As exciting as it is to become a homeowner, it can also come with a lot of confusion surrounding mortgages and real estate. There are so many acronyms used you may not understand, and while your Home Loan Specialist and Realtor will do a great job educating you and making sure you feel confident, it always helps to have a cheat sheet.
Here are some definitions to help you better understand some of the most commonly used terms in the mortgage and real estate world.
- CMA: Comparative Market Analysis and Comps
Real estate agents use a Comparative Market Analysis (CMA) as a tool to help both home buyers and sellers. The CMA looks at the selling prices of homes in the area that are similar in size, have the same number of bedrooms, etc. It’s best to have your Realtor compare at least three similar homes that have sold within the last 3-6 months to help narrow down pricing in the current market.
Comparables (comps) are the houses included in the CMA that you and your Realtor will use to compare the home you are either buying or selling to other homes in the area. This will help to ensure you’re not far off when providing an offer to buy a home or that you’re not listing your home for too much (or not enough) when you’re looking to sell.
- NAR: National Association of Realtors
The National Association of Realtors is an organization that serves and is made up of professionals in the real estate industry. It has both national and international members and includes Realtors, home appraisers, and property managers too.
The NAR requires membership and dues paid to join and remain in good standing. While the National Association of Realtors is designed to help those in the real estate industry, it can also help you as a client. Because the NAR sets the standards for real estate transactions and Realtors, working with professionals affiliated with the NAR may offer you a deeper level of service and adherence to best practices.
- CD: Closing Disclosure
A Closing Disclosure is a document given to a home buyer at least three days before the closing. It includes a breakdown of your monthly mortgage payment, your closing costs, and the fees and interest rate that are associated with your home loan.
- HOA: Homeowner’s Association
If you move into a subdivision or condo, you may have a Homeowner’s Association. A Homeowner’s Association (HOA) is an organization that enforces community guidelines in a subdivision or condominium building. It’s typically made up of a volunteer board of directors who are voted into office.
Specific HOA guidelines could include things like lawn and home maintenance, noise guidelines, etc. When you move into an area that has an HOA, membership is automatic and fees will be charged. Depending on the HOA, fees can be paid monthly, quarterly, or yearly.
- FSBO: For Sale by Owner
For Sale by Owner is when a property is for sale by … you guessed it … the owner! There is no real estate agent associated with the home seller, which means the homeowner doesn’t have to pay commission on the sale. It’s worth noting by not hiring a real estate agent, the sellers take on all the risk regarding the legal aspects of the home sale as well as all the work regarding the home sale. This means the sellers do all the showings, price negotiations, advertising, staging, and paperwork.
- MLS: Multiple Listing Service
Many people know the Multiple Listing Service as MLS, a database of properties for sale. Realtors use the MLS to find homes for clients looking to purchase. The rules of the MLS are set by the National Association of Realtors (NAR) and real estate agents pay fees to use it. It’s broken down by region and helps agents of both home buyers and sellers connect to see what homes are listed on the market.
- PMI: Private Mortgage Insurance
If you don’t put 20% down when you purchase your home with a conventional loan, you’ll be required to pay Private Mortgage Insurance each month. PMI drops off automatically when your mortgage balance reaches 78% on your primary residence.
You may request removal of PMI at 80% of your balance but you’ll need to first have your home appraised. Remember, if you miss any mortgage payments it may be harder to remove PMI at 80%. Note: These PMI rules don’t apply to second homes and investment properties.
- MIP: Mortgage Insurance Premium
If you get an FHA loan, the insurance structure is a little different. Since the down payment on this type of loan can be as little as 3.5% of the total purchase price, Mortgage Insurance Premiums are required for all FHA loans. MIP is calculated every year and is paid once a month.
- HELOC: Home Equity Line of Credit
A Home Equity Line of Credit allows a home buyer to use the equity in your home for various things (kind of like a credit card that uses your home as collateral). So, you’ll borrow money against the equity you’ve built up in your house. You must have at least 20% equity in your home to be eligible for a HELOC.
While a HELOC can offer flexibility, interest rates are typically higher and oftentimes require you to pay off your account after the borrowing time frame has ended. We recommend thinking through all of your options (like refinancing, etc.) first.
- PITI: Principal, Interest, Taxes, and Insurance
PITI breaks down the four different parts of a homeowner’s monthly mortgage payment.
- Principal is the amount of money borrowed. For example, if your loan is $250,000, then your principal will be $250,000.
- Interest is the money paid for borrowing funds from a lender. The interest owed on a loan will depend on your interest rate. Your interest rate is determined by many different things like your credit score and debt-to-income ratio.
- Taxes also need to be paid on properties and are decided on a local government level. While determined annually, taxes can increase or decrease. And homeowners pay typically pay taxes in their monthly mortgage payment.
- Insurance will include both your Monthly Insurance Premium (MIP) or Private Mortgage Insurance (PMI) depending if you have one of these on your loan, and hazard insurance. Hazard insurance is part of your homeowner’s insurance policy and essential to keeping your home protected from things like fire, hail, lightning, vandalism, windstorms, etc.
- APR: Annual Percentage Rate
The APR on a mortgage can be confusing. While your interest rate on your home loan is the amount of money you pay for borrowing money from a lender, the APR takes your interest rate plus any additional fees (or mortgage points) you may pay.
Mortgage lenders are required by law to post APR in both loan paperwork and on their advertisements that showcase a specific loan rate. While we encourage everyone to make the decision that’s best for them, we recommend always working with lenders who are following all regulations associated with the mortgage industry.
- ARM: Adjustable Rate Mortgage
An Adjustable Rate Mortgage is a home loan with an interest rate that can change (sometimes drastically) throughout the life of the loan. This can cause your monthly payment to increase or decrease as time goes on. These changes are based on what’s going on in the market, not your personal finance situation. Depending on your situation, your budget could be at risk using an ARM so talk to your Home Loan Specialist about what’s best for your situation.
- DTI: Debt-to-Income Ratio
Your debt-to-income ratio is the amount of money you have coming in each month (also known as your gross monthly income) in comparison to the amount of money going out (paying bills, etc.) each month.
A car loan, student loan, and credit card debt are some examples of what affects your DTI. The lower your debt-to-income ratio, the better your opportunity to be financed. A lower DTI may also help with securing a better interest rate on your home loan.
- LTV: Loan-to-Value
The LTV ratio is a measurement between how much money being borrowed for your mortgage and the appraised value of your home. So, the more money you have for a down payment, the lower your LTV ratio will be. This will be used in both the purchasing and refinancing of the home.
- FICO: Fair Isaac Corporation
The FICO score, also called a credit score, came out in the late 1980’s from the Fair Isaac Corporation. There is a scoring system ranging from 300 to 850. These scores are mostly based on credit reports from the three credit bureaus (Experian, Equifax, and TransUnion).
Typically, the higher your credit score, the lower your interest rate will be. Many people aim toward a zero credit score with the goal of being debt free. Click here to learn more about the difference of low credit vs no credit. No matter what your score is, it’s important to say on top of it!
- VOE: Verification of Employment
When applying for a home loan, your lender will request a Verification of Employment to help verify your employment history. This can be done by speaking to your employer, though email verification may be required as well. VOE can include asking about your title, how long you’ve been with the company, your salary, and more.
If you are self-employed, a form requesting a Transcript of Tax Returns from the IRS and having your accountant verify your income are both options your Home Loan Specialist may use.
- FHA: Federal Housing Administration
An FHA loan is a mortgage insured by the Federal Housing Administration and is then issued by an approved FHA lender (like Churchill Mortgage). The FHA has worked to make housing more affordable for people in America since lower down payments and credit scores are required than with a conventional loan.
- VA: (U.S. Department of) Veterans Affairs
The purpose of the VA is to provide benefits to our Veterans who have done the heroic work of serving in the Armed Forces. It helps Veterans and their families with educational and vocational services, healthcare, and provides home loans known as VA loans. These loans require no down payment, no PMI, and can be qualified for with a lower credit score than conventional loans.
- HUD: (U.S. Department of) Housing and Urban Development
HUD stands for the U.S. Department of Housing and Urban Development and much like the FHA, was created to help make homeownership possible for more Americans. HUD offers financial assistance for housing through vouchers and grants. They also provide the Good Neighbor Next Door program giving access to financing and homes for civil servants.
- FHFA: Federal Housing Finance Agency
The FHFA, or Federal Housing Finance Agency was created to supervise the secondary mortgage market, including Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System. (The secondary mortgage market is where loans are created, bought, and sold by many different areas that make up the mortgage industry).
The FHFA works to prevent foreclosures, oversee credit availability for mortgages, and to allow private investors (meaning not from a bank or the government) to play a bigger role in the mortgage market, lessening the risk to America’s taxpayers.
Work with an Expert
While having an overview of key industry terms is helpful, nothing replaces having an expert to guide you through the home buying process. At Churchill, we partner with our clients to help you achieve your goals through education and a smarter mortgage plan. If you’re ready to become a homeowner, or are looking to refinance your current home, we’re ready to help.