Glossary of Terms

Glossary of Real Estate Terms as used in the Guaranteed Approval Programs

This glossary contains terms you should know to make your home buying experience easier.

80/20. An old way of getting 100% financing that’s generally not available any more. Instead of making one loan at 100%, lenders would make one at 80% and another at 20%. Doing so avoided PMI which was good for borrowers, but left banks unprotected when borrowers defaulted, which is why 80/20 loans are generally not available any more.

Agent. See “Real Estate Agent”.

Amortization. Paying a debt through periodic payments, rather than all at once.

Appraisal. A professional estimate of value prepared by an appraiser. An appraisal is a written estimate of the value of something. In real estate, it is a professional opinion of the market value of property (such as a home) as of a given date. Not to be confused with a Home Inspection.

Assumption. Buying a house by paying some cash and then taking over the seller’s existing mortgage yourself, continuing to make the monthly payments to the bank. Saves you from having to qualify for your own loan, but fairly rare.

Borrower/Buyer. These terms are generally used interchangeably, though technically there’s a difference. The buyer of course is the person buying a property, and the borrower is a person who gets a loan to buy a property. We use “buyer” when we’re talking about the purchase, and “borrower” when we’re talking about the loan. Note that not every buyer is a borrower, since some buyers pay cash.

Closing. The actual purchase transaction. You go to the office of the company handling the transaction (often a title company) and sign all the papers.

Closing Costs. Various fees you pay related to the purchase, often around 2-5% of the purchase price. These are costs outside a property’s sales price that must be paid to cover the cost of the transaction, such as a loan origination fee, discount points, insurance fees, survey fees, and attorney’s fees. Closing costs vary from location to location, but must be described to you when you submit your mortgage loan application.

Contract. The document in which the seller agrees to sell the house to you and you agree to buy it. You often have a number of “outs” which let you back out of the contract.

Contract for Deed. In Louisiana it is real estate contract (called a Bond for Deed) in which the purchase price is paid in installments, and title is transferred after the payments are made in full. In other states, a Bond for Deed is called a Contract for Deed or a Land Contract.

Conventional. Fancy word for “normal”. A conventional loan is a normal loan. No wonder real estate is confusing, huh? The other kinds of loans are FHA and VA. A loan that is not guaranteed or insured by a government agency.

Credit Bureau Scoring. Your credit score is a numerical index used by credit grantors to decide if you are a good credit risk. The information is based solely on your past credit performance and not on your race, gender, or other factors. When you get your credit report, you won’t receive this rating. Remember, the credit bureaus don’t extend credit; they provide credit information to prospective lenders.

Debt Ratio. The ratio of your debt to your income. Banks use this to figure out how much money they’re willing to loan you, which of course impacts what price home you’re able to buy.

Deed. A document that transfers ownership of property from one person to another. You’ll get a copy of this at closing.

Disclosure (Seller’s Disclosure). Prior to closing, the seller is required to give you a form detailing all the physical problems with the house that they’re aware of.

Down Payment. The portion of the sale price that you pay in cash. The rest is paid with the mortgage. A down payment is a portion of the sales price you pay to the seller to close a sale, with the understanding that the balance will be paid at settlement. It is also the difference between the sale price of real estate and the mortgage amount.

Earnest Money. A deposit you pay when you sign a contract with the seller to show that you’re serious about buying and not just window-shopping. This amount is deducted from the sale price at closing.

Equity. The amount of value you own in a property, after subtracting the outstanding loan. For example, if your house is worth $200,000, and there is $150,000 left on your mortgage, your equity is $50,000.

Escrow. A free service offered by the lender to make it easy for you to pay your property taxes and insurance. Taxes and insurance are generally due once a year, but your lender will build a little extra into your monthly payment for taxes and insurance, saving it on your behalf, and then forwarding the payments to the tax assessor and insurance agent once a year as your bills become due. While escrow is convenient and free and most borrowers use it, you don’t have to; you can opt-out of escrow and pay your taxes and insurance manually yourself if you prefer.

FHA Loan. A program in which the federal government insures the lender if you fail to pay and they have to foreclose and wind up losing money. The government doesn’t make the loan, they just offer the guarantee to the banks. So “FHA Loan” doesn’t refer to where the loan comes from, it refers to the flavor of loan. Houses have to be in good shape to qualify for FHA Loans (not “fixer-uppers”). The other kinds of loans are Conventional and VA.

FICO score. Your credit score.

Financing Arrangement. A seller agrees to accept installment payments directly from the buyer rather than having the buyer obtain a loan from a bank. Also known as owner financing (and seller financing, bond for deed) is a useful tool that provides buyers with credit issues easier qualification and repayment terms than a traditional mortgage.

Foreclosure. The lender’s taking ownership of a property because the buyer failed to make payments.

FSBO. For Sale By Owner is a term used to describe a home that is being sold by the owner, without assistance from a real estate agent or a broker. The seller is attempting to save money by avoiding agent’s and broker’s fees, but the buyer should be careful to make sure that the terms of sale comply with all applicable federal, state, and local regulations.

GFE / Good Faith Estimate. An estimate of closing costs that the lender is required to give you. Make sure you get it.

Home Inspection. A close physical examination of a home to evaluate its plumbing, electrical, and heating and cooling systems, as well as its appliances, roof, foundation, and structural stability. The inspection should be completed before you purchase a home and your offer contract should state that purchase would be contingent on the home inspection results.

HUD. The HUD is actually the Department of Housing and Urban Development, which oversees mortgage lending practices. But when you hear the term “HUD” from your real estate agent, they’re probably talking about the Settlement Statement, which is also called a HUD Statement since it’s required by that agency.

Financing. A mortgage loan to buy a house.

Interest. The extra amount you pay to the bank for the privilege of borrowing money. This is the bank’s profit on the loan.

Lease Purchase. A written agreement between a landlord and a tenant giving the tenant the option to purchase the property at some future point in time. Similar to owner financing, Bond for Deed, or seller financing. The nature of this type of transaction can very a great deal because virtually all of the terms of a lease purchase are negotiable.

Lease Option. More formally, lease with the option to purchase is a type of contract used in New Orleans residential real estate. In a lease option, a property owner and tenant agree that at the end of a specified rental period, the renter has the option of purchasing the property.

Lender. The bank that makes the loan for you to buy a home.

Market Value. The highest price that a buyer—ready, willing, and able, but not compelled to buy—would pay, and the lowest price a seller—ready, willing, and able but not compelled to sell—would accept. Market value is the basis for the “listing price” or the “asking price” of a home.

Mortgage. The loan from a bank used to buy a home.

Mortgage Broker. A company which shops various lenders to get you a good deal on a mortgage. They charge a fee for doing so, but it’s often well worth the cost.

Option Fee. A small, optional fee you can pay to the seller when you sign the contract which gives you the right to back out of the contract for any reason within a certain period of time.

Origination Fee. A one-time fee charged by the lender for making the loan to you. Yes, this is in addition to all the interest they’re going to charge you. Some banks don’t charge an origination fee, and others will drop the fee if you negotiate well.

Owner Carry Back. Throughout the country, owner financing goes by many names. In Louisiana, it is referred to owner financing, seller financing, owner carried financing, or Bond for Deed, and in some cases, Lease Purchase.

Owner/Seller. The person selling a property. These terms are used interchangeably, and there is no difference.

Owner financing: A transaction in which a property’s seller finances the purchase directly with the person or entity buying it, either in whole or in part. This type of arrangement can be advantageous for both seller and buyer because it eliminates the costs of a bank intermediary.

PMI / Private Mortgage Insurance. If your down payment is less than 20%, you’ll have to buy Private Mortgage Insurance which protects the bank if you fail to make your payments, they have to foreclose, and they lose money.

Points (Discount Points). Points are a fee charged by a lender in exchange for giving you a lower interest rate.

Premium. The amount you pay for an insurance policy.

Prepayment. A portion of the loan principal paid early, to save on interest and end the loan faster. Most loans let you pay a little extra at any time without any penalty, but there’s often a small penalty if you want to pay off the entire balance early and don’t give your bank enough notice.

Principal. The outstanding balance on a loan. Also refers to the portion of a loan payment that pays down your debt (as opposed to interest, which is the bank’s profit). For example, of an $900 mortgage payment, $200 might be for principal (reducing the outstanding balance of the loan), and $700 might be interest.

Property. In a real estate context, property is the land and any houses on it. On this site we talk about buying a “house”, but you’re not just buying a house, you’re buying property, because you’re also buying the land that goes with it — which in many cases, is actually worth more than the house itself.

Property taxes. Taxes paid annually to state and local governments on property you own. Most borrowers use the bank’s free escrow service to pay these taxes. (See Escrow.)

Qualifying. Getting the bank to think you’re worthy of loaning money to. You fill out an application, and if you’re approved, then you’ve qualified.

Real Estate Agent. The person who represents a buyer or seller in a real estate sale. Not all real estate agents are Realtors. (See Realtors, below.)

Realtor. A real estate agent who’s a member of a special trade organization (The National Association of Realtors). “Realtor” is actually a trademarked term, and Realtors occasionally email me to complain that it’s supposed to be spelled in all-capital letters and have the stupid ® mark after it, since I never spell it that way. Whatever. Many realtors think that they’re a special super class of real estate agent, but given that the ones I’ve encountered are so hung up on that, I would be more likely to use a regular agent than a REALTOR®.

Rent To Own Program: You rent your single-family home out to a tenant with an option to buy. Your tenant signs a lease agreement and an option agreement (Which is why another name for “Rent to Own” is “Lease Option”). Guaranteed Approval Programs is NOT a Rent to Own Program. Seller financing is a transaction in which a property’s seller finances the purchase directly with the person or entity buying it, either in whole or in part. This type of arrangement can be advantageous for both seller and buyer because it eliminates the costs of a bank intermediary.

Settlement Statement (aka “HUD”). The standard document with the details of the sales transaction, and the closing costs.

Term. The number of years a mortgage lasts. Usually 15 or 30.

VA Loan. Similar to FHA Loans, the federal government insures the lender if you fail to pay and they have to foreclose and wind up losing money. The government doesn’t make the loan, they just offer the guarantee to the banks. “VA Loan” thus refers to the flavor of the loan, not where the loan comes from. It’s possible to get a 0% down loan through the VA program. The other two kinds of loans are Conventional and FHA.