21 Terms You Need to Know to Buy A House

by Jessica Brita-Segyde

The mortgage and real estate industries are full of terms we rarely hear in everyday life. Below are the most commonly used words and phrases that you'll hear from your realtor or loan officer during the buying and selling processes.

Amortization – Amortization can be difficult to understand at first, but the terms get easier after this first one! Let’s start with a definition: According to Merriam-Webster, to amortize means “to pay off (an obligation, such as a mortgage) gradually, usually by periodic payments of principal and interest or by payments to a sinking fund.” The amortization of a mortgage is represented by a schedule showing each monthly payment and how those payments are divided among the loan’s principal, interest, taxes, and insurance. Your lender can provide an amortization schedule at the beginning of your loan or at any point in the future to show how payments are distributed when they are made on time. If a borrower makes payments early or pays extra onto the principal of their loan, the amortization will change (resulting in less interest paid over the life of the loan).

Application – Most lenders and loan programs utilize a standard form called the Uniform Residential Loan Application (URLA). The URLA provides a snapshot of the information that an underwriter needs to make an informed decision. The loan officer can advise on the documentation needed to support of the loan application. Examples of documentation include bank statements and W-2 forms.

ARM – ARM means Adjustable Rate Mortgage. Many ARM products exist. Borrowers interested in an adjustable rate should discuss this with their loan officer early in the application process.

Closing Statement – The closing statement (formerly called the settlement statement) must be provided to buyers and sellers at least three days before closing. Realtors, loan officers, title agents, and other interested parties will review the closing statement with buyers and sellers to ensure the accurate distribution of funds and expenses. Borrowers will review and sign a copy of the final closing statement at the closing.

Contingent Offer – All purchase contracts have basic contingencies built-in. Two examples of standard contingencies are: the home must appraise at or above the agreed-upon offer price and the buyers have the option to request changes to the contract as the result of a home inspection. A “contingent offer” has all of the elements and contingencies of a standard purchase offer but with one or more additional provisions that could negate the original purchase offer. An example of a non-standard contingency is the completed sale of the buyer’s previous home.

Down Payment – The down payment is the amount of cash provided toward the buyer’s purchase price at closing. The down payment reduces the loan amount.

DTI - DTI is the debt-to-income ratio. The underwriter uses this to help determine the level of risk that a mortgage applicant presents.

Earnest Money – Earnest money is provided from the buyer to the seller or their agent during the initial purchase offer. It is usually held by the seller’s brokerage until it is applied toward the buyer’s costs at closing. If the amount of earnest money exceeds the buyer’s closing costs, then the earnest money can become part of the down payment.

FICO – An applicant’s FICO score is calculated by the major credit repositories and is helpful to the underwriter in determining risk. The acronym expanded is Fair, Isaac, and Company.

First Right of Refusal – First Right of Refusal is a contingency added to some purchase agreements. It states that the buyer has no obligation to purchase the home but will have the option of entering into a purchase contract on said home before anyone else does. If the seller receives another offer during the First Right of Refusal period, the original buyer must decide whether to proceed with a legally binding offer or concede their position to buyer number two.

Good Faith Estimate – The Good Faith Estimate is like a closing statement in its infancy. It is the lender’s estimation of all fees and costs associated with a loan and is provided to borrowers early in the application process.

Listing – Realtors often refer to marketed properties as “listings.” This term originated pre-internet when real estate agents literally carried a handwritten list of properties available for sale in their area.

LTV – The loan-to-value ratio (LTV) represents the percentage of a home’s appraised value being financed. LTV is another useful piece of information for the underwriter

MIP/PMI – MIP is the mortgage insurance premium that accompanies a government-funded loan. Borrowers may also hear the letters FHA MIP strung together. PMI means private mortgage insurance, which is the premium that accompanies some conventional loans with a high LTV. Both of these acronyms refer to insurance that covers the lender’s losses in case the borrower defaults on the loan.

PITI – Borrowers who utilize an escrow account will pay the standard principal and interest (PI) but will also include taxes and insurance (TI) in their monthly payment. Escrow accounts are common in most states, especially on loans with a high LTV.

Purchase Agreement – This is the contract to purchase a piece of real estate. Purchase agreements are state-specific because real estate law varies by state.

Preapproval – Preapproval for a loan is granted after a collection of some basic information. It is not a guarantee of a loan offer, but it is a great place to start.

Prequalification – Prequalification is more specific than preapproval and includes cost estimates and loan terms. A lender will usually require documentation such as paycheck stubs and bank statements before issuing a prequalification.

Realtor/Agent/Broker/Associate Broker – The important thing to know here is that these titles refer to something different, though one person could hold several of these titles at once. The world of real estate is rife with designations.

Title Insurance – Title insurance is required by lenders to prove that the person selling the property has clear title and the right to sell it. The title company will perform a search before offering insurance on the sale.

Truth-in-Lending Disclosure – The Truth-in-Lending Disclosure (TIL) accompanies the GFE. It shows the borrower the maximum amount of insurance they could pay over the life of the loan if all payments are made as scheduled.

 

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