REAL ESTATE TERMS YOU SHOULD KNOW
Adjusted Gross Income (AGI): This is the underwriter will first look at for your income. Adjustments are made from here. It is an Internal Revenue Service term that describes a person’s gross income minus certain specific deductions.
Adjustable Rate Mortgage (ARM): A mortgage loan where the interest rate is not fixed for the entire term of the loan, but changes during the loan in line with movements in an index rate.
Amortization: Amortization refers to the equal loan payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. A fully amortized loan will be completely paid off at the end of the loan term.
Annual Percentage Rate (APR): An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.
Appraisal: An estimate of the value of real property, made by a qualified professional called an “appraiser.” An appraisal will be needed to determine the value of your property.
Cash Out: Any funds disbursed directly to the borrower, after closing costs and a small buffer. Cash out refinances have higher risks to the lender therefore typically a higher rate.
Closing Costs: Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. These are fees that happen one-time. Prepaid interest or taxes are not considered as closing costs, but they still need to get paid at closing. The costs of closing usually are about 3 percent to 6 percent of the total mortgage amount.
Community Property: California is a community property state, and typically, all property purchased during marriage is considered community property. The exception is when the spouse signs a quit claim deed releasing any interest in the property.
Credit Score: The score (aka FICO score) given to an individual to determine the credit worthiness. The raw data come from TRW, Equifax and Trans Union. There are many different types of scores, most people get their consumer score from their credit card company, whereas mortgage lenders use the clients’ mortgage version.
Debt-to-Income Ratio (DTI): The customer’s monthly obligations (including their proposed housing expenses and all installment, revolving and legal obligations) divided by their monthly gross income.
Deed of Trust: A document used which pledges real property to secure a debt. It indicates ownership. It does not indicate any financial liability. In California a deed of trust is used in place of a mortgage.
Escrow: Refers to a neutral third party (Escrow Company) who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or “closing.” Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments. In Southern California, escrow companies are sometimes separate from title companies.
Escrow Instructions: The escrow agent gives the parameters and contingencies involved in the transaction and agreed upon by both parties.
Escrow (Impound) Waiver: The Request for a borrower to pay their own taxes and insurance. Escrow wavers are not granted in California with less than a 10% equity position (<90 LTV).
Flood Insurance: This insurance covers the property in the case of a flood. This is required if the property is in a 100 year flood zone..
Gross Income: Gross income is total income from all sources. It is the income you get before you pay federal/state taxes, Medicare, Social Security, union dues, or make your retirement contributions.
Hazard Insurance (Fire Insurance or Homeowners’ Insurance): A form of insurance in which the insurance company protects the insured from specified losses, such as fire and liability, it would not cover earthquake, riot, or flood damage. For a stand-alone property (single family residence), the owner is responsible for insuring the entire property. For a condo or a townhome, the homeowners’ association insures the exterior of the property, and the homeowner needs to acquire insurance that covers “walls in”.
Impound (Escrow Account): That portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
Loan Estimate: Good Faith Estimate of buyers loan charges that must be given within three day of beginning an application. It replaces what was the Good Faith Estimate.
Loan-To-Value Ratio (LTV): The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
Note: Short for promissory note. This document gives the parameters of the loan and legally obligates the borrower to pay back the debt.
P.I.T.I.A. Principal, interest, taxes, insurance and Homeowners’ Dues. The complete monthly cost associated with financing a property.
Points: Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000). This is often times broken into origination fee and discount points.
Power of Attorney: An authority by which one person enables another to act on his or her behalf. Power of attorney can be limited to specific areas (a specific residence) or be general in some cases.
Pre-Approval: The Buyer has actually begun the application process and an underwriter has approved their income, funds and credit. Beware of any conditions on the approval.
Pre-Qualified: Buyer has discussed their financial situation with a loan expert. No attempt has been made to verify the validity of any of the borrowers’ information. PRE-Qualification is only an indication of how much a buyer should qualify.
Private Mortgage Insurance (PMI): This insurance protects the lender for the difference between 80% of the lower of the purchase price or the appraisal value and the overall percentage of the loan (LTV).
Quit Claim: In the broadest sense to quit claim means to release or relinquish a legal claim or right to something. In the context of marriage, quit claim usually refers to a Quit Claim Deed. That is a document one spouse signs that releases all of their rights in a particular property.
Title Insurance: This is insurance that insures the owner of record and any lenders from a claim against the ownership of a property. This insurance is required on all properties that have lender financing.