Remember when you were in elementary school and on Monday you received a list of ten words and their definitions? Your job through the week was to use the words in a sentence, memorize how to spell the
words and recite their definitions for the "vocabulary quiz" on Friday? Every industry has common words that the "insiders" throw around each day. Of course there will not be a quiz on Friday, but I thought a quick list of the top words and expressions used in the real estate and mortgage businesses might be helpful. Here goes...
Adjustable-rate mortgage (also know as a ARM) - this is a type of loan in which the interest rate is tied to a market index. As the index goes up or down, your interest rate and payments will also change at each adjustment period. This will save you money in the beginning and might allow you to qualify for a more expensive home.
Appraisal - an independent 3rd party who completes analysis to identify the fair market value of a property using recent comparable sales in the neighborhood of the subject property. An appraiser may look at homes "like" the subject property that have sold within the last 90-120 days and within a 5 mile radius.
Buyer's Agent - this is the agent that represents the buyer throughout the home shopping and transaction process. This individual is the person who you hire to help you search for the best deal, negotiate on your behalf, guide you through the home inspection and any additional negotiations (when needed). In Connecticut, this buyer's agent is usually compensated by the seller and agreed amount identified during the listing process.
Closing Costs - These are the fees paid to the bank or lender for the services provided by the attorney and lender throughout the loan application to the actual closing. They normally range between 1-2% of the property's final sales price.
Collateral - When you apply for a loan, the lender looks for something of value that can be taken in the event you do not pay the loan back. In real estate, the property being purchased is used as collateral. If a loan is not paid, the lender will file a foreclosure on the property.
Credit rating - This is s 3 digit score in which a credit bureau determines, based on your current and past history of paying your bills, how long you've had credit and what type of credit you have used. The big three bureaus are Experian, Equifax and Transunion. It's advised that you check your credit report each year to look for discrepancies and other errors that could hurt your credit score.
Default - This occurs when the borrower stops making payment on their loan and does not follow the terms of agreement.
Down payment - This is the amount of payment that a buyer makes when purchasing a property. In some cases it is 20% of the sales price, leaving the remaining 80% to be financed through a mortgage. The more money you put down the less the amount of the mortgage.
Equity - Is the amount of the home's value minus the mortgage payoff. When the home value is less than the mortgage that is what is called "being underwater".
Escrow - Usually an account held separately by an attorney and/or real estate firm for deposits of real estate transactions until the closing when all funds are brought together for the exchange of money and the deed.
Loan Origination fee - This is the amount billed by the lender or mortgage broker to begin the loan process. Usually it is one (1%) percent of the loan amount.
Mortgage broker - different than a lender who funds the actual loan, like a bank. The mortgage broker, is an individual who has relationships with multiple lenders and will "shop" your loan to find the best interest rates and terms for the buyer.
Points - also referred to as "discount points" this is the amount you pay initially to reduce your interest rate. Usually 1% of the loan amount equals a point.
Pre-qualification vs Pre-approval-
Pre-qualification - the beginning of your journey. It's a quick overview of your financial affairs - amount and number of loans, number of creditors, type of debt, employment information (where, how long and your salary). A pre-qualification will often give you an idea of the price range you can comfortably afford when purchasing a home.
Pre-approval - A much more in-depth analysis of your financial portfolio. It often means a loan officer has reviewed your financial records and vetted you as a loan candidate. Often times you will be required to submitt tax returns, check stubs, savings statements and more documents. Once you have found a home and are submitting an offer, the seller looks more favorable on a pre-approval than a pre-qualification letter. Qualified lenders will often provide a letter of approval at no charge in hopes that you will continue to work with them for the loan.
Private mortgage Insuraance (PMI) - this is the insurance policy that covers the lender in the event you can not afford your loan payments and the bank can not get it's money back. If you make a down payment less than 20%, you will need PMI.
Rate lock - When your lender guarantees an interest rate for a specific period of time.
Seller's Agent - this is the agent that represents the seller in a real estate transaction. The buyer's agent will work directly with the seller's agent to negotiate the transaction and bring it to a successful closing.
Ok that's all for now... no quick on Friday. But if you have any questions, please feel free to contact me.
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