Let’s brush up on your real estate jargon.
Here is a reference guide to the commonly used terms, phrases, concepts, and acronyms used when discussing the process and requirements of home buying.
Condo Association or Homeowner’s Association Dues (HOA)
These are fees that are collected each month for common area maintenance and ongoing costs of managing the property. The association uses this money to pay monthly expenses and accumulate an amount to pay for repairs. This can include things such as common area taxes, insurance, common utilities, pool maintenance, landscaping, cable, water, etc
Credit or FICO Score
A credit score is a number assigned to a person that indicates creditworthiness. Lenders use credit scores to assess a buyer’s capacity to repay a mortgage. There are three credit repositories (Experian, Transunion, and Equifax) and each have their own scoring methodology. The FICO score, a credit score calculated with software from Fair Isaac Corporation (FICO), is the most widely used for making credit decisions. A FICO score ranges from 300 to 850. The higher your score, the less you typically pay for credit, the lower your score, the higher you will pay for credit.
A debt-to-income ratio is one way mortgage lenders measure your ability to manage the payments you make every month to repay the money you have borrowed. You calculate your debt-to-income ratio by adding up all your monthly debt payments and dividing them by your gross monthly income. Your gross monthly income is the amount of money you earned before your taxes and other deductions are taken out.
Earnest Money Deposit
It is typical for a buyer to deposit earnest money when entering into a contract to buy a home. This is NOT an additional cost but a portion of the money that will be needed to close the purchase transaction. This money is held in trust usually by the title / escrow company and will be applied to settle the total costs of the transaction (including any contractually obligated costs, loan fees, down payment, etc.).
Wind insurance is a type of property insurance designed to protect against damage from hurricanes. Some lenders require this insurance in addition to ordinary homeowner’s insurance if a property is located in areas of the country where hurricances are common.
Every mortgage loan servicer is required to establish an escrow account where funds from the monthly mortgage payment are kept separated from the account holding principle and interest, and used to make payments for certain fees that apply to the mortgage, usually property taxes and homeowner’s insurance.
Escrow or Closing Agent
Your escrow or closing agent is responsible for making sure that all of the contract conditions tied to the purchase and sale of a property have been met, such as money collected and transferred, documents signed, and deeds recorded. They typically work for an escrow company, or in some states, could be an attorney.
Escrow or Closing Company
An escrow or closing company is commonly used in the transfer of high value personal and business property, like real estate. If you have an escrow company handling your closing, that means that the agent will make sure that all of the conditions of sale are met and any money transfers happen within their trust accounts.
Flood insurance is a form of property insurance that pays the policyholder in the event of flood damage to the property. In certain flood-prone areas, a mortgage lender will require flood insurance as a condition of approving a mortgage loan. This coverage is also in addition to ordinary homeowner’s insurance and does not cover your personal property.
Hazard insurance is part of the coverage provided by your homeowner’s insurance policy that provides specific protection for a broad number of perils. Some of these perils are natural hazards, such as fire or hail damage, while others are manmade, such as theft or vandalism.
It’s important to remember that not all insurance policies are the same. In some cases, coverage can differ from one state to another. For this reason, it’s vital that you have a clear understanding of what is covered by your policy and never assume that certain perils are covered.
Interest Rate Float
Floating the rate, during the time from submitting your loan application and prior to closing, is a concept that allows you to wait to choose a final interest rate on your transaction. While the rate is floating, you are assuming the risk that interest rates will not go up or that they will fall. If rates have been dropping, then you might want to float the rate in the hope that rates will be even lower by the time you close your loan.
Interest Rate Lock
A rate lock is a guarantee from a mortgage lender that they will give a mortgage loan applicant a certain interest rate, at a certain price, for a specific time period. The price for a mortgage loan is typically expressed as points paid to obtain a specific interest rate.
Loan-to-Value or LTV
This is the percentage of the purchase price that will be financed as a mortgage. For example, if the purchase price is $100,000, and the loan amount requested is $97,000, then the loan-to-value (LTV) is: 97% LTV of the property.
Monthly Mortgage Payment or PITI
Your monthly mortgage payment, also referred to as PITI, often includes the following:
- Principal and Interest (P&I): Amount collected by the lender to repay the amount you borrow and the interest on it.
- Property Tax (T): Amount collected by the lender to pay local property taxes when due.
- Insurance (I): Amount collected by the lender to pay hazard or homeowners’ insurance, which covers the property in case of fire or other type of disasters. Lenders typically collect a monthly amount necessary to pay the annual premium every year.
A type of loan used to purchase residential property (your home). The property serves as security or collateral to a creditor (your lender) for the debt (the amount you borrow). This means the lender can take possession and sell the property to pay off the loan if the borrower defaults on the loan or fails to adhere to its terms.
Mortgage Insurance, MI or PMI
For homebuyers, mortgage insurance enables them to become homeowners years sooner by helping them purchase a home without a 20% downpayment. For mortgage lenders, mortgage insurance is the first level of credit protection against the risk of loss on a mortgage in the event a borrower is not able to repay the loan, and there is not sufficient equity in the home to cover the amount owed. There are two types of mortgage insurers: government agencies and private insurers. The main government mortgage insurer is the Federal Housing Administration (FHA). Like private insurers, FHA insures lenders from losses when borrowers default; however, unlike private insurers, the taxpayers bear substantially all the financial risks when those loans are not repaid. More information on the differences between mortgage insurance and FHA loans can be found here.
Personal Tax Rate
Your personal tax rate is the percent of taxes to gross income you pay on your Federal Income Tax Return.
Property Tax and Property Tax Rates
Property tax is paid to your local county tax authority and each county sets its own property tax rate. Your property tax is calculated by taking the county’s assessed value of the property and multiplying it by the tax rate.
A condition of approving your mortgage loan is that it must be the first or only lien on the property. Title insurance protects an owner’s or a lender’s financial interest in a property from losses due to title defects, such as liens against a property that have priority over the mortgage loan. It is purchased as part of the closing process for a mortgage.