If you aren't closely associated with a given industry, sometimes the vocabulary and acronyms used in that industry can be overwhelming. Here's your cheat sheet for some of the terms and acronyms you will likely encounter during your home buying journey.
Amortization: The process of paying off a loan through a series of fixed payments to a lender.
APR (Annual Percentage Rate): The total cost of securing financing in a mortgage transaction, expressed as a percentage.
Appraisal: A written estimate of the market value of a home determined by a licensed appraiser.
ARM (Adjustable-Rate Mortgage): This mortgage loan has rates and payments that are fixed for a predetermined period and then can vary over the remaining life of the loan.
Cash Reserve: A lender's requirement in some instances that the borrower have enough assets to cover a determined number of mortgage payments.
Close of Escrow: The recording of the deed and the disbursement of funds (after the signing of closing documents by all parties ) signifying the official close of the sale or loan transaction.
Closing Costs: Costs outside the property's sales price that must be paid to cover the expenses of the transaction such as lender fees, appraisal fee, escrow/title fee, property taxes/insurance, and prepaid interest.
Conditions: Additional documents requested by the underwriter after the initial file review.
CTC (Clear to Close): When a lender receives word from the underwriter that all conditions for the loan have been satisfied and the loan can move into closing.
Deed: This is the document which provides written evidence of who owns a given property.
Discount Point: A cost for a rate.
Down Payment: A portion of the sales price the buyer pays to the seller during the closing process. The down payment shows both the seller as well as the lender the buyer is serious and has some personal investment in the transaction. Typically, the down payment is 3.5-5% of the price of the home.
DTI (Debt-to-Income Ratio): DTI is a ratio lenders use to asses your ability to pay your bills. It takes your total amount of monthly housing expenses plus monthly payments on debts/liabilities (recorded on your credit report) and divides that by your total income.
Earnest Money: This is an amount of upfront money the buyer puts in escrow to show they are serious about buying the property. The earnest money will be applied to the down payment during closing.
Equity: In real estate, this refers to one's net ownership in a property. This means the difference between the value of your property and how much you still owe on your mortgage.
Escrow: This is a holding account established for each transaction where funds that are waiting to be disbursed are held. In most cases this account is with a Title company.
Interest Rate: The cost of the money being borrowed expressed as a percentage.
LTV (Loan to Value Ratio): The ratio of the amount borrowed compared to the value of the property in question.
PITI: This is an acronym for the four elements that make up residential mortgage payments: principal, interest, taxes, and insurance.
Pre-approval: The amount of money a borrower qualifies for on a home loan. The amount is confirmed after a lender runs the borrower's income, assets, credit history, and debts through an Automated Underwriting System (AUS).
Pre-qualification: A letter stating the amount for which the borrower will likely be approved to receive via a home loan. In the ideal scenario, the pre-qualification is issued after a full pre-approval.
Prepaid Items: Costs paid at closing for taxes, interest, and insurance. These items are recurring costs that are not able to be financed.
Principal: The original amount of the loan excluding interest.
PMI (Private Mortgage Insurance): Insurance provided that protects the mortgage lender against financial loss should the borrower default on his or her loan.
Property Tax: Money you pay to your local and state government when you own a home within their jurisdiction.
Refinancing: Simply stated, this is the process of paying off your original mortgage by taking out a new home loan and using the same property as collateral. People refinance for many reasons, including but not limited to lowering their interest rate, reducing their monthly payment, changing their loan type, or taking cash out.
VOE (Verification of Employment): This is where the underwriter gets a written verification of your employment from your employer.
VVOE (Verbal Verification of Employment): This is a verbal call to verify employment. It is often done at the end of the loan process prior to closing to do a final confirmation that you are still employed.
Have questions about any other terms or concepts you have heard? Feel free to call any time and a member of our team at O Capital Group LLC would be happy to help.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.