Real Estate Terms

Real Estate Terms/Dictionary

• Adjustable-Rate Mortgage (ARM)
  • An adjustable-rate mortgage (ARM) is a mortgage loan in which the interest rate is not fixed but instead is adjusted at specific intervals during the life of your loan. For example, a 30-year loan with a 5/1 ARM means that you’ll pay a fixed interest rate for five years, and then your rate will change each year after that for the remainder of the loan. The most common ARM loans are for five, seven, or ten years.

• Appraisal
  • An appraisal is a licensed appraiser’s opinion of a home’s market value based on comparable recent sales of homes in the neighborhood. Appraisals are usually ordered on behalf of a buyer’s lender to protect the interests of the lender. The lender’s underwriter will compare the appraisal price to the final purchase price of the home to ensure the buyer is not borrowing more than the house is worth. If the home appraises lower than the final sale price, the buyer may be able to renegotiate a lower price with the seller. If the seller won’t lower the price, the buyer’s lender may ask that the buyer put more money toward the down payment in order to make up the difference. Or, in the state of Tennessee buyers have the option of terminating the purchase and sale agreement (contract) and getting their money back.
  • What’s the difference between an appraisal and an assessment?
    • An appraisal is conducted by a licensed appraiser for a lender, while an assessment is conducted by a government employee who evaluates the home to determine how much property tax the homeowner will pay.

• Appraiser
  • An appraiser is a licensed individual who conducts home appraisals. Appraisers primarily conduct appraisals on behalf of mortgage lenders in order to determine the value of a home. Appraisers can also be hired directly by buyers and by sellers and contractors.
  • Calculate your home’s value
  • You don’t have to hire an appraiser in order to determine how much your home is worth. Real estate agents can perform a comparative market analysis to determine the value of your home. 

• Assessment
  • An assessment can mean two different things. A home assessment means the value of the home as determined by the local assessor for the purpose of determining property taxes. Home assessments are not the same as appraisals, which are instead conducted by private, licensed appraisers. Home assessments are usually determined by government officials using sales data from previous years to determine the average change in local home values. Those values are then used to calculate property tax amounts, while appraisals determine the market value of your home.
  • In Tennessee it is state law that local officials set their assessments to be done every 4, 5, or 6 years. And, local governments cannot increase their total revenue through a reassessment of properties. This means if home values go up by 40% between assessments the government’s revenue does not go up by 40%. In fact, the government must create a new tax rate that keeps their total revenue the same… unless… the local government leaders vote/decide to raise rates.
  • Check out this video I did with 2022 Knox County Assessor, John Whitehead. https://youtu.be/ln5icJjniGA?si=sTE25U4U5AmnZpT6

• Assessor
  • An assessor is a government official responsible for determining the value of a property for tax purposes.

• Broker
  • A broker is an individual licensed to represent people in the purchase and sale of homes. The requirements to become licensed vary by state. In some states, brokers have more training and hold a managerial role at a real estate brokerage. In other states, real estate broker is synonymous with real estate agent or REALTOR®.

• Buyer’s Agent
  • A buyer’s agent is a licensed real estate agent who represents the buyer in a transaction. The buyer’s agent has authority to act on behalf of the buyer in negotiating a Purchase and Sale Agreement with the seller’s agent.
  • You may hear real estate agents refer to the buyer’s agent as the “selling agent,” which should not be confused with “seller’s agent.” In the real estate community, the buyer’s agent is referred to as the “selling agent” and the seller’s agent is referred to as the “listing agent.” “Selling agent” is a term used to track a real estate transaction’s progress in the Multiple Listing Service (MLS).

• Buyer’s Market
  • A buyer’s market is one in which the supply of homes significantly exceeds demand. Since supply is greater than demand, the price of homes is pushed lower, making them more attractive to buyers. In contrast, a seller’s market is one in which there are more buyers and relatively fewer homes for sale, which leads to multiple-offer situations that drive up prices.
  • A market’s absorption rate is the best way to figure out whether a certain area is behaving as a buyer’s market or seller’s market. The absorption rate is calculated by looking at how many homes sold in a certain month and dividing that number by the total number of homes for sale at the end of the month. An absorption rate of 20% or below is generally deemed a buyer’s market, since homes are selling relatively slowly and the number of months of supply (20/100, or 5 months) is high.

• Cash-Out Refinancing
  • Cash-out refinancing occurs when a borrower refinances his mortgage for more than he currently owes to pocket the difference in cash up front. Homeowners who need cash to pay for a child’s college education or for a new car will often do a cash-out refinance. These loans differ from home equity lines of credit (HELOCs) in that cash-out refinances replace the current mortgage, while a HELOC is a separate loan in addition to the first mortgage. Cash-out refinances often have lower interest rates than HELOCs, but the closing costs are usually higher.

• Closing Costs
  • Closing costs are the expenses and fees associated with the purchase and sale of a home, such as taxes, title insurance, appraisal, lender fees, and other services carried out during closing. For buyers taking out a mortgage loan, closing costs are listed on the Closing Disclosure statement the buyer should receive from the lender at least three days before closing. Closing cost amounts vary depending on the buyer’s loan program, but they typically range from 2%–5% of the purchase price. The buyer’s down payment must also be paid at closing, but it is listed separately from the closing costs. 

• Closing Disclosure
  • A Closing Disclosure is a final statement of loan terms and closing costs that the lender must provide to the borrower at least three business days before closing in most transactions that involve a loan. The statement lists the loan terms, projected monthly payments, cash necessary to close the sale, and a detailed accounting of the closing costs. The three-day review period allows the borrower time to review the Closing Disclosure and compare it with the Loan Estimate, which the borrower should have received when he or she applied for the loan. 

• Comparables
  • Comparables are homes of similar size, condition, age, and style that recently sold in a certain neighborhood. Evaluating comparable homes and their prices can help determine a fair market value for a home. Comparables are examined by buyers, sellers, and real estate agents in a comparative market analysis (CMA) to establish a price range for a home based on current market activity. Comparables are also used by appraisers to determine the fair market value of a home during an appraisal. A quality comparable is most similar to the home in question in terms of:
    • Last sale price
    • Number of bedrooms and baths
    • Age and style of home
    • Condition of home
    • Lot size and condition
    • Views and waterfront access

• Comparative Market Analysis (CMA)
  • A comparative market analysis (CMA) is an evaluation of a home’s value based on similar, recently sold homes (called comparables) in the same neighborhood. A comparative market analysis is not the same as an appraisal, which is performed by a licensed appraiser. A CMA is prepared by a real estate agent. 

• Contingent
  • When a home is listed as contingent, it means the seller has accepted an offer but the deal is contingent on a home inspection, loan approval, or other contingency contained in the Purchase and Sale Agreement. For example, “Contingent – Show” means that it is still possible to tour the property and submit a backup offer in case the current one falls through. “Contingent – No Show” indicates that the seller no longer wishes to show the property.

• Conventional Loan
  • A conventional loan is a mortgage loan that is not insured or guaranteed by any government program. It is the most common type of mortgage loan. Unlike non-conventional loans, for which interest rates are set by statute, each mortgage lender, bank, or mortgage broker will offer different rates, terms, and fees for conventional loans, so it’s best to get a good faith estimate from a number of different places to find the best loan. Examples of non-conventional loans include an FHA loan or VA loan.
  • The term “conventional loan” should not be confused with “conforming loan.”” Conventional loans can be either conforming (if they follow the Fannie Mae and Freddie Mac loan guidelines) or non-conforming.

• Credit Score
  • A credit score measures how likely a borrower is to default on a loan. This is also known as a FICO score, short for Fair Isaac Company, the corporation that created the most widely used formula. A credit score allows lenders to determine credit risk and is based on bill payment history, length, and type of credit, along with many other factors. Under FICO, your credit score can range anywhere from 301 to 850, with anything greater than 740 considered an excellent score. Lenders reserve the best loans and lowest rates for customers with excellent credit.

• Down Payment
  • A down payment is the amount of money a buyer pays at closing to fund a home purchase, usually expressed as a percentage of the total home price. The required down payment amount varies depending on the type of loan, ranging from as little as 3% for an FHA loan to more than 20% for some conventional loans. Mortgage insurance is required for borrowers with a down payment of less than 20%. Down payments are usually paid via cashier’s check or wire transfer and must be paid at closing.

• Dual Agency
  • Dual agency occurs when the same real estate agent represents both the seller and buyer. In most cases, it’s not a good idea for one agent to represent both parties in a real estate transaction. The listing agent‘s job is to sell a home at the highest possible price, while the buyer’s agent aims to negotiate the lowest price for the buyer. In this case, the agent and his client’s interests aren’t aligned.
  • Some buyers feel that a dual agent will be more motivated to write an offer on his own listing since he’ll get double the commission from both sides of the deal. This is a possibility, but buyers and sellers should be sure to understand all potential conflicts of interest before entering into a dual agency relationship.

• Earnest Money
  • Earnest money is the money you pay soon after a home seller has accepted your offer on a home. How much earnest money you pay varies, but it’s typically 1%–3% of the sale price of the home. In some areas, earnest money is a fixed amount. You’ll pay earnest money by cashier’s check, personal check, or wire transfer. Your earnest money will be deposited into an escrow account or held by the listing agent. Once the sale of the home has been completed, the earnest money you paid will be applied toward your closing costs. If you back out of the sale due to a failed contingency (e.g., inspection report), you can recover your earnest money in full. If you back out of the sale for reasons not covered by contingencies, you will forfeit your earnest money.
  • Before signing a Purchase and Sale Agreement to buy a home, carefully review all contingencies to understand how much earnest money you’ll pay and how to successfully recover your earnest money if you need to back out of the sale.

• FHA Loan
  • Like a Veterans Affairs loan, a Federal Housing Administration (FHA) loan is one alternative to a conventional loan. FHA loans are insured by the FHA. If the buyer can’t pay the loan, the government pays the lender for any losses. Because of the government’s insurance, lenders are willing to offer FHA loans with smaller down payments, as low as 3.5%. Each mortgage lender, bank, or broker will offer different rates, terms, and fees for FHA loans, so it’s best to shop around to find the best loan. To pay for FHA mortgage insurance, the buyer is charged a monthly mortgage insurance premium and an upfront mortgage insurance premium, which can be financed into the monthly mortgage payments. Learn more about how to get an FHA loan.
  • Advantages:
    • Lower credit score requirements
    • Smaller down payment
    • Greater flexibility for buyers with recent bankruptcies
    • No pre-payment penalty for paying off a loan early

• Seller’s Market
  • A seller’s market is one in which there are more buyers than homes for sale. Since supply is less than demand, homes are higher priced and more attractive to sellers in the market. In contrast, a buyer’s market is one in which there are lots of sellers and relatively few buyers, which leads to lower prices.
  • A market’s absorption rate is the best way to figure out whether a certain area is behaving as a seller’s market or buyer’s market. The absorption rate is calculated by looking at how many homes sold in a certain month and dividing it by the total number of homes for sale at the end of the month. An absorption rate of 20% or higher is usually deemed a seller’s market, since homes are selling relatively quickly and the supply of homes is low. Learn more about buyer’s markets and seller’s markets.

• VA Loan
  • A Veterans Affairs loan, commonly known as a VA loan, is a special type of loan guaranteed by the US Department of Veterans Affairs and only available to eligible veterans, their spouses, and other beneficiaries. As with FHA loans, the risk is lower for the lender because the loan is guaranteed by the government, so this mortgage type offers a competitive interest rate without requiring a down payment or private mortgage insurance.
  • Qualifications
    • Eligibility: Certificate of Eligibility (COE) required
    • Down payment: Not required, as long as the home’s sale price does not exceed appraised value
    • Funding fee: Required, varies by veteran type
    • Mortgage insurance: Not required
  • Advantages
    • Available to eligible veterans
    • No down payment or mortgage insurance required
    • No pre-payment penalty for paying off a loan early
    • VA rules require closing costs stay below specified limits
    • VA assistance to veteran borrowers who encounter difficulty making payments