Comprehensive Guide to Real Estate, Mortgages, and Leasing for Students

mortgage loan

A loan to purchase real estate in which the property itself serves as collateral.

Rent

the regular payment to a landlord charged for using an apartment or other housing space. It is usually due on a specific day each month, with a late penalty being assessed if the tenant is tardy in making the payment.

damage deposit

a sum of money paid in relation to a rented item to ensure it is returned in good condition. It is common in rented accommodations. It is often charged before the tenant moves in, is often equal to one month’s rent, and is refundable if at the end of the lease the tenant leaves the home in good condition.

security deposit

provide some assurance that you will not move without paying your rent. Again, this amount is often equal to the last month’s rent payment. It too is refundable or is applied to the last month’s rent.

lease

a contract specifying the legal responsibilities of both the tenant and the landlord. It identifies the amount of rent and security deposit, the length of the lease (typically one year), payment responsibility for utilities and repairs, penalties for late payment of rent, eviction procedures for nonpayment of rent, and procedures to follow when the lease ends.

periodic tenancy

(week-to-week or month-to-month residency), where the agreement can be terminated by either of the parties if they give notice in advance (one week or one month). Without such notice, the agreement stays in effect. This arrangement also typically applies in situations in which no written lease is established.

Tenancy for a specific time

usually for one year. When this period expires, the agreement terminates unless prior notice is given by both parties that the agreement will be renewed.

subleasing

An original tenant leases the property to another tenant.

Retaliatory actions

Prohibitions against retaliatory actions such as rent increases, eviction, or utility shut-off for reporting building-code violations or otherwise exercising a tenant’s legal rights.

Habitability

Assurances of some legally prescribed minimum standard of habitability for items such as running water, heat, and a working stove and the safety of access areas such as stairways.

Deposit return

Prompt return of a security and damage deposits and limits on the kinds of deductions that can be made. Landlords must explain specific reasons for deductions. Some localities require that interest be paid on deposits.

Nonperformance

The right to file a lawsuit in small-claims court against a landlord for nonperformance.

single-family dwelling

a housing unit that is detached from other units. Buyers have many choices available for both new and existing homes with varying floor plans and home features.

condominium (or condo)

the owner holds legal title to a specific housing unit within a multi-unit building or project and owns a proportionate share in the common grounds and facilities.

homeowners association

An association that manages condo developments.

homeowners association fee

condo owner must pay this fee. (covers expenses related to the management of the common grounds and facilities and insurance on the building.)

cooperative (or co-op)

the owner holds a share of the corporation that owns and manages a group of housing units. The value of this share is equivalent to the value of the owner’s particular unit. The owner also holds a proportional interest in all common areas. A monthly fee + an amount to cover the professional management of the complex as well as payments on the cooperative’s mortgage debt.

Manufactured housing

consists of fully or partially factory-built housing units designed to be transported (often in portions) to the home site.

Mobile homes

fully factory-assembled housing units that are designed to be towed on a frame with a trailer hitch. Mobile homes depreciate in value every year just like automobiles and are often set in place for use on rented land within a mobile home park.

price-to-rent ratio

This ratio is the median existing home price divided by the average annual rent for a comparable home in the area. -The lower the price-to-rent ratio, the more attractive purchasing a home is relative to renting.

-Values below 15 - favorable to buying a home.

-Values above 15 and below 20 indicate that renting is somewhat more attractive than buying similar housing.

-Values above 20 is strong evidence that renting is the better economic option.

appreciation

Increase in a home's value.

Closing costs

include fees and charges other than the down payment and typically vary from 3 to 6 percent of the purchase price.

Closing

the final step in executing a real estate transaction and is where the legal ownership of the property is transferred. All the parties to the purchase, sale, and the mortgage loan are represented at the closing. The down payment and closing costs must be paid here

down payment

an initial payment made in the context of buying expensive items on credit, such as a home or vehicle. The buyer actually writes a check to the seller for the net amount.

(interest) point

fee, paid to the lender, equal to 1 percent of the total loan amount. Charges for points are typically paid in full when the home is bought, although sometimes they can be added to the amount borrowed. Lenders use points to increase their income return on loans and buyers are willing to pay points to reduce the interest rate paid over the life of the mortgage.

title

Legal right of ownership interest to real property.

deed

A written document used to convey real estate ownership.

warranty deed

Safest type of deed that guarantees the title is free of any previous mortgages.

title search

inspecting court records and prepare a detailed written history of property ownership called an abstract. The fees for this process can be paid by the seller or buyer

abstract

A detailed written history of property ownership.

title insurance

Protects the lender's interest if the title is later found faulty.

loan origination fee

Half of a point.

credit reports

Buyer pays a fee for this.

home inspection

conducted to ensure that the phone is physically sound and that all operating systems are in proper order, typically paid for before closing, but it certainly is an up-front cost and may save the buyer from buying a money pit.

Title and deed recording fees

charged to transfer ownership documents in the county courthouse.

Appraisal fee

fee charged for a professionally prepared estimate of the fair market value of the property by an objective party

survey

Sometimes required to certify the specific boundaries of the lot.

home title transfer fee

A tax imposed to support community services.

notary fees

may be charged for the services of those legally qualified to certify (or notarize) signatures.

Pro-rata interest

may be required if the closing does not occur on the due date of the mortgage payment and interest will accrue before the first payment is due.

principal

The amount you owe.

PITI

acronym that real estate agents and lenders often use to indicate a mortgage payment that includes principal, interest, real estate taxes, and homeowner’s insurance.

loan-to-value (LTV) ratio

the loan amount divided by the value of the home, which initially is the purchase price. An 80 percent LTV ratio at purchase translates into a 20 percent down payment, an amount that is challenging to come by for many first-time buyers.

Mortgage insurance

Iinsures the difference between the amount of down payment required by the lender’s desired LTV ratio and the actual, lower down payment.

Private Mortgage Insurance (PMI)

obtained from a private company. The cost of PMI varies from 0.25 to 2.0 percent of the debt, depending on the degree to which the LTV ratio exceeds the lender-desired percentage.

Federal Housing Administration (FHA)

part of the U.S. Department of Housing and Urban Development (HUD) insures loans that meet its standards. FHA-insured loans can borrow with as little as 3.5 percent down and a credit score of 580.

Veterans Affairs (VA) Mortgage insurance

the federal Department of Veterans Affairs promotes home ownership among military veterans (active-duty, reserve, and National Guard veterans) by providing the lender with a guarantee against buyer default.

Home warranty insurance

gives assurance to the buyer that all the key home components, such as the air-conditioning, heating, plumbing, and water heater, are in good operating condition.

Escrow account

a special reserve account at a financial institution in which funds are held until they are paid to a third party. When the insurance and tax bills are due, the institution pays them out of the escrow account.

Real estate property taxes (the T in PITI)

taxes that must be paid to local governments annually and range greatly from place to place.

Fair market value

what a willing buyer would probably pay a willing seller for the owner’s home and land.

Assessed value

The dollar value assigned for the purposes of setting applicable taxes.

Annual cost of maintaining a home

Estimated to be between 1 and 4 percent of the home value.

7 Steps in the process of Buying a Home

Step 1, Six months before moving in, Get your finances in order: Ensure that your credit bureau file is accurate and request any updates or corrections as necessary; Estimate expected monthly housing costs; Adjust budget to fit the costs expected.

Step 2, three to five months before moving in, Pre-qualify for a mortgage: Shop for best rates; Estimate affordability using front- and back-end ratios; Consult several lenders and mortgage brokers.

Step 3, two to four months before moving in, Search for a home online and in person.

Step 4, two months before moving in, Agree to terms with a seller: Negotiate a price with the seller and give the seller earnest money; Have lawyer review the purchase contract; Sign the purchase contract; Have the home inspected by a certi­fied professional.

Step 5, one to two months before moving in, Obtain a mortgage loan. Decide on the best type of mortgage loan for you: Formally apply for a mortgage from the desired lender; Consider locking-in an interest rate if rates are likely to go up before the closing; Arrange for a lawyer to help go over the contract and the good-faith estimate of closing costs.

Step 6, two to four weeks before moving in, Prepare for the closing: Make moving arrangements; Transfer and activate utilities; Initiate the change of address process.

Step 7, Closing day, Attend the closing: Correct any errors in the contract or uniform settlement statement; Sign and write the big checks; Celebrate!

FICO score: 800-850

Typically considered exceptional and will qualify the buyer for the best financing terms.

FICO score: 740-799

Considered very good and should help buyers qualify for acceptable financing terms.

FICO score: below 740

Considered good at best and borrowers will face higher rates or have to pay more up-front interest in points.

FICO score: below 620

Will likely eliminate the possibility for conventional bank financing.

FICO score: below 580

Probably excludes the potential borrower from financing with programs that rely on government guarantees.

Subprime market

serves higher-risk applicants with low credit scores. However, such loans carry higher interest rates that may lead to future repayment difficulties.

Preapproved

a lender believes it is likely that a loan would be granted based on preliminary information provided such as a credit report, amount borrowed and likely down payment. It tells us if we can obtain a loan and the tentative APR.

Front-end ratio

compares the total annual expenditures for housing (the principal and interest on the mortgage plus the real estate taxes and insurance) with the loan applicant’s gross annual income (before taxes). Generally, the total annual expenditures should not exceed 25 to 29 percent of gross annual income.

Back-end ratio (debt-to-income) ratio

compares the total of all monthly PITI expenditures plus auto loans and other debts with gross monthly income. To calculate, divide the total of all monthly debt repayments (for the mortgage, real estate taxes, and insurance, plus auto loans and other debts) by gross monthly income (before taxes). A ratio of 0.36 or less is desirable in terms of conventional mortgage qualification, but a lower debt-to-income ratio means that less of our income is committed to debt payments.

Real estate broker (agent)

a person licensed by a state to provide advice and assistance, for a fee, to buyers or sellers of real estate. Real estate brokers who are members of the National Association of Realtors often use the registered trademark of Realtor® to describe themselves.

Flat-fee brokers

Charge a flat fee for their services rather than a percentage-based commissions.

Listed

Under contract with the seller and the broker by a realty firm.

Listing agent

the party with whom the seller signs the listing agreement. Listing agents advertise the property, show it to prospective buyers, and assist the seller in negotiations.

Selling agent (also buyers agent)

mostly deals with the homebuyers, usually only listing just a few homes for sale. They also sell the homes that have been placed in the multiple listing service via other listing agents. This person serves as the buyer’s representative in the real estate negotiations and transaction.

Purchase offer

Written offer to purchase real estate.

Earnest money

funds given to the seller as a deposit to hold the property until a purchase contract can be finalized. 2 or 5% of the purchase price should be sufficient to show good faith when making an offer to purchase the seller’s property. This money is returned if the seller rejects the offer or if the deal does not go to closing for any valid reason.

Purchase agreement

the contract outlining the agreed-upon price and terms for the purchase of a home. It includes the final negotiated price and a list of conditions and contingencies that the seller has agreed to accept.

Contingency clauses

a contract provision that requires a specific event or action to take place in order for the contract to be considered valid.

Qualified residential mortgage (QRM)

a descriptor placed on a home loan that meets strict underwriting guidelines and a specified set of product features built into the loan. The QRM was designed to set the standard for residential mortgages and to minimize the risk that borrowers may default.

-It requires that debt-to-income ratios be limited to 43 percent and loan fees limited to 3 percent, and interest-only loans and negative amortization are not allowed in most cases.

Loan estimate

designed to provide standardized disclosures that are helpful to consumers in understanding the key features, costs, and risks of the mortgage loan for which they are applying. The loan estimate must be provided to consumers no later than three business days after they submit a loan application.

Closing disclosure

designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction. The closing disclosure must be provided to consumers three business days before they close on the loan.

Mortgage Lock-in

agreement that includes a lender’s promise to hold a certain interest rate for a specified period of time, such as 30 or 60 days. Make sure to receive a written lock confirmation of the lender’s promise.

Loan Commitment

A lender's promise to grant a loan.

Home Inspector

a licensed or certified inspector and they should look for termite infestation, wood rot, mold, and radon gas as well as examine the general condition of the home, including heating/cooling, plumbing, and electrical. The buyer should pay the inspector ($250 to $400 is the typical fee), inspections provided by the seller may not reveal all areas of concern.

Uniform Settlement Statement

Document that lists all of the final costs and fees to be paid at the closing.

Foreclosure

A specific legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the asset used as collateral for the loan.

Deficiency Amount

The difference between the amount owed and what the lender collects at the short sale.

Preforeclosure

The time between when the homeowner has been notified by the lender that they are in default and the actual foreclosure has been completed.

Private Short Sale

Occurs when a home sale is negotiated with the owner at a price below the actual balance of the debt.

Lender Short Sale

The lender accepts less than the full mortgage amount and often forgives whatever debt is left unpaid.

Foreclosure Auction

Sold property; once the foreclosure process has been completed, the lender typically takes ownership of the property.

Mortgage Finance Companies

Focus specifically on making mortgage loans.

Mortgagee

The lender.

Mortgagor

The borrower.

Lien

The lender has the right to take and hold property or to sell it in the event the borrower defaults on the loan.

Mortgage

A loan in which property or real estate is used as collateral.

Amortization

The process of gradually paying off a loan through a series of periodic payments to a lender.

Amortization Schedule

List that shows all the monthly payments, the portions that will go toward interest and principal, and the debt remaining after each payment is made throughout the life of the loan.

Homeowner's Equity

The dollar value of the home in excess of the amount owed on it.

Conventional Mortgage

A fixed-rate, fixed-term, fixed-payment mortgage loan.

Adjustable-Rate Mortgage (ARM)

The borrower's interest rate fluctuates according to an index of interest rates based on the rising or falling cost of credit in the economy.

Teaser Rate

Entices people to borrow using an ARM, transferring the risk from lender to borrower.

Interest-Rate Cap

Limiting the amount by which the interest rate can increase to no more than 1 or 2 percent per year and no more than 5 percent over the life of the loan.

Growing-Equity Mortgage (GEM)

A fixed rate mortgage on which the monthly payments increase over time.

Biweekly Mortgage

A form of growing-equity mortgage that calls for payments to be made every two weeks.

Assumable Mortgage

The buyer pays the seller a down payment generally equal to the seller's equity in the home and takes responsibility for the mortgage loan payments.