Real Estate Defined

Overview
Buying a home can be an overwhelming process. It is important the home buyer has the proper resources to help. The first step is to hire a mortgage professional and a real estate professional. The mortgage professional will help you figure out how much you can afford based on your income, debts and credit. They will also help you shop for a loan and provide information on other home buying programs to find you one that matches your needs. After you have been prequalified a real estate professional will help you find homes in the appropriate price range, write the contract and help you through the inspection process. Both the mortgage and real estate professional can help you with other referrals like home inspection, home warranty, title and home insurance companies. Once all the loan and contract documentation has been completed you will sign papers to complete the purchase of the home.


Adjustable Rate Mortgages - Adjustable Rate Mortgages (commonly called ARMs) provide a lower initial interest rate that will reset sometime in the near future. These loans are useful if a buyer expects their income to increase as it allows them to buy a more expensive home today. The rates can adjust in as little as one year or up to five years. Home buyers should be cautious about these loans. If the interest rate increases and your salary does not the home may become unaffordable.

Appraisal - If you are getting a loan to buy a property the lender will almost always require an appraisal to be prepared. The appraisal will be prepared by a trained, licensed professional and is an opinion of value based on a combination of factors like location, condition, recent sales of similar properties as well as the price of properties currently available for sale. The lender will select the appraisal company. The buyer is typically required to pay for the appraisal prior to the appraisal being completed.

Ballon Payment - A Balloon Payment mortgage typically has a fixed rate of interest and payment for the term of the loan followed by a large ending or balloon payment. For example a home buyer purchases a $100,000 home with $50,000 down. The monthly payments are $1000 per month for three years for a total of $36,000 not including interest. At the end of three years the buyer must pay the $14,000 balance in one payment plus any accumulated interest.

Bank Owned Homes - A bank owned home may also be referred to as an REO. REO stands for Real Estate Owned (by banks). A bank owned home is a home where the owner stopped making their payments and the bank has foreclosed or taken back the property. The bank typically lists the home for sale with a local real estate professional. Bank owned homes generally sell for less than normal home sales as they are sold in "as is" condition meaning no repairs will be made. Contact your real estate professional for more information.

Closing - Closing means all the terms of the contract have been met, the monies owed to the seller and others have been paid and the deed has been recorded. At this point escrow has closed and the home belongs to the buyer.

Closing Costs - Closing costs are various charges paid to different entities associated with facilitating real estate transactions. Some of the closing costs a buyer might encounter include: credit report, transfer tax, discount points, loan application, loan origination, appraisal, attorney, notary, documentation, title and escrow fees, loan fees, mortgage insurance, title insurance premium and others. 
Closing costs are negotiable between the buyer and the seller. This means the buyer could ask the seller to reduce the money they are receiving for the home and contributing this money to the buyer. Lenders generally estimate 3% for conventional loans. Costs can be higher or lower on FHA or VA loans. Consult your mortgage professional to determine the exact costs.

Contract - This document is typically prepared by a real estate professional and contains the terms and conditions of the home sale. When it is signed by both the buyer and the seller it is referred to as an executed contract. The executed contract, earnest money, along with other documents, is used by the the title and escrow company, mortgage company and others to complete the sale of the home. When asking about availability of a home the seller or real estate professional may say "It is under contract." meaning a contract has been accepted. No more offers can be accepted unless the contract is cancelled.

Co-Signer - If a buyer does not have sufficient credit or income to qualify for a home loan they may still be able to buy with the help of a co-signer. A co-signer is someone who is willing to sign a mortgage loan obligation with you as extra insurance for the lender that you will not default on your monthly payments. The cosigner is required to go through the same application and approval process as the original signer of the loan. 
Co-signers should be very careful before agreeing to co-sign on a loan as they will be responsible to pay the loan if the other party stops making the loan payments. In addition the co-signer's credit will reflect any late payments. Not all loans allow co-signers. Consult with your mortgage professional for more information.

Credit Score - A credit score is also called a FICO® score. FICO® stands for Fair Isaac and Company. FICO® developed the software used to produce the credit scores. Your score is determined by whether or not you pay your debts when they are due, how many debts you have and other factors. The companies you owe money to for your car payment, credit cards and other debts report any late payments to three credit bureaus called Equifax, Experian and Trans Union. Other public records like judgments from landlords, child support or income tax liens may also be reported.
One of the first things your mortgage professional will do is pull your credit score to determine if you can buy a home. A higher credit score typically lowers your interest rate and required down payment. This is because a low credit score indicates a higher risk loan. A good FICO® score is very valuable as it can reduce the amount of down payment required and save thousands of dollars on your mortgage payments. FICO® scores and their ratings are: 
720 and above Excellent 
620 to 720 Good 
580 to 620 Fair 
580 or less Poor
The credit score plus other factors will determine what interest rate you might pay. The credit score must be at least 620 to qualify for a conventional loan with a 5% down payment. FHA requires 3.5% down if the home buyer´s FICO® score is at least 580. If the home buyer´s FICO® score is less than 580 then the buyer will be required to put 10% down. VA requires a credit score of at least 620. There are some free websites available that will give you a high level credit report. The best way to get an accurate credit report is to contact a mortgage professional. 
Note there may be a charge to get the credit report from the mortgage professional. 

Credit Score Improvement - The first step is to get a copy of your credit report and make sure there are no errors. People with very common names may end up with someone else´s bad debt on their credit report. Identity theft is another problem. Be prepared to be patient as it is far easier to get something on your credit report than it is to get it removed. 
FICO® Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories and have different percentages of importance 

1) Payment History - 35%, 
2) Amounts Owed - 30%, 
3) Length of Credit History - 15%, 
4) New Credit - 10% and 
5) Types of Credit Used - 10%. 

These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different.
If you have a lot of credit cards pay off the balances (but do not cancel the credit cards) to reduce the total amount owed. Do not spread the debt over more loans as the mortgage company will look at total debt. Manage your credit cards responsibly. Limit the number of inquiries on your credit. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called "inquiries") will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time like 30 days. Typically, these are treated as a single inquiry and will have little impact on the credit score. 

Pay your bills on time, get current and stay current. Delinquent payments and collections can have a major negative impact on your FICO® score. The longer you pay your bills on time, the better your credit score.

Sometimes there are not enough "lines" of credit which means not enough companies have reported information about your payment history to the three credit bureaus. This can be solved by taking out small loans and paying them off over a few months or signing up for an additional credit cards and using them so the activity gets reported. 
Note: Do not sign up for too many new accounts or it will have a negative effect on your FICO® score.  
In some cases it will require time to improve the score. A bankruptcy, foreclosure or other bad debt may stay on your credit report for years. There are some very good credit counseling companies who can develop a plan to improve your credit. Consult your mortgage professional for referrals to a reputable credit counselor.

Debt to Income Ratios - Prospective homebuyers must answer many questions, but the first is always "How much home can I afford?" Calculating a debt-to-income ratio will give you a good idea of how much of your income will be available for monthly mortgage payments, including principal, interest, taxes, and insurance, collectively referred to as "PITI." 
Most mortgage professionals agree the total amount you pay toward your mortgage (PITI), should not exceed 28 percent of your gross income. The total amount you pay in debt-related expenses, including your mortgage, car loan payments, credit card bills, student loan payments, and any other debts, should not exceed 36 percent of your income. So how much can you afford to pay each month? The first step is to determine your total income. This includes not only your regular salary but also the following:

• Bonuses
• Regular income from dividends and interest
• Assistance or support payments, such as alimony or child support
• Payment from tips or commissions

The total of all these figures will give you your gross annual income. Dividing by 12 will yield your monthly gross income. Multiplying your monthly income by .28 will give you an idea of how much you can afford in monthly mortgage payments. For example:

Your total household income is $80,000, your monthly income is $6,667. 
At 28 percent, you can afford to spend $1,867 on your mortgage per month. 
At 36 percent you would have a total limit of $2,400 in debt-related expenses per month. 
If you have debt other than the mortgage, you may have to adjust the mortgage amount down to stay within this 36 percent limit. 
Once you know your total debt limit you are ready to consider your loan options and use a calculator to see how much you can buy. If you find a mortgage loan with a monthly payment of $1,500, you would be well under your $1,867 limit. Next, factor in your average monthly credit card expenses, car payments, and any other rotating charges. If that total comes to $800, your total debt burden would be roughly $2,300, $100 less than your $2,400 limit.

Ultimately it is up to you to apply these formulas and ratios to your own financial situation. Remember, while the numbers may help you get approved for a loan, they won´t provide you with the whole story. Some people can afford a little more, while others should pay less, depending on lifestyles and other factors.

Deed - This document is typically prepared by the title company, signed by the seller, notarized and recorded in the County 

Recorder´s Office to document the transfer of the property from one person to another.

Default - A home owner stops making their home loan payments. The borrower has violated or defaulted on the terms of the loan repayment agreement with the lender. 

Down Payment - The down payment amount depends on the type of loan. FHA requires 3.5% down if the home buyer´s FICO® score is at least 580. If the home buyer´s FICO® score is less than 580 then they will be required to put 10% down. VA loans require zero down. Conventional loans typically require 5-20% down depending on the FICO®. Note if a home buyer has less than 20% down then they will have to pay Private Mortgage Insurance or PMI. See the PMI section for more information. There are some other programs available from USDA and others that require less down payment. Down payments are typically required to be on hand at the time of the offer. Some portion of the down payment may be paid by a family member. Down payments cannot be contributed by an unrelated third party except for special programs. Consult your mortgage professional for more information.

Earnest Money - When a buyer makes an offer to purchase a property, they need to provide an earnest money deposit as a sign of good faith. The earnest money deposit becomes a part of the purchase price and is held, or deposited, into a trust or escrow account until there is full acceptance of the offer and the transaction closes. Typically, the earnest money deposit is usually a minimum of $500 or 1% of the purchase price. If the contract cancels earnest money may or may not be refundable. Consult your real estate or escrow professional for more details.

Escrow - In a real estate transaction escrow is where the contract documents and earnest money is deposited with a neutral third party called an escrow agent to be held until all the conditions of the home purchase have been completed. This is called closing escrow. Escrow can also refer to an account held by the lender where a portion of the monthly payment paid by the home owner is held to pay future property insurance and taxes. 

FHA - FHA stands for the Federal Housing Administration which is part of HUD. FHA loans have been around since 1934. HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in homeownership by making loans more readily available for lower and moderate income families through its FHA mortgage insurance program and by making HUD Homes available. HUD/FHA does not make loans or grants to homeowners. All of the HUD/FHA insured mortgage loan programs are handled through HUD-Approved mortgage lenders. 


FHA History - Congress created the Federal Housing Administration (FHA) in 1934. The FHA became a part of the Department of Housing and Urban Development's (HUD) Office of Housing in 1965. When the FHA was created, the housing industry was flat on its back:Two million construction workers had lost their jobs.Terms were difficult to meet for homebuyers seeking mortgages.Mortgage loan terms were limited to 50 percent of the property's market value, with a repayment schedule spread over three to five years and ending with a balloon payment.  America was primarily a nation of renters. Only four in 10 households owned homes.During the 1940s, FHA programs helped finance military housing and homes for returning veterans and their families after the war.In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA's emergency financing kept cash-strapped properties afloat. The FHA moved in to steady falling home prices and made it possible for potential homebuyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s. By the third quarter of 2001, the nation's homeownership rate had soared to an all time high of 68.1 percent.

Fix Up Loans - In order to qualify for financing a home must meet the minimal guidelines of the loan program. For example a home in poor condition that needs appliances, plumbing, flooring, roof, etc will not qualify for a regular FHA loan as it will not meet minimal FHA guidelines. If the buyer does not have the cash to buy the home and make the repairs needed so it will qualify for FHA financing there is another option called a Fix Up or Renovation Loan. FHA offers two different fix up loans referred to as 203K and 203B loans. These loans allow the buyer to finance the cost of the repairs and the purchase price into one loan. The advantage to the buyer is the ability to buy a home and make repairs without having to come up with cash out of pocket.


A 203K loan is for homes needing a lot of repairs - typically between $5,000 to $35,000. The home will be given two values by an appraiser - the current or as is value and the fix up value or what it will be worth when the repairs are completed. In order for the home to qualify the appraiser´s opinion of value after repairs must equal the purchase price plus the cost of repairs. The buyer must be able to qualify for the higher amount. The money to make the repairs is held by the title company and released only after the repairs are complete. All work is completed after closing and must be completed within 30 days. 


A 203B loan is for a home that needs small repairs of less than $5,000. For example if the home is in good condition except for the roof that cost $3,000 then a 203B loan would be the solution. Just like with the 203K loan, the money to make the repairs is held by the title company and released only after the repairs are complete. All work is completed after closing and must be completed within 30 days. 

Conventional mortgages are also available for fix up homes with varying terms. In general the same rules apply - the home must appraise, the buyer must qualify, the money is held until the repairs are complete and the repairs must be completed within 30 days of closing.

Fixed Rate Mortgages - A fixed rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the same through the term of the loan, usually 15 or 30 years, as opposed to adjustable rate loans (ARMs) where the interest rate will adjust. Other common mortgage loans are interest only and balloon payments. Foreclosure - A foreclosure occurs when the owner stops making the payments on the home loan. After a period of time the bank will take the property back which is also known as a foreclosure. The timing and laws of the foreclosure process vary from state to state and depend on the type of loan. In some states it can take 6-12 months while others take only 90 days. Consult with your attorney, mortgage or real estate professional for more information on the foreclosure process.

Good Faith Estimate - When a home buyer has been pre-approved and has found a home to buy they contact their mortgage professional. The mortgage professional collects information about the home like price and taxes and based on the buyer´s financial information and, with the information from the lender, prepares a good faith estimate (commonly referred to as a GFE). This form summarizes key loan information, details escrow costs and displays the total estimated settlement charges associated with obtaining the mortgage. All mortgage professionals and lenders use the same form so loan terms and costs from different lenders can be easily compared by the home buyer. The GFE cannot change unless the home buyer has been informed of the change and given a new GFE at least three business days prior to closing. The buyer can either agree to the new terms or cancel the loan. 

Home Inspection - A home inspection is performed by a trained, licensed professional who will examine the heating, air conditioning, plumbing, electrical, appliances, roof and other items to determine if they are in need of repair. The home inspection is paid for by the buyer and typically takes about four hours depending on the size and age of the house. 

HUD - HUD stands for Housing and Urban Development and is a government organization. HUD enforces the Fair Housing Act and other laws that prohibit discrimination based on race, color, national origin, religion, sex, familial status, or disability. These rules apply to nearly all types of properties and housing transactions including rental, sale and mortgage loans. The Federal Housing Administration is part of HUD. 

HUD-1 - This is also referred to as a settlement statement. Based on the information received on the Good Faith Estimate from the mortgage professional the title company will prepare this form as an accounting of all the monies needed to complete the home purchase. This will include property taxes, HOA fees, property insurance, title and escrow fees along with the key loan information. It also displays the total amount of cash and borrowed money the home buyer needs to complete the home purchase. Once all the terms have been met and the monies paid then the deed will be recorded, escrow will be closed and the home belongs to the buyer.

Insurance - This is the cost to insure a home against a loss due to fire, wind or other natural disasters and is referred to as Property or Home Owner´s Insurance. Insurance rates can vary widely from state to state and depend on the type of property. Note that flood insurance is typically a separate cost. Consult your insurance professional to determine the insurance costs for a particular property.

Interest Only Loans - As the name suggests, you pay only interest for the first five, ten, maybe even fifteen years of the loan, thereby lowering your initial monthly payment. Once you do begin paying principal, you'll have to play catch-up to pay down your debt before the loan term is up. These loans are not for everyone. Consult with your mortgage professional to see which loan is the best choice for you.

Interest Rate - Interest rates change on a daily basis and vary depending on credit score, type of loan, monthly debts, work history and other factors. The latest national interest rates can be found on the internet on websites like www.bankrate.com or www.money.cnn.com. Your mortgage professional will be able to give you the current interest rate you will qualify for. 

Lender - The Lender is the one who will actually loan the money. 

Loans - The most common loans are conventional, VA and FHA. VA financing is available through Veterans Affairs and only to the military. FHA financing comes from the Federal Housing Administration and is available only to first time home buyers. Conventional financing is available to anyone with sufficient credit and down payment to qualify. There are other types of loans available. Consult your mortgage professional for information on the available loan programs.

Loan Limits - The maximum loan amount for a conventional loan is $417,000 and is set by the Federal Housing Finance Agency. You can see more information at:
Https://www.efanniemae.com/sf/refmaterials/loanlimits /

The maximum amount for an FHA loan varies by state. You can find out the information for your state on: https://entp.hud.gov/idapp/html/hicostlook.cfm

There is no maximum VA loan, except that the loan cannot exceed the lesser of the appraised value or purchase price, plus VA funding fee and energy efficient improvements, if applicable. However, lenders usually won´t make a no-down payment loan larger than $417,000 ($625,500 in Alaska, Hawaii, Guam, and U.S. Virgin Islands) due to secondary market limitations. http://www.va.gov/
Consult your mortgage professional for more information.

MLS - MLS stands for Multiple Listing Service. This refers to the database used by realtors to list the homes available for sale so other realtors can see the availability, price and features and show the homes to their buyers. Larger cities usually have a shared MLS system listing all the homes in the area. Most MLS systems also have an agreement or license to allow information about the homes to be distributed on public websites like www.realtor.com.

Mortgage - A mortgage is a loan made to an individual or a group of individuals to finance the purchase of a piece of property. The property is held as collateral or security to make sure the loan is repaid.

Mortgage Broker - Mortgage brokers work as the middleman between home buyers and banks/lenders to help the buyer obtain financing to purchase a home. The Lender is the one who will actually loan the money. Working with a Mortgage Broker makes it easier to find out what different banks have to offer as the Mortgage Broker will do this "shopping" for the buyer. Buyers with unique financial situations may not be able to use the traditional bank financing. The home buyer can either work with a mortgage broker or directly with the bank or lender. Typically the pricing with a Mortgage Broker can be just as competitive as working directly with a bank but always check to make sure.

PITI - PITI stands for Principal, Interest, Taxes and Insurance. This number is the total monthly home loan payment other than HOA fees.

PMI - PMI stands for Private Mortgage Insurance. If you have less than 20% to put down you will have to pay PMI. PMI is based on the amount of the loan and is usually less than 1%. Typical values are: 0.78% for loans with less than 10% down; 0.52 for loans with 5% to 99.9% down and 0.37 for loan with 15% to 199.99% down. These percentages can change slightly depending on the Mortgage Insurance company used by the lender. Consult your mortgage professional to confirm your PMI costs.

Points - One point is equal to 1 percent of the loan amount. Depending on the context, it can have different interpretations. Sometimes a lower interest rate can be obtained by paying points. This is sometimes called a discount point which is pre-paid interest. An origination point is a fee for services rendered in connection for originating the loan. An FHA or VA buyer may ask the seller to pay points. Consult your mortgage professional to determine the exact costs.

Pre-qualified versus Pre-Approved - When a buyer is pre-qualified, a mortgage professional has given their opinion regarding the price the potential buyer can afford. Their opinion considered the buyer's down payment, debts, income, credit rating and a lender's underwriting guidelines. Being pre-qualified is only an opinion from a mortgage professional who will not actually lend the money to purchase the home. If a buyer is pre-approved then the lender has received the information from the mortgage professional, verified all the above and more. The lender's opinion is more valuable than the mortgage professional since it is the lender who will actually loan the money. When a buyer is pre-approved, the seller can be more confident the buyer can close the deal. A seller will always ask potential buyers to provide a pre-approval letter before agreeing to the contract.

Principal - Principal is the amount borrowed. Each monthly payment on a fixed rate mortgage will pay some amount towards the principal. The balance of the payment goes to the other costs like interest, taxes and insurance.

Rent versus Buy - Buying a home is a big decision. Often there are more costs to consider than just the monthly mortgage payment like HOA fees, repairs and other improvements you may want to make. Home ownership gives more freedom to make changes and improvements in addition to potentially building equity. If your monthly total mortgage payments are less than rent then buying may be the right move. Considering all of the costs can help you decide if buying is the right decision for you.

REO Homes - See Bank Owned Homes.

Short Sale - A short sale or pre-foreclosure is when the home owner owes more money to the mortgage company than the home is worth. If the owner can no longer afford the payments due to a reduction in income or other issues then they can try to negotiate with the mortgage company to take an amount less than owed. If the mortgage company will not agree then the the mortgage company will foreclose on the property. The mortgage company may agree to a short sale because it is cheaper than a foreclosure. The advantage to the home owner is the negative impact to their credit is shorter - two to three years versus seven to ten years. There may be tax and other implications the owner needs to consider. The owner should consult with their accountant, attorney and credit counselor before pursuing a short sale. 


Buyers may be interested in buying a short sale property because the price may be significantly lower than a regular sale or a bank owned property. The disadvantage of a short sale is it may take many months to receive a response from the mortgage company. Typically the owner has stopped making the payments so the home may go into foreclosure before the mortgage company responds. Consult with your real estate professional for more details on how short sales work.

Taxes - Most states have a property tax that is collected annually by a government entity typically referred to as the Assessor. Taxes vary widely from state to state. Consult your mortgage or real estate professional to determine the exact costs.

Termite Inspection - A termite inspection is a visual inspection of the readily accessible areas of a home for evidence of wood-destroying insects or organisms. Termites and other pests bore through wood by digesting cellulose material from structural wood like rafters, floor boards and studs which weakens the structure. Subterranean termites are the most common termite in the United States. Though they typically move slowly they can cause thousands of dollars in damage if left untreated. Chemicals or baiting systems are typically used to kill these termites. 
Dry wood termites may require the house to be tented and fumigated with a gas. 
Formosan termites are sometimes called "super termites" due to their ability to cause significant damage in short periods of time. They are the most destructive wood destroying insect due to their large size and aggressive breeding habits. A Formosan termite colony can consist of 350 thousand to 2 million workers. Formosan termites are most commonly found in humid coastal and subtropical regions (i.e. Hawaii, South Carolina, Georgia, Florida and Louisiana). Other wood-destroying pests include carpenter ants, carpenter bees and wood-boring beetles.
Termite inspectors look for more than just termites. They may also identify water drainage or grading issues, excessive moisture, earth to wood contact and more. Consult with your termite inspector for more information on wood destroying pests and more.

Title Insurance - Title insurance protects the buyer and seller as well as the lender. It is an insurance policy issued by a title insurance company and specifies, among other things, what liens are recorded against the subject property. Public records can be incomplete and contain errors regarding the history of ownership of a property referred to as the chain of title. It's critical a home buyer receives an undisputed, marketable title to the property. Banks will not lend against a property unless the title is clear. Title insurance was developed to attest to the reliability of the chain of title, and compensate people in the event problems arise and someone contests the sale transaction. There are different levels of protection offered by different types of title insurance. Consult your title professional to determine the differences between the types of title insurance available.