Mortgage and Real Estate Terms to Know: A Guide for Homebuyers
Wading into the world of unfamiliar mortgage terms and real estate jargon can quickly become overwhelming. That’s why we’ve compiled a glossary of 50 must-know real estate definitions and mortgage terms you should know for each stage of the homebuying process.
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Before you buy: Real estate terms to know
Browsing listings, touring homes and ultimately making the decision to put in an offer is the usual order of operations for most homebuyers. The specialized terminology you’ll encounter during these steps, as well as the many rules and procedures around making an offer, come from the real estate industry.
A property where “what you see is what you get.” Selling a home “as-is” means the seller is unwilling to make repairs or negotiate with a buyer based on the costs of needed repairs. Buyers should ensure that any home bought as-is is thoroughly inspected prior to closing.
A real estate professional who represents a homebuyer in a real estate transaction.
One of the costs of selling a home, the real estate agent’s commission, is a fee paid to the real estate agents who help you sell your home. The fee is typically 5% to 6% of the sales price, and often paid by the seller to their listing agent, who then splits the commission with the buyer’s agent for bringing the buyer to the table.
A discount or benefit offered by a buyer or seller to help close a home sale. Concessions are typically negotiated in the purchase contract and may be applied to closing costs. For example, a seller may be willing to pay for new appliances or home repairs.
A clause in a purchase contract that allows the buyer to back out of the agreement if a certain condition isn’t met. Common contract contingencies kick in when the buyer can’t get a loan (financing contingency), repairs can’t be negotiated (home inspection contingency), the home’s value is below the asking price (appraisal contingency) or the buyer is unable to sell their current home (home sale contingency).
A response to a previous offer. If a buyer’s offer price is lower than what you’re willing to accept as a seller, you might make a counteroffer. Likewise, a buyer can counter a seller’s counteroffer with additional terms.
Earnest money deposit
An initial deposit (usually 1% to 3% of the sales price) to show a buyer’s intent to buy a home. If the purchase moves forward successfully, the earnest money is typically applied toward the buyer’s closing costs or down payment.
A home that needs a lot of repairs and/or cosmetic work, and is usually sold for a relatively low price to account for the costs of this work. Fixer-upper loans are designed to help borrowers finance a property and any needed renovations with one loan.
A written report providing an inspector’s professional opinion of a home’s condition, including its utility systems and structural elements. A home inspection isn’t “pass or fail” — it simply provides information to the buyer.
A real estate professional who represents the home seller in a real estate transaction.
Multiple Listing Service (MLS)
Privately owned databases that allow real estate professionals to share information with each other and, in doing so, facilitate collaboration between real estate brokers representing buyers and those representing sellers. MLS databases are operated by local real estate associations, and consumers can typically view MLS listings online.
Houses not listed on an MLS database are said to be “off-market” because the only way to find out about them is through personal connections or local advertisements. This type of listing may not be as common anymore, however, since it’s no longer allowed by the National Association of Realtors (NAR), which is the country’s largest trade group for real estate professionals.
An assessment of what a mortgage company might lend you based on a preliminary review of your credit, debt, income and assets available for a down payment. Sellers typically won’t accept an offer without a preapproval letter included.
A more casual conversation (in comparison with preapproval) about how much you might be able to afford, based on an estimate of your credit scores, earnings and down payment amount.
Also called a purchase or sales contract, this is a legal document detailing the price and conditions for the home you’ve agreed to buy. The typical contract includes information about the property, down payment, earnest money, closing date and contingencies.
A realtor is a real estate professional who is a member of a trade group called the National Association of Realtors (NAR). This group has more than 1.5 million members and is the largest trade association in the country. Its members must follow a code of ethics and certain standards of practice, which govern how they do business.
Real estate agent
A real estate agent is a professional whose job it is to help you with some aspect of the home buying or selling process. There’s an important distinction between a general agent versus special agent, which depends on how much power each has to act on a client’s behalf. Special agents are the most common type of real estate agent, and typically help you with a specific aspect of your real estate transaction, like listing or showing properties. A general agent has more power and an ongoing role, like a property manager.
Real estate owned (REO)
When a house goes into foreclosure, it’s repossessed and sold so the lender can recoup the money they loaned the former homeowner. In cases where the bank who executed the foreclosure also purchases the home in the foreclosure sale, the property is considered “real estate owned.” The term also applies to homes owned by a bank because the homeowner used a deed-in-lieu of foreclosure.
During the loan process: Mortgage terms to know
As you nail down the details of your loan it may feel like rules, regulations and acronyms are flying everywhere. The mortgage process can be very complex, but if you take the time to learn unfamiliar terms as they come up, you’ll quickly get into the swing of things. Your lender should also be available to explain any details about your loan that aren’t clear.
Adjusted gross income (AGI)
Earnings before taxes, but after certain types of deductions (such as health insurance premiums, student loan payments or contributions to tax-advantaged retirement accounts) are made.
Loans that amortize are structured so that if you make all of the payments over the term, the loan is fully paid off. While it may be counterintuitive, some loan types actually allow the balance you owe to grow, even if you make all of your scheduled payments.
An analysis by a professional appraiser comparing other sales of nearby homes to estimate a home’s value. Most purchase contracts include an appraisal contingency, which allows a buyer to back out if the appraisal returns a market value that doesn’t at least match the sales price.
Annual percentage rate (APR)
A measure of closing costs including points, origination fees and other credit charges included in mortgage financing and expressed as a percentage. Because it includes more costs, the APR on a given loan is usually higher than the interest rate.
Automated underwriting system (AUS)
A technology platform that allows lenders to approve or deny borrowers automatically, based on the computer program’s analysis of a borrower’s loan application data.
A large payment that comes at the end of your loan term. Saving that big payment for the end can help reduce the many monthly payments that come before it, but a balloon payment can also be a big source of shock and overwhelm for homeowners who aren’t prepared.
Basis points (BPS or ‘bips’)
Numbers used in finance to represent interest rates in an absolute way, rather than the relative way they’re usually represented when given as a percentage. You’ll often encounter basis points when reading about how changes in the market affect mortgage rates.
Upfront fees charged to originate a mortgage, typically about 2% to 6% of the loan amount. The closing costs are detailed on the initial loan estimate — provided to borrowers within three business days after applying for a mortgage — and again on a closing disclosure form provided three business days before closing on the home purchase.
Combined loan-to-value (CLTV) ratio
A number that compares the principal balances of all loans secured by a home to the value of the home. The number used for the home’s value is the purchase price or appraised value, whichever is less.
A type of mortgage loan that conforms to a set of rules created by the Federal Housing Finance Agency (FHFA), a body of federal regulators of mortgage markets. Conforming loans qualify to be guaranteed by government-sponsored entities like Fannie Mae and Freddie Mac. This is significant because that can make a loan less risky to the lender, and may therefore come with lower interest rates for the borrower.
A non-conforming loan, on the other hand, may in some cases be a more risky loan with fewer protections for the borrower — but it can also come with unique features that fit unique needs. Government-backed loans and jumbo loans are both non-conforming loan types.
One of several types of loan programs that aren’t insured by any government agency. Allows for down payments as low as 3% with a minimum 620 credit score.
Credit score/credit report
A credit score is a number that tells lenders how risky it may be for them to take you on as a borrower. A credit report evaluates your credit history, and the results of the data are calculated into a credit score. Lenders have minimum credit score requirements, depending on the loan program you use.
How it affects your mortgage rate:
Your credit score is one of the most important factors in determining the interest rates lenders will offer you. You’ll need a 780 or higher to get the absolute best interest rates available, but even if your score is average, or below average, any amount you can bump it up could lead to lower interest rates. It can really pay to repair and rebuild your credit as much as possible before purchasing a home.
Debt-service coverage ratio (DSCR)
This ratio compares a business’ cash flow to its debts to help lenders assess the financial health of a business seeking a commercial real estate loan. Some lenders may have DSCR requirements in order to qualify a borrower for a loan.
Debt-to-income (DTI) ratio
A measure of the relationship of your monthly debt (including your new mortgage payment) to your monthly earnings before taxes. The Consumer Financial Protection Bureau (CFPB) recommends a DTI ratio of 43% or less.
The upfront cash a buyer pays — as a percentage of the sales price — toward the purchase of a home. Some home loan programs don’t require a down payment.
How it affects your mortgage rate:
The amount you can put down is the second-largest determining factor in what interest rates you’ll see. In general, the larger your down payment, the better your mortgage rate quotes. Once you meet that 20% down payment threshold, you’ll see even greater savings through not having to pay for private mortgage insurance (PMI).
A savings account set up by your lender to collect and pay property taxes, homeowners insurance and mortgage insurance as they come due.
A nickname for the Federal National Mortgage Company, which was created by congress in 1938 to help the mortgage market run smoothly. Today, the company provides a large portion of the mortgage financing used to offer loans to single-family and multifamily property buyers. Because it’s such a large force in the mortgage world, the rules it sets for the loans it will back are followed by many mortgage lenders across the country.
A mortgage insured by the Federal Housing Administration (FHA), which allows for more lenient borrowing guidelines than conventional loans. For example, you can have a credit score of 500 to 579 and a 10% down payment, or a score of at least 580 with as little as 3.5% down. However, FHA loans will require two types of mandatory mortgage insurance: an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP).
FHA mortgage insurance recently got more affordable
The Federal Housing Administration (FHA) has reduced its annual insurance premiums by 0.30 percentage points. That’s good news for the average FHA borrower, who will save around $800 per year as a result.
A mortgage with an interest rate that stays the same for the life of the loan.
Originally a nickname for the Federal Home Loan Mortgage Corporation, a government-sponsored mortgage company that helps regulate the mortgage market (the company officially changed its name to “Freddie Mac” in 1997). Freddie Mac has its own loan programs and sets of rules for the loans it will acquire, which means that many other mortgage programs take pains to follow Freddie’s rules as well.
Lender’s title insurance
Lenders require title insurance to protect them against financial loss if any ownership claims arise against the property (such as ownership disputes, past judgments or liens).
A three-page document outlining all of the costs and risks associated with getting a mortgage. Lenders are required to provide a loan estimate to a borrower within three days of receiving a mortgage application.
The amount of time you have to pay back your loan in full. Popular fixed-rate mortgage loan terms are 15 years and 30 years. For homeowners having difficulty making their mortgage payments, it’s sometimes possible to modify a shorter loan term to a 40-year mortgage.
Loan-to-value (LTV) ratio
A ratio of the amount borrowed compared to a home’s value. Lenders set LTV limits on some loans. For example, conventional loans usually have a 97% LTV maximum, meaning you have to make a 3% down payment, at minimum, to be approved for the loan.
A licensed mortgage professional who acts as an intermediary between several different lenders to provide options to a buyer seeking financing. Mortgage brokers charge a fee between 1% and 17% of the loan balance, so they may not be the most economical choice for individual homebuyers who can go directly to lenders without a middle man.
A company that processes, underwrites and funds a home loan. The lender may or may not manage the loan after closing; in cases where they don’t, this is done by a loan servicer.
Mortgagor vs. mortgagee
A mortgagor is also known as the borrower; the mortgagee is the lender. If a mortgage loan is originated and later sold, a new mortgage company may become the mortgage holder and mortgagee.
A homeowner’s living arrangements. Some mortgage loan programs require you to live in the home you’re financing as your primary residence. Other loans allow or are designed for borrowers who don’t live at the property, but want to use it as a rental, second home or vacation home.
How it affects your mortgage rate
If you’re taking out a conventional loan, you’ll see higher costs to finance an investment property, second home or multiunit property.
A fee (or group of fees) paid to a lender for processing and funding a mortgage. The origination fee may be itemized or charged as a percentage of the loan amount.
Owner’s title insurance
Homebuyers may opt to purchase an owner’s title insurance policy to protect themselves from ownership claims or disputes. Unlike lender’s insurance — which protects the lender for the life of the loan — owner’s title insurance protects the homeowner against financial losses for as long as you own the home.
A mortgage term that is short for principal, interest, taxes and insurance, which are the four key parts of a monthly mortgage payment.
The money that you originally borrowed to purchase a house is the principal, but you’ll also owe interest as a fee for borrowing that principal. Typically, each mortgage payment will go toward the unpaid principal balance, as well as some amount of interest, based on the amortization schedule.
Private mortgage insurance (PMI)
Insurance paid for by a borrower to cover the lender’s financial risk. If the borrower defaults on the loan, the insurance pays the lender. PMI is typically required on a conventional loan where the buyer has put down less than 20%, but it can be canceled once 20% equity is reached.
Property inspection waiver (PIW)
Allows a property to qualify for a mortgage without a home appraisal.
A written promise from a lender to give you a specific interest rate. The guarantee lasts for a set period of time prior to closing. Most rate lock periods are 60 days or less.
A legal term for buildings or land.
Also known as a home equity conversion mortgage (HECM), a reverse mortgage allows homeowners over the age of 62 to borrow money against their home equity without making monthly payments.
Settlement service provider list (SSPL)
A list of providers that a buyer can use as they close on their loan (with “settlement” being another name for the mortgage closing process). The law requires lenders to notify borrowers about which services related to settlement they are able to shop for and to provide a list of providers of that service.
Legal rights related to ownership of a home. How a home is titled affects what happens to it if there’s an ownership change or an owner dies.
A mortgage guaranteed by the U.S. Department of Veterans Affairs (VA) for active-duty military service members, veterans and eligible spouses. Flexible VA loan qualifying requirements include no down payment or mortgage insurance.
Closing: Terms used in mortgage settlement
The finish line is in sight! Once your offer has been accepted and you’ve put down your earnest money, you’ll go through the closing (or “settlement”) process. Here are some useful terms you may encounter as you close on your loan.
Depending on where you live, an attorney or escrow officer will serve as the “closing agent.” It’s their job to coordinate the closing, as well as to collect and disburse the money from each party to the other.
Date on which the buyer and seller meet to finalize the sale of the home. Certain key pieces of the closing process may be tied to the closing date. For example, the funds each party brings to the closing must usually be in the escrow account on or before the closing date. The closing date is agreed upon by the buyer and seller and put in the purchase contract; however, the date can be changed if everyone involved agrees to the change.
A five-page form that puts in writing all of the costs and fees due at closing. Lenders must provide the closing disclosure at least three business days before closing. Any errors in the terms of the sale should be corrected before closing on the loan, so review the document carefully.
A written agreement that allows a seller to remain in a home for up to 60 days after it is sold. For that period of time, the seller becomes a renter and the buyer becomes their landlord.
Once a buyer and seller sign a purchase agreement, a house is considered to be “under contract.” The sale could still fall through if contingencies come into play, but it’s relatively rare because there aren’t many ways to legally exit a real estate contract.
This final inspection of the home by the buyer takes place before closing and is a customary part of buying and selling homes. During this inspection — which is also known as a “final walk-through” — a buyer ensures that agreed-upon repairs have been completed and the home is in move-in ready condition.