Real Estate Terms all Home Buyers Should Know

Handing keys to new owner

Real Estate Terms all Home Buyers Should Know

You don’t need a real estate license to find your dream home, but it does help to become familiar with real estate jargon you might encounter during the process. When searching for a home or applying for a mortgage, refer back to this handy glossary.

According to Zillow, if you keep this four-part guide handy — you’ll be fluent in the language of home buying before you know it.

Real estate terms to know when you’re searching for a home.

Affordability

Affordability or home affordability refers to the amount of money you can comfortably afford to spend on a home. Home affordability takes into account your income, down payment, and monthly debts. Try Zillow’s affordability calculator to see how much house you might be able to afford.

Approved for short sale

A term that indicates that a homeowner’s bank has received an offer from a buyer and has determined the reduced listing price on a home meets their short sale criteria based on the seller’s circumstances and how much is owed.

Buy-rent breakeven horizon

A concrete point at which buying a home makes more financial sense than renting one. Read more about the Buy-Rent Breakeven Horizon here

Buyers market

Market conditions that exist when homes for sale outnumber buyers. Homes can sit on the market for a long time, and prices tend to drop.

Comparative market analysis (CMA)

An in-depth analysis, prepared by a real estate agent, that determines the estimated value of a home based on recently sold homes of similar condition, size, features and age that are located in the same area.

Comps

Or comparable sales, are homes in a given area that have sold within the past several months that a real estate agent uses to determine a home’s value.

Days on market (DOM) 

The number of days a property listing is considered active.

Sellers market

Market conditions that exist when buyers outnumber homes for sale. Bidding wars are common. Prices are often higher than average.

Short sale

The sale of a home by an owner who owes more on the home than it’s worth. The owner’s bank must approve a lower listing price before the home can be sold. Learn more about short sales here

Terms to know when you’re applying for a mortgage

Adjustable-rate mortgage (ARM)

An adjustable-rate mortgage, or ARM, has an introductory interest rate that lasts a set period of time and adjusts every six months thereafter for the remaining loan term. After the set time period your interest rate will change and so will your monthly payment. Learn more about adjustable-rate mortgages here.

Back-end ratio

One of two debt-to-income ratios that a lender analyzes to determine a borrower’s eligibility for a home loan. The ratio compares the borrower’s monthly debt payments to gross income. Read more about back-end ratio here.

Depository institutions

Banks, savings and loans, and credit unions. These institutions underwrite as well as set home loan pricing in-house.

Debt-to-income ratio (DTI)

A ratio that compares a home buyer’s expenses to gross income. Try ZIllow’s debt-to-income calculator to learn more. 

Housing ratio

One of two debt-to-income ratios that a lender analyzes to determine a borrower’s eligibility for a home loan. The ratio compares total housing cost (principal, homeowners insurance, taxes and private mortgage insurance) to gross income.

Loan estimate

A three-page document sent to an applicant three days after they apply for a home loan. The document includes loan terms, monthly payment and closing costs.

Loan-to-value ratio (LTV) 

The amount of the loan divided by the price of the house. Lenders reward lower LTV ratios.

Origination fee

A fee, charged by a broker or lender, to underwrite and process a home loan application. An origination fee is not a single fee. It’s a set of lender-specific fees that are part of your costs when closing a mortgage loan. Read more about origination fees here

Pre-approval 

A thorough assessment of a borrower’s income, assets and other data to determine a loan amount they would qualify for. A real estate agent will request a pre-approval or pre-qualification letter before showing a buyer a home. Learn more about pre-approval here

Pre-qualification 

A basic assessment of income, assets and credit score to determine what, if any, loan programs a borrower might qualify for. A real estate agent will request a pre-approval or pre-qualification letter before showing a buyer a home. Read more about pre-qualification here

Underwriting 

A process a lender follows to assess a home loan applicant’s income, assets and credit, and the risk involved in offering the applicant a mortgage.

Real estate terms to know when you’re shopping for a mortgage

Conventional loan 

A home loan not guaranteed by a government agency, such as the FHA or the VA. Read more about conventional loans here. 

Down payment 

A certain portion of the home’s purchase price that a buyer must pay. A minimum requirement is often dictated by the loan type. Learn more about down payments here

Fannie Mae and Freddie Mac

Government-sponsored enterprises chartered in 1938 (Fannie Mae) and 1970 (Freddie Mac) to help ensure a reliable and affordable and or constant supply of mortgage funds throughout the country.

Federal Housing Administration (FHA) 

A government agency created by the National Housing Act of 1934 that insures loans made by private lenders. The Federal Housing Administration is part of the U.S. Department of Housing and Urban Development. Read more about FHA loans here.

FHA 203(k) 

A rehabilitation loan backed by the federal government that permits home buyers to finance money into a mortgage to repair, improve or upgrade a home.

FHA loan

Loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA). FHA loans are different from conventional loans because they can be approved for borrowers with lower credit scores and may allow for down payments as low as 3.5 percent of the total loan amount. Maximum loan amounts can vary by county.

Fixed-rate mortgage

A mortgage with principal and interest payments that remain the same throughout the life of the loan because the interest rate does not change.

Foreclosure

A property repossessed by a bank when the owner fails to make mortgage payments. Learn more about foreclosure here

Mortgage banker and broker

A mortgage banker is someone who originates, sells, and services mortgage loans and resells them to secondary mortgage lenders such as Fannie Mae or Freddie Mac. A Mortgage broker is a licensed professional who works on behalf of the buyer to secure financing through a bank or other lending institution.

Mortgage interest rate

The price of borrowing money. The base rate is set by the Federal Reserve and then customized per borrower, based on credit score, down payment, property type and points the buyer pays to lower the rate.

Piggyback loan

A combination of loans bundled to avoid private mortgage insurance. One loan covers 80% of the home’s value, another loan covers 10% to 15% of the home’s value, and the buyer contributes the remainder.

Prepayment penalty

A prepayment penalty is a fee some lenders may charge if you pay off some or all of your mortgage early. Not all mortgages carry a prepayment penalty. Be sure to read the fine print carefully.

Prime rate

Prime rate is the interest rate charged by a lender to customers who are the least likely to default on their loans. The most credit-worthy customers (mainly large corporations), receive the best or lowest rate that the lender would offer any of its customers. Each lending institution sets its own prime rate. Typically, most consumers’ mortgage interest rate is going to be higher than the prime rate.

Private mortgage insurance (PMI)

A fee charged to borrowers who make a down payment that is less than 20% of the home’s value. The fee, 0.3% to 1.5% of the yearly loan amount, can be canceled in certain circumstances when the borrower reaches 20% equity. 

Points

Prepaid interest owed at closing, with one point representing 1% of the loan. Paying points, which are tax deductible, will lower the monthly mortgage payment.

With some knowlege in real estate vocabulary and determination, the process of buying a house can be made understandable, even to the unexperienced.

Source: May 4, 2022, zillow.com/resources/stay-informed/when-to-buy-a-house/, All rights reserved.

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