Understanding Real Estate Terms

Adjustable-Rate Mortgage: a mortgage loan in which the interest rate is periodically adjusted, depending on the credit market. This can often mean lower payments in the beginning than a fixed mortgage loan, though it is possible the interest rate can increase after your initial term, increasing the rate and payment throughout the life of the loan. Sometimes also called a variable rate mortgage or tracker mortgage.

Amortization: a method for equalizing a monthly mortgage payment throughout the life of the loan by adjusting the proportion of principal to interest over time. In basic terms, this is how your lender offers you a predictable monthly payment rate.

Appraisal: a licensed appraiser’s opinion of a home’s market value based on the sale of comparable homes in the area as well as the condition and features of the home. An appraisal is often required in order to secure a loan so that the lender can make sure the home is worth the amount of money they are loaning you.

Bridge Loan: a short-term loan that is normally taken out to cover a period of time between real estate transactions. For example, if you are buying a house but your home hasn’t sold yet, you may take out a bridge loan in order to cover the down payment on your new home until your old home sells.

Broker: normally real estate agents work under a real estate broker. A real estate broker is someone who has taken education beyond what is required of a real estate agent and has passed a broker’s license exam. Often a real estate broker oversees the work of real estate agents at their firm and makes sure that all realtors in their firm are in compliance with real estate law. Brokers can also help settle disputes within transactions and help agents come to resolutions.

Buyer’s Agent: the real estate agent that is working on behalf of the clients buying the home.

Closing: this is the final step in a real estate transaction. During the closing, the ownership of the property is transferred from the seller to the buyer. In order to close, you must have an attorney, title officer, or escrow company officer present who is a neutral third party that handles the legal paperwork. The closing date will be set when you make the offer on the home, and your real estate agent and lender will give you details leading up to closing of what you need to bring to the closing. Normally the closing will include the buyer and the seller, as well as their real estate agents and lenders.

Closing Costs: Expenses that are in addition to the price of the property that are paid at the closing. Depending on if you are the seller or buyer, these costs may include the realtors’ commission, appraisal fees, loan fees, and other expenses.

Commission: the amount of money your real estate agent makes for handling the sale of the house. Real estate agents are not paid until the deal has gone through. Normally commissions are a percentage of the sale, split evenly by the listing and buying agents. Oftentimes, agents have had to invest their own money in marketing your home, and don’t get paid back until they are paid commission at closing.

Comparative Market Analysis: a property evaluation that determines the value of the property by comparing properties that have been recently sold with similar size, condition, age, and style to the home that is being analyzed.

Contingency: a provision in a real estate contract that makes the contract null and void if a certain event occurs. Common contingencies are based on loan approvals, appraisals, home inspections, final walkthroughs, repair requests, and/or sale of another home.

Conventional Mortgage: any mortgage loan that is in no way offered, insured, or guaranteed by a government entity

Counter Offer: after an original offer is made on a home, the seller has the option to come back with a counter offer. The counter offer means that they have rejected the original offer and are proposing a different deal. For example, a counter offer may include a different price, closing date, or different terms.

Deed: a legal document that transfers ownership of property from the seller to the buyer.

Down Payment: the portion of the home price that you pay upfront and do not include on the mortgage. Depending on the type of loan you get, varying amounts of a down payment may be required and is normally calculated as a percentage of the total price of the home.

Earnest Money: an amount of money paid by the buyer to the seller to show good faith that they are moving forward in buying the home. Normally this money is held by the title company or put in escrow until closing. In some cases, if a buyer backs out due to a reason outside of the contract, the seller gets to keep the earnest money.

Equal Credit Opportunity Act: a US law that protects applicants from being discriminated against due to their ethnicity, gender, age, marital status, religion, national origin, or reliance on public assistance.

Equity: the amount of money you have in a home beyond what is owed in the mortgage. Basically, equity is the amount of money you would get if you sold your home, once the loan was paid. Equity can be determined by estimating the value of your home and subtracting any loans you have on it and expenses that would need to be paid.

Escrow: when a neutral third party holds on to something of value until contractual obligations are meant. Normally, when you pay earnest money on a home you are purchasing, it goes into escrow until the deal is closed. Escrow also refers to the money that your lender holds on to make payments for insurance and taxes.

Fair Market Value: the price that a home would go for on the market.

FHA Loan: a type of mortgage that is insured by the Federal Housing Administration (FHA) that allows down payments of 3.5% and also qualifies lenders with lower credit scores. FHA loans are commonly used by first-time home buyers and others who may not have a substantial down payment to put on a house. An FHA loan requires the borrower to pay for mortgage insurance until they have 20% of the price of home paid.

Fixed-Rate Mortgage: a mortgage loan in which the interest rate will stay the same throughout the life of the loan, regardless of what the credit market does. This allows for a predictable monthly mortgage payment.

15 Year Fixed Rate Loan: a shorter fixed-rate loan that will include higher monthly payments, but a much faster payoff time. This can also be good for those planning to stay in a home for less than 5 years as you are able to pay principal on the home and build equity much faster.

30 Year Fixed Rate Loan: a longer fixed-rate loan that is best for people planning to stay in their home for at least 5 – 10 years; offers lower monthly payments.

Foreclosure: the legal process of the lender/bank taking control of a property, evicting the homeowner, and selling the property due to the homeowner not paying their mortgage. Often foreclosures go to an auction or quick sale by the bank in which the bank tries to sell the home for the amount of money they are still owed on the home, with the home often being sold in “as is” condition.

For Sale by Owner: a property that is being sold directly by the seller. Some people list their homes for sale by owner to not have to pay commission on the sale of the home, but it leaves the seller responsible for the all detailed work involved in the sale of the home. If someone has experience in the purchasing, sale, and marketing of a home, for sale by owner could be a good option. But, for someone who doesn’t have experience in marketing and real estate, for sale by owner could be very costly and cause dyer mistakes that lead to financial or legal repercussions.

HOA: a homeowners’ association is an organization that enforces rules for properties in a neighborhood. If a property belongs to an HOA, being a member of the HOA is required, meaning you must pay dues and follow all HOA restrictions on property. Knowing if the property has an HOA and what the specific rules for the property prior to buying the home is important because it can have specific rules about exterior fixtures you want to put up (sheds, pool houses, fencing, swimming pools, landscaping, etc), the type of items you have visible on your property (boats, motorhomes, excessive number of cars, etc.), and maintenance of a home.

Home Inspection: a non-invasive examination of a home that determines the condition of a property. Home inspections are performed by a licensed home inspector and often look at the heating systems, air conditioning systems, water heaters, interior plumbing, electrical systems, walls, ceilings, floors, attics, roofs, windows foundations, and basements. Home inspections are often contingencies in the real estate deal. The home inspector submits a report to the buyer of the home listing the condition of the items in the house, and from there the buyer can decide whether or not they want to move on with the purchase of the home, or if they want to request repairs prior to purchase.

Home Warranty: a home warranty plan is one that covers sudden defects within the house, on things like appliances, electrical systems, and plumbing. Home warranty plans can be bought at any time, but are the most affordable to new homeowners. Buyers can also request a home warranty as part of their purchasing agreement, or sellers can offer it to entice buyers into the sale.

Homeowner’s Insurance: a type of property insurance that covers a private residence and protects against partial and total loss of a home, often required for mortgage. There are many types of homeowners insurance with varying policies and protections, so it is important to understand lender requirements as well as your own personal needs.

Lease Option: a contract used in residential and commercial real estate that works out a rental period with the option of purchasing the property once the rental period is over.

Lender: a financial institution, bank, private group, or individual that makes funds available to another with the expectation that the funds will be repaid with interest and/or fees.

Listing Agent: the real estate agent that represents a homeowner in the sale of their home

Mortgage: a loan for property in which the property is used as collateral.

MLS: stands for multiple listing service and is a marketing database set up by a group of collaborating real estate brokers to provide accurate and structured data about properties for sale. It allows agents to see each others’ listings and quickly gain information about other properties for clients.

Pre Approval (Letter): a statement from lender that you qualify for a specific mortgage amount based on a review of your financial information

Pre Qualification: informal estimate of how much a buyer can borrow that is different from a preapproval in that it doesn’t include verification of information provided by buyer, meaning that issues could come up later when an a loan officer starts checking into financial information

Private Mortgage Insurance: coverage for mortgage lender against loss if a borrower defaults on a home loan; required for buyer to pay if they are putting down less than 20% of loan value, normally required in FHA loans

Real Estate Agent: licensed professional who works on behalf of the buyer and/or seller of real estate during a sales transaction

Refinance: refinancing a home means taking out a new loan to pay off the current loan that you have on your house. Refinancing is normally done to obtain a better interest rate or to get access to equity you currently have in the home.

Short Sale: when the net proceeds from selling a property falls short of the debts that is owed on the property. In a short sale, lien holders must agree to accept an amount that is less than what is owed on the debt.

THDA Loan: Tennessee Housing Development Agency is a state agency created to help low income families obtain home loans. The THDA is responsible for several federal and state housing programs and promotes long-term homeownership, and stability to Tennessee’s residential construction agency. THDA offers down payment assistance to first-time homebuyers and also has specific loan options available.

Title Insurance: a form of insurance that protects against any defects in real estate property titles. For example, if you bought a home that someone did not pay proper taxes on, or something was not handled properly in a previous sale, legal action could be brought against you at varying degrees. Title insurance protects you from these circumstances and may be required by your lender.