CMA, ARM, Conventional Loan, HOA...are you confused yet? Don’t worry -- you're not alone! Most people are confused all of the terms, abbreviations, and acronyms that are commonly used in the real estate an mortgage world.
Here are just a few that you will likely hear as you begin your homebuying journey and go through the process to get to the closing table. There will be many more throughout our website that we will define for you along the way.
Adjustable Rate Mortgage: There are many types of mortgages, and two terms you may hear in relation to your home loan choices are adjustable-rate mortgage (ARM) or a fixed-rate mortgage. An ARM will usually carry a specific interest rate for a set period of time, and at the end of that time period, the interest rate fluctuates (it can go up, down, or up and down, and some may even have a "balloon" payment associated with them, meaning a large balance paid in one lump sum at the end of the loan term). Most of these mortgages have a cap on how high the interest rate may increase, but many people avoid choosing an ARM because of the possible uncertainty associated with them. This is a choice you should discuss with your lender, and possibly your CPA and financial planner.
Amortization Schedule: An amortization schedule is a detailed breakdown (usually year-by-year but possibly month-by-month) that shows how much interest and how much principal of the mortgage has been paid off and how much remains with each payment. The definition of "amortize" is to reduce a debt, so as your mortgage amortizes, it means your debt decreases with every payment.
Commission: The amount of money paid to the buyer’s agent (if there is one), as well as the seller’s agent (if there is one). The commission is how the agent(s) are compensated for their work. While you may hear that "the seller always pays the commission," this is a myth; while some REALTORS® may have a standard of practice for their own business, like the rest of the real estate transaction, these amounts (and who pays them) are negotiable.
Closing: The closing is the final step in a real estate transaction, when the transfer of the title of the property occurs in exchange for money or other considerations. For most buyers, this is also the time that they sign all of their mortgage documents; for most sellers, this means they are signing the deed and the release from their current mortgage (if applicable). The buyer usually receives their keys to the property and ownership rights at this time.
Closing Costs: Any fees associated with the closing of the home, not including the buyer's downpayment, are called the closing costs. In other words, any costs associated with concluding the closing. These may include, but are not limited to: attorney or title company fees, lender fees, and commissions. Discussion of closing costs may or may not also include the set-up of your escrow account, also referred to by lenders as "prepaids" (see below). Closing costs differ for buyers versus for sellers -- to read more about each click BUYER CLOSING COSTS or click SELLER CLOSING COSTS.
CMA: CMA stands for Comparative Market Analysis, which is juts a fancy way of talking about a report or analysis a REALTOR® may do to determine the market value of a property (the "subject property"). The REALTOR® looks at recent sales that are of similar size, age, and features (criteria may vary based on the type and location of the property) and compares the properties that have sold to the subject property. Two times that a CMA may be done are prior to listing a home when working with a seller or prior to writing an offer when working with a buyer.
Downpayment: The downpayment is the amount of money (usually expressed in terms of a percentage of the total contract price of the home) that a buyer pays upfront in order to purchase a property; this amount is separate from the closing costs. This amount is typically between 5% and 25% of the value of the property for a Conventional Loan (and can vary for other types of loans). Click here for a handy downpayment calculator.
Dual Agency: When an agent represents both the buyer and the seller in the transaction. If this is to occur, it requires permission from all parties involved. (NOTE: Always ask your REALTOR® if they practice dual agency and how it may affect their ability to protect your best interests in the transaction; we -- meaning Maura and Ben Neill -- do not practice Dual Agency, even though it is legal to do so in Georgia, as we consider it to be a conflict of interest for our clients.)
Earnest Money: Earnest money is the amount of money a buyer provides up-front, at the time of writing an offer to purchase a home, which shows the seller that the offer is being made "in earnest," in other words that the buyer is serious. This is different from the downpayment, which is paid at closing. The earnest money can serve as collateral and may revert to the seller, in the event that the buyer defaults on the real estate contract. However, in most cases, the earnest money is returned to the buyer at closing, credited to him or her as part of the downpayment or closing costs (toward the total funds the buyer must bring to closing). To read more about earnest money, click here.
Executed Contract (or Binding Contract): This means the real estate contract (in Georgia, this is formally knowns as the Purchase and Sale Agreement) has been signed by all parties involved (usually the buyer and seller). Until the contract is signed by all parties, it is not valid or enforceable so it’s important everyone signs the contract quickly. Click here to review a sample copy of the Georgia REALTORS® Purchase and Sale Agreement.
Foreclosure: Foreclosure refers to the legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. In other words, an homeowner who has stopped making their regular (usually monthly) mortgage payments who is foreclosed on has had their home repossessed by the lender. The lender may then, at some point in the future, choose to sell the property in an attempt to recover some or all of the
Good Faith Estimate: A good faith estimate is an approximation of the total cost of the purchase of property -- this includes the purchase price, the closing costs (including all lender fees), the interest rate and monthly mortgage loan payments associated with the purchase (including collect of the "prepaids"), etc. It is provided by your mortgage lender, usually during the pre-qualification or pre-approval process, before the mortgage loan is secured, so the buyer can compare the offers of different lending and choose the lender that is best for them.
Prepaids: Prepaids refer to the amount of money "prepaid" at closing, collected by the lender in order to set up the homebuyer's escrow account, for the annual payment on behalf of the borrower of the property taxes and homeowner's insurance. The lender sets up an escrow account and collects a certain number of months' worth in advance and then a set amount each month toward those annually-paid expenses. Payment of the property taxes and homeowner's insurance by the lender on behalf of the buyer ensures that those payments will be made on time and in full, ensuring that the borrower doesn't forget to make those payments or let insurance coverage on the property lapse. Some lenders may allow homeowners to cancel the escrow account after a certain amount of time or to obtain a mortgage without setting up an escrow account; those conversations should be had with the lender at the time of loan application. To read more about escrow (or impound) accounts, click here.
Pre-qualification and Pre-approval: Pre-qualification and pre-approval refer to the screening process a homebuyer goes through with a mortgage lender in order to determine whether the buyer is going to be able to obtain a mortgage and how much purchasing power they will have (i.e., the price point of the home they will be able to afford). While these two terms are often used interchangeably, they actually have different meanings. Click here for a more detailed explanation of how the pre-qualification process and pre-approval process differ.
Short Sale: When a person puts their home on the market and the property’s market value is less than the balance of the money owed on the mortgage(s), this is called a short sale. This is usually associated with drastic falls in the market value of the property. A simplified definition is that the seller owes more money to the bank than the home can be sold for in today’s market. It’s a tough break for sellers, but can be a great opportunity for buyers. The downside to short sales is that they can take a very long time to close (6-12 months), and there is no guarantee they will close, as any banks involved have to agree to take less money for the house than they are owed by the seller. Short selling a home can be a complicated process and should be trusted to a REALTOR® with experience dealing with banks in this fashion.
Underwriting: The underwriting process is usually the final step that a lender undergoes in determining whether to extend credit, in other words, in determining whether they can approve your mortgage loan. The underwriter makes the decision based on a variety of factors including the borrower’s credit scores, credit history, income, other debt obligations and property value.
Have a question about a common real estate term? Email us at Maura(at)BuySellLiveAtlanta.com
