys an asset with the intention of reselling it for a profit. In real estate, flipping houses, a.k.a flipping is used when someone buys a house and resells it for profit. Most of the time, people who flip houses buy them for cheap prices, renovate them, and then sell them. In order to succeed as a house flipper, you must do thorough research, purchase good houses at the lowest prices possible to accommodate renovations, and then sell them at a high price.
Related: 4 Things to know before flipping a house
Float down
After locking in an interest rate on a mortgage, it cannot be changed automatically. If, for example, the interest goes down, the borrower’s interest does not get adjusted to new rates. There is a way borrowers can reduce their interest rate without refinancing their mortgages. They can do what is known as float down.
Float down is an agreement between a borrower and the lender which allows the borrower to lower the interest rate they pay on the mortgage. Lenders usually charge a fee that is expressed as a percentage of the loan amount for this service.
Flood insurance
Flood insurance is insurance that protects homeowners from losses related to floods. This insurance comes in handy and is recommended for people who live in locations or states that experience hard and strong floods. For example, homeowners who live in states like Texas, Florida, etc. should have flood insurance.
For sale by owner
When homeowners are selling their houses, they can either use a real estate agent or choose to not use an agent. When they(sellers) choose to proceed without an agent, the listing will be For Sale By the Owner or FSBO for short. This technique can help sellers lower the commission as there will be only one agent(buyer’s agent) to take the commission. Furthermore, the buyer’s agent will receive a large commission since there will be no seller agent to split it with.
Foreclosure
There are times when borrowers will no longer afford to make mortgage payments on their properties. When this happens, it will be said that the borrower defaulted on the mortgage. Following the default, the lender will attempt to recover the remaining mortgage balance through a legal process called foreclosure.
It is also possible that some borrowers can purposefully decide to stop making payments on the mortgage. For example, if the value of the house drops by 75%, it would not make sense to continue making mortgage payments. Think of purchasing a house for $400,000 and later its values drop to $100,000. Would you still make payments? Well, some homeowners will choose to not make payments. This is because they will be making payments on a home valued at $400,000 whereas the actual value of the house is $100,000.
Foreclosed home
A foreclosed home is a home that was legally taken by the lender from the buyer through foreclosure after the buyer defaulted on the mortgage. These properties are usually sold in auctions, on the lenders’ websites, or on MLS. The first choice for lenders is the auction since they are not in the business of owning or selling houses and properties cost them more money the longer they keep them.
H
Home Equity Line Of Credit (HELOC)
Homeowners who purchase houses using mortgages make monthly mortgage payments. As they pay off the mortgage, they build equity in the house through amortization. After building enough equity in the house, homeowners can borrow money against that equity. This loan will be known as a home equity line of credit.
So, a home equity line of credit is a type of loan that lets homeowners borrow money against the equity they built in their houses.
Home Owner Association (FOA)
A homeowner association or HOA is an association that owns, manages, and makes rules for planned settlements. These types of settlements range from condominiums, town-houses, single-family homes, etc. Owners of these properties pay a monthly fee known as the HOA fee that takes care of maintenance activities, routine check-ups, cleaning shared areas, taking care of amenities, etc.
HOA Fee
HOA Fee is a fee that homeowners pay on properties they own in planned settlements. This fee helps the HOA to maintain and manage properties in these settlements. Some of the activities this fee covers include but are not limited to cleaning common areas, mowing yards, snow removal, maintenance, etc. The HOA fee varies by association, property type, and location.
Home Owner’s insurance
The most important service homeowners should purchase is homeowners insurance. This is insurance that protects homeowners’ properties from future damages related to accidents, disasters, etc.
Home Valuation Code of Conduct (HVCC)
When appraising houses, appraisers must be transparent and give their best opinion about the property. That is, they should not appraise a property for a higher value or lower in a favor of one party involved in the transaction.
Since it is difficult to be fair, the federal government has put in the palace a set of guidelines that govern the appraisal process. These guidelines are known as the home valuation code of conduct or HVCC for short. HVCC specifies how appraisers are selected and paid to increase transparency. In doing so, HVCC prohibits real estate agents and mortgage brokers to choose or pay appraisers.
I
Inspection
One of the most important steps when it comes to buying a house is the home inspection. That is before you hand over your hard-earned money to the seller, you should have the property inspected. The inspection will be conducted by a professional and licensed inspector.
The inspection happens after the seller has accepted the buyer’s offer but before the sale is finalized. Home inspections do not cost a lot of money compared to their benefits. If you are buying an average-size house, you should expect to pay between $200-$450. This price will increase as the size of the property and the number of units increase.
The inspector evaluates the structural integrity of the house. Some of the main aspects of the house that will be inspected include plumbing, electrical, HVAC systems, floors, windows, doors, roof, attic, etc.
J
Jumbo Loan
Fannie Mae and Freddie Mac purchase most mortgages from approved lenders. That is why you easily get a mortgage from your favorite bank. The bank goes on and sells that mortgage to these institutions. After purchasing mortgages from approved lenders, these institutions (Fannie&Freddie) will group all mortgages into securities that can be sold to other institutions. This trick makes it possible for the mortgage and loan industry to survive. In addition, it gives a chance to many citizens to own homes.
The problem is that there is a limit to how much Fannie and Freddie can purchase. This limit is almost the same in every state except in a few states or cities where the cost of houses is higher than the average in the country.
In other words, any mortgage or loan that is above the limit set by Fannie and Freddie is a jumbo mortgage and will not be purchased by these institutions. Lenders have stricter rules when it comes to jumbo mortgages since they take on all the risks.
L
Land lease
A tenant can enter into an agreement to use the land that comes with the property. This agreement is known as a land lease and tenants usually pay a fee to lease the land. The fee varies depending on the size of the land and its location. The land lease agreement will include terms of use such as the types of activities on the land, length of the agreement, etc.
Lien
When you buy a house using a mortgage it becomes legally yours after you have fully paid your lender the money you borrowed and interest. That is the lender has a legal claim on the property until all terms in your mortgage contract are fulfilled. This legal claim on the property is called a lien. If you fail to pay off the money you borrowed, the lender will legally take the property from you through a foreclosure.
List Price
A list price is a price at which a house is being sold for. This price is usually set by the seller of the property together with the seller’s agent. The list price is what the seller wishes to receive on the property. Usually, seller lists their properties at higher prices hoping to receive higher offers. At the same time, buyers offer less money to make sure that they do not pay more than what the property is worth.
Depending on the market conditions, motivation of buyer or seller, etc., a house can be sold at a price that is higher, lower, or equal to the listing price.
Lis Pendens
Lis pendens is a legal notice that is recorded in public records against someone’s property. This notice shows that there is a pending legal action against a property. For example, if you bought a house and fail to make payments, the lender can file legal action to take the property. Once the property is taken from you, the lender will sell it to recover the unpaid mortgage balance.
Loan estimate
A loan estimate is a set of papers that the lender sends to a borrower in response to a mortgage application. The response from the lender will include all information about the mortgage and its terms. For example, the lender will include the money a borrower is qualified for, interest rate, estimated monthly payments, closing costs, tax estimate, etc.
Loan commitment letter
A loan commitment letter/mortgage approval letter is a letter that a lending institution gives to a borrower which contains the promise that the lender will give money to a borrower. In this letter, the lender includes the approved amount, interest rate, and all related terms.
The mortgage approval letter comes in handy before the closing date. Without this letter or cash to buy a property, there will be no proof that a buyer can actually afford to buy a house. As a result, the sale would not be successful.
Loan to Value (LTV) Ratio or LTV Ratio
The loan-to-value ratio has two main parts: appraised value &approved value. The appraised value is the value of the property estimated by an appraiser. On the other hand, the approved value is the total amount a lender agreed to give to the borrower.
The ratio between these two values is the loan-to-value ratio or LTV ratio and it is expressed as a percentage. A higher percentage means that you are borrowing more money in relation to the value of the house. This is risky because you are trying to put down less money and finance the house with a mortgage.
Loss of mitigation
When borrowers can no longer meet their mortgage monthly payments, many steps are taken to resolve the issue. Moneylenders and their borrowers will work together to come to a solution and avoid major losses. This is known as loss mitigation.
Even if foreclosures are common in real estate, they are not appreciated by lenders or homeowners. They are costly for both parties, and more importantly, they affect the credit score and credit history of the borrower. This is why moneylenders prefer loss mitigations to prevent the problem from getting out of control. Some of the options considered during the loss mitigation processes include but are not limited to a short sale, modification of mortgage terms, forbearance, etc.
M
Market Value (MV)
A market value is a price a buyer is willing to pay on a property in an open market. This value changes and fluctuates based on market conditions and business cycles. For example, buyers are willing to pay less money during a buyer’s market due to a high supply of properties. On the other hand, buyers pay a little more on properties during a seller’s market.
Median
A median is a statistical metric used when estimating how much a property costs in a given location. To calculate the median, you would align the prices of all properties sold in ascending order. The median will be the middle property.
The median is used to give a more accurate estimation in a market where there are more outliers(properties that costs much higher or less compared to the rest of the properties in a given market). This is because outliers give an inaccurate average which is the most used statistical measure. Hence, relying on the median to further assess the market.
Months of supply
Months of supply is a measure of how long it will take to sell the current real estate inventory in a given market. This measure helps both buyers and sellers to understand the market. For example, a higher month of supply shows that the rate at which houses are bought is low and therefore, you would expect the current inventory to last for a while.
Mortgage
Buyers who don’t have enough cash use mortgages to finance the purchase of houses. The mortgage will be an agreement between a home buyer and the lender. In this agreement, the lender will promise to give money to the buyer. In return, the buyer will repay the principal, interest, and other charges.
For conventional mortgages, buyers usually have either a 15year or a 30-year fixed-rate mortgage. Mortgages require a down payment and it varies depending on the mortgage type you are getting. For example, a conventional mortgage requires a 20% down payment whereas an FHA mortgage can take as low as 3.5%.
Mortgage broker
A mortgage broker is a middle man between a lender and a borrower. Mortgage brokers facilitate the mortgage processes. That is they shop around and find the mortgage rates and terms that fit borrowers and satisfy the lender at the same time. These brokers can either be compensated by a buyer or the lender.
Mortgage insurance
Homebuyers who do not meet the down payment minimum requirements or want mortgages they don’t qualify for must purchase insurance to protect the lender. This insurance is known as mortgage insurance and it covers the lenders in case borrowers default on their mortgages.
For example, borrowers who don’t have a 20% down payment must purchase mortgage insurance to protect the lender. This insurance makes it expensive to buy a house. It is recommended for homebuyers to apply for the mortgage they qualify for and have enough down payment to avoid mortgage insurance. Some lenders can agree to eliminate the mortgage insurance once the borrower has made enough payments to cover the 20% of the property cost.
Related: 10 tips to avoid private mortgage insurance?
Mortgage fees
Mortgage fees are fees related to securing a mortgage as estimated by the good fair estimate(GFE). The GFE is sent to the borrower from the lender after the application for the mortgage is received. This document will outline all fees that the borrower should expect to pay. These fees include but are not limited to the origination fee, processing fee, title search fee, appraisal, yield spread premium(YSP) fee, etc.
Multiple Listing Service (MLS)
Multiple listing service or MLS for short is a listing service that allows real estate brokers, agents, etc. to share information about properties they are selling. The system makes it easy for agents to sell properties as they are exposed to a wide range of interested buyers and agents. Through MLS, agents help each other to find buyers of properties and earn commissions on sales they facilitated.
Mutual Acceptance
Mutual acceptance is one of the most important steps in real estate sales and it happens when a buyer and a seller agree on a real estate sale. After this agreement, other important steps will follow. These steps will include but are not limited to a house inspection, contingencies, etc.
Multi-family
Multi-family are properties with more than one unit. These properties can have one or more owners and they include duplex, triplex, fourplex, condos complex, etc.
N
Negative Amortization Loan
Amortization is a term used when homeowners pay off their mortgages in equal monthly installments. This method helps them build equity in the house and eventually own the house after the mortgage is fully paid off. This is not what happens when borrowers have a negative amortization loan.
Negative amortization loans are loans that let borrowers pay a small amount that does not cover the interest rate. With this method, the loan mortgage balance increases as the unpaid interest get added to the principal amount. A negative amortization does not last forever, as the borrower must catch up sometimes, usually after the time agreed with the lender.
New Construction
New construction is a term used to define a property that has been recently built and was not previously lived in. With new construction buyers secure houses equipped with the latest technology and newly invented materials in real estate. The downside of new construction is that they come at a premium price.
Notice of default
Borrowers are required to make monthly payments until the house is fully paid off. There are times when homeowners will miss some payments or stop paying due to financial hardship. When this happens, the lender will send a notice of default to the borrower and file it to the local government where the property is built.
The notice of default will inform the borrower that they have violated the terms and conditions of the loan, and therefore, proper steps must be taken. Without taking proper action to resolve the issue, the borrower could end up losing the property through foreclosure.
Net Proceeds
The net proceeds refer to the amount a seller of a property takes home after all expenses are deducted from the gross proceeds. When computing the net proceeds, the following are some of the expenses that will be subtracted from the gross sale price.
- All liens
- Commission
- Excise tax
- Closing costs
Net Operating Income (NOI)
The net operating income (NOI) is a profitability metric that measures the ability of a property to generate cash flow. To calculate the net operating income, you would subtract the operating expenses from the gross operating income. A negative NOI shows that the property is losing money. On the other hand, a higher NOI shows that the property is making money.
National Association of Realtors (NAR)
The national association of realtors is an organization made of real estate agents, REALTORS®, brokers, and other real estate professionals. Before receiving a realtor title, real estate agents must join this organization.
O
Offer and Acceptance
An offer and acceptance mark the time when a seller of a property has accepted the buyer’s offer. This is a very important step as it is followed by signing the purchase and sale agreement contract, inspections, appraisals, and hopefully, a potential sale.
P
Par Rate
Par rate is the interest rate that a borrower qualifies for before the lender’s credits and mortgage points/discount points are adjusted to the rate.
Pending
A pending is a listing status that means that the seller of a property has accepted an offer. However, the sale has not been finalized yet. As a buyer, you should know what listing statuses mean. This will allow you to focus on the right properties and save time in the process.
Pending short sale
When buying a house, you will come across diverse listing statues. One listing that confuses many people is a pending short sale. A pending short sale means that the seller of a short sale property has accepted an offer. However, the sale is not finalized yet.
To understand what a pending short sale means, we need to understand what a short sale is. When a homeowner faces financial distresses and becomes unable to meet their monthly mortgage payments, appropriate action will be taken. By default, many people would think that a foreclosure will be the next step. This is not necessarily true.
A foreclosure hurts both lenders and borrowers. Lenders spend a lot of money to maintain foreclosed properties, deal with auction processes, and end up selling properties on their own as real estate owned (REO) if they are not sold in auctions.
On the other hand, foreclosures hurt borrowers’ financial standings, credit history, and credit scores. To avoid these problems and more financial troubles, a borrower and lender can work together to come up with a much cheaper solution.
This is where a short sale comes in. A short sale means that a homeowner is selling the property for less than its value. In other words, the borrower gets approval from the lender to sell the property and all proceeds go to the lender (because short sales usually sell for less than their market value).
This means that the final offer must be approved by the lender. Short sales take longer to close and come with a lot of uncertainties. For example, it can sometimes take months to get a response from the lender and there is no guarantee that the offer will be accepted. So, you have to wait patiently.
PITI
PITI is an abbreviation for principal, interest, taxes, and insurance. These four elements make up the total monthly payments on mortgages. Keep in mind that some lenders do not include every element in the monthly mortgage payments calculations. For example, the HOA can require a homeowner to pay the property insurance separately. As a result, your monthly mortgage payments will not include insurance.
Planned Unit Development (PUD)
A planned Unit Development (PUD) is a community of buildings that are not governed by the local zoning requirements. These communities can be made of single-family homes, townhouses, condos, multi-family, or a combination of some of these units. These units usually come with HOA regulations and HOA fees. Homebuyers should consider these factors before they buy properties in PUDs.
Pre-approval letter
A pre-approval letter is a document the lender provides to their mortgage clients which shows the amount a borrower is qualified for. This amount will be different from one lender to another due to different priorities, algorithms, and other factors. Homebuyers should always shop around to find the lender that can give them more money(if needed) at the best rates possible.
Pre-qualification
One of the most important steps in mortgage shopping is pre-qualification. Being pre-qualified for a mortgage means that the lender has looked at the information you have provided and made a decision on how much money they are willing to let you borrow.
In other words, pre-qualification is an unofficial estimation of the money a lender is willing to give to a borrower based on the information collected. Some of the information the lender collects during this process include but is not limited to the borrower’s income, credit score, credit history, assets, other loans such as student loans, car loans, liens on assets, etc.
Purchase and sale agreement
The purchase and sale agreement is a contract that binds a buyer and a seller of a property. This contract will include all terms of the sale such as contingencies, sale price, closing date, etc.
Price adjustment
Price adjustment is a price change performed by a real estate agent or an appraiser, usually during the comparative market analysis (CMA) process. This adjustment is made to reflect the true value of the property in question.
For example, let’s say that your agent performed a CMA and found that similar houses were sold at $200,000. With this analysis. you would expect your own house to sell for $200,000 or around this price. What if you have done major renovations on the house? Assuming that you have done a kitchen renovation worth $20,000, you would expect your house to sell for more than other properties in the area due to this renovation.
That is the price of your property must be adjusted to reflect his renovations. The adjusted price of your property would become $200,000 plus $20,000 which will be $220,000.
Pocket listing
A pocket listing is a type of listing where the seller and his agent try to sell the property on a private network before they list it on MLS. The seller and his agent will try to sell the house to people they know such as friends, clients, family members, etc. The pocket listing gives sellers a lot of privacy and maximizes the seller’s agent commission.
The downside of this method is that the house will have less exposure which can take longer to sell. It could also be sold for less money due to less competition among buyers. In addition, pocket listing can lead to ethical problems.
Price per square foot
The price per square foot is calculated by dividing the total price of the property by its total square foot. This price will represent how much a seller is willing to accept for every square foot of the property. For example, let’s assume that you are buying a 2,000 sq. ft. house for $300,000. To know how much you are paying per square foot, you will divide the $300,000 by 2,000 which will give you $150/sq.ft.
Pre-payment penalty
A pre-payment penalty is a fee that lenders imposed on borrowers when they pay more money than they are allowed to by the term of the contract in a given period. Some lenders do not apply this fee on mortgage payments. However, mortgage borrowers must read all documentation and make sure they understand the terms and conditions of the mortgage.
Probate sale
When an owner of a property dies, the property will sometimes be sold so that its proceeds can be divided into its beneficiaries. The sale of a property in this way is known as a probate sale and it is conducted by the county’s probate court. Some people consider a probate sale as the liquidation of the property.
Property tax
A property tax is a tax that owners pay on properties they own. This tax is paid to the local government(county or city) where the property is built. The size and price of the property will directly affect its tax.
Related: Tips to lower property tax
Property tax assessment /tax assessment
Property tax assessment or tax assessment is the evaluation of the property’s value for tax purposes. This assessment is conducted by a tax assessor(assessor) from the local government. Tax assessments are usually done every year. However, there are times when the assessment can be done once in five years.
Procuring cause
In real estate, an agent is often referred to as the cause of the real estate transaction. This is because the agent is the one who brings together buyers and sellers. The interaction of clients and their agent(s) that result in successful transactions is defined as the procuring cause. After a successful transaction, the agent will be compensated for his/her contribution to the sale. Agents get paid in commissions and the commission is usually between 5-6% of the total sale of the property.
Q
Quitclaim deed
A quitclaim deed is a type of deed that transfers a property from one owner to another. This deed is faster and simple which makes it a favorite to many people.
Speed and simplicity can directly translate to troubles. A quitclaim deed offers little protection and does not guarantee the complete ownership of the property. In addition, it does not shows all liens on the property.
R
Real estate agent
A real estate agent is a licensed individual who serves as a liaison between buyers and sellers of properties. Agents guide buyers and sellers throughout the buying and selling processes. That is they offer guidance on listing prices, offers, negotiations, property showings, do paperwork, etc.
In return, real estate agents earn a commission that is estimated as a percentage of the sale price. As noted by Redfin, agents make between 5-6% of the sale price. This amount is split between the seller and buyer’s agents based on their negotiations and their contribution to the sale.
Realtor
A realtor is a licensed real estate professional who is an active member of the National Association of Realtors(NAR) and adheres to its code of conduct and practices. All realtors are experts in their fields and have enough experience in what they do.
As a realtor, you can legally perform tasks you are certified for. For example, a certified real estate agent who holds the realtor title can perform his duties fairly and ethically.
Real estate
The term real estate is used to define property, land, and all-natural resources that come with it. Natural resources include but are not limited to water, minerals, etc.
Real estate owned(REO)
When a lender is not able to sell a foreclosed property, the property will be added to his portfolio. These properties will be classified as real estate owned or REO for short. Some lenders try to sell REOs to their clients on their websites to avoid commissions and related expenses. Once this fails, the property gets listed on MLS and other listing services.
Rescission Notice
There are times when a real estate sale will not go through due to many circumstances. If a buyer decides not to pursue the property and backs out of the deal, he will let the seller know that he is no longer considering buying the property. The notice to end the contract is known as a rescission notice.
In short, a rescission notice is an official notice a buyer gives to the seller about the termination of the contract. Buyers must be careful when they send this notice. There are times when the notice cannot be validated. For example, if the buyer violated the term of the contract, the rescission of notice will not be validated.
Refinance
There are times when you will need to change the terms of your mortgage. For example, if the interest rate went much lower compared to what you are paying, you could replace your current mortgage with a new one at a lower rate.
The term refinance is used when a borrower replaces their current mortgage with a new one under different terms. There are three main reasons homeowners refinance their mortgages.
- Interest went lower: It does not make sense to continue paying a much higher interest rate while everyone else is paying less.
- They want equity from the property: If you had been a mortgage for a while, it is possible that you built enough equity in the house. You can have access to this equity through mortgage refinance and use it to cover your projects.
- They were approved for a high rate due to bad credit: If you have been approved for a high rate, you could refinance your mortgage to get a much lower rate after rebuilding your credit score and credit history.
Tip: 8 tips you can use to improve your credit score
Rent-back agreement
There are times when sellers of properties find buyers before they secure the next places. When this happens, a seller can either get an apartment, stay in a hotel, or negotiate with the new owner to rent the property for a little longer.
This agreement is known as a rent-back agreement. In other words, a rent-back agreement is an agreement between buyers and sellers that lets the seller stays in the property while looking for another place. Like any other rental agreement, this short-term contract will include the length of the terms, conditions, what is included, extension terms, etc.
Rental Properties
A rental property is a type of property in which the owner allows another person to live in it. In return, the owner receives a payment known as rent. The person who uses the property is known as a tenant.
To avoid conflicts, a legal document(lease) between both parties must be agreed upon and signed before the move-in date. The lease will provide details of the property, location, what the tenant can or cannot do, what each party should do in any circumstances, etc. The same document will also be used in court if one party violates the term of the term.
For example, if a tenant refuses to leave, the terms of the lease must be followed during the eviction process.
Right of refusal
The right of refusal is a contract between a buyer and a seller that gives the buyers the right to buy the property before anyone else. When you see a right of refusal listing it means that there is another buyer who holds the right of refusal contract. This means that you can buy the house only if the contract holder decides not to pursue the property.
Resale certificate
A resale certificate is a set of documents that a seller of a condo gives to the buyer. These documents include details on the HOA budget, HOA fees, covenants, restrictions associated with the property, etc. Since condos have different regulations compared to other properties, a buyer has the right to know what these regulations are, fees, and other restrictions before finalizing the sale.
RESPA
RESPA stands for Real Estate Settlement Procedures Act. This is a set of laws put in place by Congress to protect consumers’ rights during real estate settlements.
Reserves
Reserves are money saved in accounts that are managed by a homeowner association (HOA). This money is used to cover special regular or revolving maintenance projects on units they manage. For example, if the association needs to build a swimming pool or change the roof, the money from the reserve account will take care of the problem.
Reserve accounts are funded by the HOA fee which is the money every owner pays monthly. HOA fee varies by location and amenities that come with each unit.
S
Sale-to-list ratio
The sale-to-list ratio is the ratio between the sale price and the final asking price expressed as a percentage. This ratio helps buyers and sellers to understand how prices are being negotiated. The sale-to-list ratio can also be used to identify who is holding a higher bargaining power in a given market.
If the ratio is higher, it will indicate that the property was sold for more than the asking price. This means that more buyers outbid each other which drives prices much higher. A market where houses are selling for more than listing prices is classified as a seller’s market.
On the other hand, if a house is sold for less than the asking price, the ratio will be less than 100%. This ratio will indicate that buyers had a higher bargaining power or the seller was motivated. A market where more properties are selling for much lower than their asking prices is considered to be a buyer’s market.
Seasoning
Seasoning is a term used to define how long a homeowner has owned the house. For example, if you bought a house 1 year ago, your seasoning will be one year. This term can also be used to define the length a borrower has held a mortgage or a loan.
There are seasoning restrictions imposed by some lenders before some services are provided on assets or mortgages. For example, most lenders require mortgages to be seasoned for at least one year before borrowers can take out a home equity line of credit (HELOC).
Secondary mortgage market
A secondary mortgage market is a market where mortgages, loans, and their servicing rights are bought and sold. After originating a mortgage, the lender will sell it to Fannie Mae, Freddie Mac, or other institutions. These mortgages will then be bundled into mortgage-backed securities or MBS which are then sold to mortgage investors. Mortgage investors are usually hedge funds, pension funds, and banks.
A secondary mortgage market makes it possible for lenders to have a constant supply of money that allows them to offer more loans to borrowers. With the risk taken over by other institutions, lenders ease mortgage restrictions and service more buyers. This system keeps the mortgage industry and housing market stable and functional.
Seller’s market
A seller’s market is a market where sellers have higher bargaining power. This is due to a lower inventory on the market. As a result, there is a high demand in relation to available supply. In any market, when the demand is higher than supply, the competition gets created among buyers. This leads to an increase in prices.
You will know if you are in a seller’s market when properties are selling for more than their listing prices, buyers outbid each other, there are fewer sellers, properties get sold fast, etc.
Seller’s agent /Listing agent
A seller’s agent is a real estate agent who represents the seller of a property. Sellers’ agents help sellers with price negotiations, paperwork, price estimation, getting properties ready for sale, and much more.
Selling Office Commission
Real estate agents perform a crucial role in property transactions. They help buyers tour properties, do paperwork, negotiate prices, perform price estimations, etc. This amazing work costs a fortune. Agents get paid a commission that is expressed as a percentage of the total sale of the property.
The buyer’s agent brings buyers of properties whereas the seller’s agent represents sellers of properties. After a successful sale of a property, the buyer’s agent will receive a commission which will be decided by the seller’s agent and the seller of a property. This commission is known as the selling office commission (SOC).
In short, a selling office commission is the amount of commission a buyer’s agent receives from the selling side after a successful real estate transaction.
Self-represented buyer
A self-represented buyer is a buyer of a property who is not represented by a real estate agent. most of the time, buyers and sellers use agents to help them navigate the complexity of buying and selling houses. Without a buyer’s agent, only the seller’s agent will contribute to the sale of the property.
Seller’s agents take home a large commission when there is no buyer’s agent to split the commission with. At the same time, sellers can save money on commission through negotiations when there is only one agent.
Senior exemption
Property taxes can be very expensive especially to those with a low income. As people grow older, their incomes grow lower and lower to a level where they cannot afford most of their expenses. This is why counties, cities, and some states offer tax benefits to some citizens. This tax benefit is known as a senior exemption.
In summary, senior exemption a.k.a property tax exemption is a property tax discount/reduction that is given to qualified senior citizens. In order to reduce the property tax, the homeowner’s property value is first reduced. Then, the tax is calculated based on the reduced value of the property. Those who want their property taxes reduced must submit their applications and follow their cities/counties/states’ requirements.
Settlement
A settlement is a term used when buyers, sellers, and their real estate agents finalized a sale of a property. This term is also referred to as closing. At the settlement, all involved parties will sign appropriate documents. Once every document, full payment submitted, and deed is signed, the buyer will get the key to the house.
Single-family residence(SFR)
A single-family residence or SFR is a building that is used as single dueling. Single-family homes are built on their own spots, have no shared walls, and have their own utility systems. They come with a private driveway and a yard. SFR’s yards vary by location and size of the property and offer more privacy than other forms of property. That is single-family residences built in the countryside usually come with a much larger yard/land compared to the ones in cities.
Short sale
A short sale is a property that is being sold at a lower price in relation to the mortgage balance on the property. This happens when borrowers face financial setbacks and can no longer afford to make their monthly mortgage payments.
Since foreclosure is costly for borrowers and lenders, other alternatives are considered before taking this route. This is when a short sale comes in.
The borrower will work with the lender and put the property on the market. Usually, short sales sell for less than their actual values since the sellers are motivated. Lenders must approve the offer before finalizing the sale and all proceeds must go to the lender. If there is any mortgage balance left, the borrower can be forgiven, have a payment structure, etc.
Sold
The term sold is a listing status that indicates that the property in question is no longer available on the market. That is the property’s ownership has been transferred to the buyer, all paperwork was completed, and all payments, fees, etc. were submitted.
Survey
Homebuyers don’t usually know exactly how much land they are getting or where their properties end. To avoid conflicts, a survey is conducted instead of taking sellers’ words.
A survey is an operation conducted on a property to measure and locate the land that comes with a property in question. Without a survey, there could be encroachments after the sale.
Subject to inspection
Subject to inspection is an agreement between a buyer and a seller of a property that lets the buyer inspect the property before the sale is finalized. Not everyone gets to inspect the property. Sellers select offers they want for inspections.
Once the inspection is finalized, the sale can go through only if the buyer is satisfied with the inspection.
Sweat Equity
Just like the name says, sweat equity is an equity a homeowner builds in a property from hard work. Instead of using contractors to renovate the house, a homeowner performs all renovations necessary by himself. Although it can take longer to finish renovations, homeowners maximize their equities due to fewer renovation expenses.
T
Tenancy in common
Buying a property is not easy due to the high cost per unit. This is why many people consider putting their resources together and their own properties as a group. For example, instead of breaking the bank to buy a rental unit for $400,000, you can team up with 3 other friends where each could bring $100,000. This kind of arrangement is known as a tenancy in common.
In short, a tenancy in common is a term used to describe a situation where multiple people share the ownership of a property. The share and return of each individual will depend on how much each person contributed to the property.
Other terms could also apply depending on how the property is managed. For example, a person who actively manages the property can take home a large share even if he contributed the same amount toward buying the property. Tenancy in common works better for people with the same goal and a written contract should be in place to avoid conflicts.
Temporarily off market
Temporarily off the market is a listing status used when the property has been removed from the market temporarily. The reasons to remove a property from the market vary from one seller to another. For example, if a seller has a family emergency that will affect the showing times and other required steps, he/she can remove the property from the market for a short time.
Once the emergency is over, the seller can relist the property on the market. Property showings and marketing must be halted until the house is brought back on the market.
Title
A title is a document that gives its holder the legal ownership of a property. Titles cover the information about the owner and the property. For example, a house title will include the property, its owner, location, the use of the property, etc. When buying a property a deed must be used to transfer the title from the seller to the buyer.
Title search
Before transferring the title from a seller to a buyer, proof of complete ownership of the property must be provided. That is as a buyer, you need to know if the seller of the house owns it and whether or not there is any other person who can claim ownership of the property. For example, if the seller has an outstanding mortgage balance on the property, the buyer will not have complete ownership until the lender is fully paid.
The process of finding out who could legally claim ownership of the property or has a lien on it is known as a title search. In short, a title search is the evaluation of all public records in order to determine the legal ownership of a property and all liens associated with it.
During the title search process, all public records related to the house will be examined. The search will focus on finding out bankruptcy records, deeds, divorce cases, tax liens, etc.
Title Insurance
Buying a house is a lengthy process with a lot of steps. One of the most important steps buyers should take is to purchase title insurance. Title insurance is insurance that protects the buyer if an unforeseen title dispute comes up after closing the sale.
This insurance will give you the money you lost on the house and can help you recover all or some of the funds related to the claim. Terms will vary from one insurance provider to another.
Townhouse
A townhouse is a property with two or more units that share a wall. Each unit in a townhouse has two or more levels. Each unit can be privately owned or all units can have a single owner. Townhouses are great for starter homes since they are cheaper compared to single-family homes.
Townhouses come with HOA fees which are paid monthly and they vary by location and the size of the unit. These properties have less privacy, walls are shared, and yards have no fences depending on the homeowner association (HOA) regulations. Each unit comes with a private parking spot and an independent utility metering system.
Transaction broker
A transaction broker is a third-party individual/firm that provides assistance to buyers and sellers of properties. Since the job of brokers is to provide assistance, they cannot negotiate prices on behalf of involved parties. In addition, transaction brokers cannot provide legal services to any of the parties involved in a real estate transaction.
Turn-key
Many homebuyers prefer properties that are renovated and ready to move in. These properties are known as turn-key. Buying turn-key comes at a premium cost due to the fact that they are new or renovation expenses. The good news is that the buyer does not change anything on the property before moving in unless they want to.
U
Under Contract
Under contract is a contract that shows that a buyer has entered into a contract with the seller of a property, however, the sale is not finalized yet. This contract will cover terms such as contingencies, parties involved, etc. Under contract does not mean the sale will be successful. This is why some sellers continue to take backup offers (if the terms of the contract allow it) until the property is sold.
Underwriter
An underwriter is a member of a lending institution that reviews the creditworthiness of mortgage borrowers. Most lending firms have their underwriters. However, there are some lenders that use third-party underwriters. When evaluating the credibility of borrowers, the underwriter will check the income, credit history, credit score, debt-to-income ratio, etc.
Upfront costs
Upfront costs are out-of-pocket money a buyer will spend on a property during a real estate sale. This amount will include but is not limited to closing costs, down payment, house inspection, earnest money, etc.
Homebuyers should make a budget before starting the homebuying process. This is because it will take more than a down payment to purchase a house. More importantly, buyers should have enough savings to cover their monthly mortgage payments and other expenses that follow the purchase of the property.
V
VA Loan
A VA loan is a loan provided by lending institutions and is backed by the Department of Veterans Affairs. These loans come with a lot of benefits as they do not require mortgage insurance, terms and conditions are less strict compared to other forms of loans, buyers can finance 100% of the property by the loan (in some cases), etc.
Vacancy rate
It is rare to have an entire rental complex fully occupied at all times. Tenants come and go, and therefore, it is easy to have vacant units in the complex. It also takes time to find new tenants depending on the market.
This means that at any given time, there is a number of units that will be vacant. This number can be used to calculate the vacancy rate with is the percentage of unoccupied units in a rental complex at a particular time.
The vacancy rate shows if a unit can retain good tenants for a while. If a complex has a higher vacancy rate, it shows that the property struggles to find and retain good tenants. This can be a red flag for investors as a high rate will affect the profitability of the property.
W
Walkthrough
A walkthrough is an inspection conducted by a buyer of a property before the sale is finalized. During this inspection, the buyer will make a final check of appliances, lights, windows, doors, VHAC, plumbing, electric systems, walls, floors, etc.
Withdrawn/Canceled
Withdrawn/canceled are two terms used when a seller of a property withdraws or cancels the listing of a property.
A withdrawn status means that the house is off the market, however, there is still a contract between the seller and his real estate agent. This means that the same agent will be representing the seller once the house is re-listed on the market.
A canceled status means that the listing was terminated and the contract between the seller and the agent no longer exists.
Y
A yield spread premium is compensation lenders pay to mortgage brokers who sell mortgages at higher interest rates than the par-rate value. Since the upfront costs can be high to some homebuyers, some borrowers can agree to pay a higher interest rate in exchange for lower closing costs.
A higher interest rate means that the lender will make a ton of money from the borrower. This is why lenders will compensate mortgage brokers who can pull this off.
Z
Zero-lot-line
Property developers sometimes try to maximize the size of the yard especially when the lot is small. For example, a developer can decide to build a house on the edge of the property to maximize the yard on the other side. Properties builts these ways are known as zero-lot-line.
A zero-lot-line define properties that are built at the edge of the lot without leaving room for a yard. A good example of these properties is townhouses where they are built at the edge of the property to maximize space. Single-family residences can also be zero-lot-line.
