Real Estate Glossary

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Amortization - Literally to "kill off" (root: mort) the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each equal payment. 

 

Appraisal - A written valuation of a property prepared by a qualified appraiser. Required for final loan approval, and usually a contingency of sale. Typically paid for by the buyer, appraisals can range between about $300-$500.

 

Broker Price Opinion (BPO)- Very similar to an appraisal but done by a licenced Realtor. The preferred way for banks to value  property in a short sale, pre-foreclose or REO situation.

 

Capitalization rate- (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value. The rate is calculated in a simple fashion as follows:

 \mbox{Capitalization Rate} = \frac{\mbox{annual net operating income}}{\mbox{cost (or value)}}

For example, if a building is purchased for $1,000,000 sale price and it produces $100,000 in positive net operating income (the amount left over after fixed costs and variable costs are subtracted from gross lease income) during one year, then:

$100,000 / $1,000,000 = 0.10 = 10%

The asset's capitalization rate is ten percent.

Capitalization rates are an indirect measure of how fast an investment will pay for itself.

 

Cash flow- Net operating income minus PITI.

 

Conforming Loan - A loan for up to $417,000 in the continental United States.

 

Close of Escrow (COE) - When escrow closes, the title to the house legally transfers owners.

 

Closing Costs - All of the costs aside from the property's actual purchase price that are required to complete a real estate transaction.  These are split into two categories: Non-Recurring: One time costs such as points and other loan fees. Recurring: Recurring costs such as property tax and insurance.

 

Conventional loan- A traditional loan usually requiring 20% down. This can be a loan done through a mortgage broker or your own bank.

 

Contingency- Items that a real estate sale is contingent upon, usually loan, appraisal and inspection approval. A standard real estate contract gives a buyer 17 days after acceptance to remove contingencies. Once contingencies are removed a buyers deposit will be at risk if they cancel.

 

Debt to Income Ratio (DTI)- A formula used by lenders to determine how much a buyer will qualify for. Different loans allow for different DTI ratios. Based on consumer debt (credit cards), mortgage debt, and any other loans such as school or car vs. a buyers income. 

 

Equity - The difference between the current market value of a property and the principal balance of all outstanding loans. The percentage of down payment is the percentage of equity a buyer has in a home when they close escrow. As property values increase, so does the equity.

 

Escrow - Assets placed into a third party account for delivery to a recipient upon certain conditions being met. The cost of this is negotiable in a real estate sale, but commonly split 50/50 between buyer and seller.

 

Earnest money- A portion of the buyers down payment, given in advance, as an act of good faith to close the deal. Sometimes called a good faith deposit, not to be confused with the good faith estimate. The higher the earnest money, the more serious a buyer is considered.

 

Fanny Mae- Founded in 1968. A government sponsored enterprise that buys mortgages on the secondary market, pools them, and sells them as mortgage backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases.

 

Freddie Mac-  Founded in 1970. Similar enough to be indistinguishable from Fannie Mae.

 

Federal Housing Administration (FHA)- Offers a low down payment loan to first time home buyers (or anyone who has not bought property in the last 3 years) currently 3.5%. The property must conform to certain guidelines to be eligible.

 

Good Faith Estimate - An estimate of charges which a borrower is likely to incur in connection with a loan closing. Must be provided to a mortgage applicant within 48 hours of loan application submission. 

 

Gross operating income- Gross scheduled income plus other income (if any), minus vacancy and credit losses.

 

Gross rent multiplier-  The ratio of the price of a real estate investment to its annual rental income before expenses such as property taxes, insurance, and even utilities for vacation rental properties. Other expenses could include the cost of hiring a property management company. To sum up Gross Rent Multiplier, it is the number of years the property would take to pay for itself in gross received rent. For the investor, a higher GRM (perhaps over 20) is a poorer opportunity, whereas a lower one (perhaps under 15) is better.

The GRM is calculated with the following formula as long as you are aware of the two variables Price and Rent, as the GRM will be the quotient of the two variables: PURCHASE PRICE/GROSS ANNUAL RENTAL INCOME =GRM; $180,000/$15,000 = 12.

The GRM is useful for comparing and selecting investment properties where depreciation effects, periodic costs (such as property taxes and insurance) and costs to the investor incurred by a potential renter (such as utilities and repairs) can be expected to be uniform across the properties (either as uniform values or uniform fractions of the gross rental income) or insignificant in comparison to gross rental income. As these costs are also often more difficult to predict than market rental return, the GRM serves as an alternative to a measure of net investment return where such a measure would be difficult to determine.

The common measure of rental real estate value based on net return rather than gross rental income is the Capitalization Rate or Cap Rate. In contrast to the GRM, the Cap Rate is not a multiplier but a rate of annual return. A similar multiplier to the GRM derived from net return would be the multiplicative inverse of the Cap Rate.

 

Gross scheduled income- Monthly Gross Income x 12

 

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Homesteps- A loan product very similar to FHA. Offered only on properties owned by Fannie Mae. 

 

Home Equity Line of Credit (HELOC)- A loan based on equity you have in your home. Very similar to a second mortgage, as the loan is secured by your home. The main difference is that you can continue to draw money if available, after the loan is in place, much like a credit card.

 

Highest and best- A phrase used in a competitive real estate market. It means that your first offer on a property should be your best and final offer. The seller will not counter your price like they might in a normal real estate market. Very common on REO properties, or in multiple offer situations.

 

Home inspection- An inspection done by a licenced contractor meant to cover major systems of a house, as well as code and safety issues. A home inspector will sometimes recommend a specialized inspection but another contractor if they suspect a problem beyond their expertise (foundation work for example). It is highly recommended that a buyer have a home inspection before removing contingencies. Issues on this report can sometimes be used to renegotiate price or credits with a private seller. In an REO sale they are more so that a buyer knows what issues they are taking on. Repair credits and price adjustments are rare, as REO properties are as-is sales, and already priced accordingly. The price of an inspection is based on square footage, and can range from about $200-$500. This is a normal buyer cost.

 

Impound Account - An account into which the lender puts a portion of each monthly mortgage payment. An escrow account provides the funds needed for such recurring expenses as property taxes, homeowners insurance, mortgage insurance, etc. Requiring families to make monthly payments into an escrow account to cover these expenses is generally viewed as a desirable practice that helps families manage their housing costs by spreading the payments for these expenses throughout the year.

 

Loan-to-value (LTV) ratio - This ratio expresses the amount of a first mortgage lein as a percentage of the total appraised value of real property. For instance, if a borrower wants $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000/$150,000 or 87%.

 

Mills Act- A property tax reduction for designated historic properties. Offered in San Diego county in the cities of San Diego, La Mesa, Escondido, Coronado, Chula Vista and National City. The County Assessor's Office determines the tax savings by applying a complex formula to the current amount of taxes being paid to determine the new amount. Savings can be up to 70%.

 

Net Operating Income-Gross operating income minus operating expenses.

 

PITI -PITI stands for principal, interest, taxes, and insurance. An "impounded" loan means that the monthly payment covers all of these, and perhaps mortgage insurance, if your loan calls for it. If one does not have an "impounded" account, then the lender still calculates these amounts separately and uses it as part of determining one's debt-to-income ratio.

 

Private Mortgage Insurance (PMI) - Insurance that is typically required when buying a home with less than 20% down. 

 

Real Estate Owned (REO) - A class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction.

 

Points (Discount )- Interest Charges paid up-front when a borrower closes a loan. A point is equal to 1 percent of the loan amount (e.g. 1.5 points on a $100,000 mortgage would cost the borrower $1,500). Generally, by paying more points at closing, the borrower reduces the interest rate of his loan and thus future monthly payments.  

 

Points (Origination)- A fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan. Usually a percentage of the amount loaned, such as one percent.

 

Pest report- Another name for a termite report, often required by a lender before they will approve a loan.

 

Proof of funds- A copy of a bank statement or other, to prove that a buyer has their down payment (or on a cash offer the full sales price) liquid and available to them.

 

Pre-approval- A letter from a lender stating that upon initial review of a buyers credit report and financials they are likely to be approved for a loan up to a certain amount. After the collapse of our banking system many sellers will no longer accept this, and require a full pre-qualification.

 

Pre-qualification- A more stringent approval done by a lenders underwriting department. While it is not a guarantee of a loan, it is considered much more official than a pre-approval.

 

Spot approval- Refers to an approval being given for an FHA loan to only one specific unit in a condo complex, as opposed to the entire complex being approved. They will no longer be issued after October of 2009.

 

 

ann otto - 619-540-1003