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Real Estate Educational Guide

Learn more about real estate terms and definitions to help you find your ideal home.

 

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Definitions:
Knowing the jargon is important to being involved with your real estate deals. Here is a list of common terms and names that might be good to know before starting the sell/buying process:
Appraisal—A professional analysis of a home’s worth.
Appreciation—Increase in the market value of a home due to market changes or home improvements.
ARM—An Adjustable Rate Mortgage includes an interest rate that periodically adjusts. The adjustment is generally made in relation to the national interest rate.
Assumption—A contract which indicates that the buyer will be assuming all responsibility, financial and otherwise, for the property’s current mortgage. An assumption fee is often charged by the lender for such a transaction.
Building Code—Local regulations set on construction, maintenance, and occupancy of real property.
Closing—A mortgage closing marks the end of a real estate transaction. A closing requires that all documents have been signed and funds dispersed.
Closing Costs—The fees associated with the closing of a financial transaction. These are initially assumed to be the buyer’s responsibility. However, many real estate negotiations redistribute the closing costs to the seller or a third party.
Closing Date—The date on which a real estate transaction is to be completed and closed.
Comparables—Short hand for “comparable properties.” This term is used to refer to properties used as comparisons during an appraisal. They help to determine the current market value of a home.
Contingency—A condition required for the closing of a contract, such as a home inspection.
Debt-to-Income Ration—The ratio between monthly income and living expenditures, such as house payments, child support, alimony, car payments, and other payments on loans or revolving credit.
Default—A failure to make good on a financial agreement. To default on a mortgage loan usually results in foreclosure.
Equal Credit Opportunity Act (ECOP)—A federal law that requires creditors to make credit readily and equally available to all people, regardless of race, ethnicity, sex, age, religion, or marital status.
Equity—The property value minus current liens against the home.
Fannie Mae and Freddie Mac—The two national mortgage finance companies, both publically traded yet government supported enterprises.
FHA— Short-hand for the Federal Housing Association. The Federal Housing Association provides loans, mortgage insurance, and a variety of refinancing programs.
Fixed Rate Mortgage—A mortgage with a fixed interest rate for a stated period of time, after which the interest rate readjusts based on national standards.
Foreclosure—A legal process in which a bank regains ownership of the property when a lendee has ceased to make mortgage payments.
Home Inspection—A formal inspection performed by a professional to determine the foundational and mechanical integrity of the home.
Liabilities—The financial obligations of an individual, including all debt.
Lien—A legal claim on a property which requires repayment when the property is sold.
Loan—An amount of money borrowed with the promise of repayment with interest.
Loan Officer—Individuals who represent the lending institution or potential lendee.
Loan Origination—The process of obtaining new loans.
Lock-In Period—The period of time for which the lender has guaranteed an interest rate.
Modification—Any changes or alterations to the terms of a mortgage.
Mortgage—A legal agreement which guarantees real property to a lender as security for debt.
Mortgage Broker—A company which originates loans, then places them with larger lending institutions.
Origination Fee—A fee applied to activate a lending interaction charged for costs of the underwriting process.
Personal Property—Any property that is not real property.
Point— Equal to 1 percent of the loan.
Pre-Approval—A general term implying that a loan application has been completed by the potential lendee, and the underwriter has approved the loan at a certain principal amount with an estimated interest rate.
Promissory Note—A written promise to repay a debt.
Purchase Agreement—A written contract signed by both the buyer and seller which details the conditions of the sale.
Rate Lock—A lender’s promise to hold an interest rate for a specified period of time.
Real Estate Agent—A person licensed to handle real estate transactions.
Real Property—All land and immovable structures fixed to land.
Refinance—Paying off one with a new loan, using the same property as collateral. Often, the new loan has renegotiated interest rates.
Second Mortgage—A mortgage that has a subordinate position to another mortgage.
Servicing—The process of collecting and handling mortgage payments.
Survey—An official drawing that details the exact boundaries of a property, as well as other important physical features.
Short sale—A sale that does not garner the entire amount owed on the property but releases the lendee from all responsibility for the remainder of the loan not paid by the sale. A short sale requires an agreement between loaner and lendee that the sale amount will release the lendee from liability for the remaining balance of the loan. SB 931 and SB 458 are recent California passed bills that ensure that lendees cannot be sued for the remainder of the loan after a fully agreed upon short sale has taken place.
Sweat Equity—A contribution to a property’s value made in physical effort, rather than financial effort.
Title—A legal document indicating a person’s right to a property.
Title Insurance— There are two types of title insurance: owner insurance to protect the purchaser and lender insurance to protect the bank or lending institution. When purchasing with a mortgage, lender’s title insurance is generally mandatory, but it is fairly common for sellers to pay the premium for an owner’s title insurance policy as part of the purchase contract. The insurance is primarily intended to protect all parties from financial losses due to defects in titles to real property, and it usually insures a purchaser up to the full value of the purchase price. In essence, title insurance assures the purchaser of the validity of the title, specifically protecting against potential errors or omissions in the deed and examining records.  For an interesting story about how title insurance could have helped stop one of the largest feuds in American history, see this blog on the Hatfields vs. McCoys: http://www.realestatescoop.net/?p=940
Truth-in-Lending—A 1968 law that requires lenders to fully disclose all the components of a mortgage, or other line of credit, in a written document.
Underwater—When a home is “underwater,” the current value of the home is less than what is owed on the home. Underwater homes often result in short sales.
VA Mortgage—A mortgage that is insured by the Department of Veterans Affairs.
For Buyers:
The Vitals of Mortgage Shopping
Here is a list of 4 suggestions for procuring the best mortgage deal:
Make sure you get pre-approved. This is a free process that can highlight important aspects of your credit report in order to provide you with valuable information about how much money you can qualify for. Getting pre-approved may also illuminate issues with your credit report that should be fixed before applying for a loan. Not only does it give you a chance to have another eye read over the report for mistakes, but most brokers will give advice on how to up your score.
Fix your credit report. After the pre-approval, make sure to fix any problems credit problems. Take all the information that you received in your pre-approval and decide how to tackle any credit issues. If you need to correct mistakes, be sure to do so prior to applying for a loan. Also, if you need to up your score, make a detailed financial plan of how you intend to accomplish this.
Shop around for rates. Not every bank will give you the best deal, so shopping around for quotes is a fundamental part of the process. You want avoid future concerns about whether or not you got the cheapest mortgage. If you obtain numerous quotes, you will be able to make an informed decision on where to purchase your loan. Be sure to look out for lender fees. Sometimes these can be justified, necessary fees; however, make sure you know exactly how much you are paying and what you are paying for. If it seems like a bloated price, start asking questions.
Remember to include closing costs in your mortgage figures. Unless you can negotiate with the seller, it is the buyer’s responsibility to cover closing costs, which usually comes out to 2-3% of the purchase price. It is important to calculate these costs in order to be fully prepared for the financial burden of buying a home. Also, be sure to think about the first mortgage payment. If you over-stretch your savings, or forget to figure in closing costs to your budget, you could end up struggling to make the first payment on time.

Preparation is imperative to the home purchase process. In order to take advantage of the current buyer’s market, it is essential that you properly prepare for the entire process, including shopping for a cheap mortgage.
First Time Home Buyers
Buying a home for the first time is undeniably a daunting process. Credit scores, differing loan types, mortgages, down payments, and homeowner’s insurance are all looming financial nightmares that complicate and frustrate the buying process, and can be especially unnerving for first time home buyers. So, here are your first steps towards the successful purchase of your dream home:
Find a good real estate broker. A real estate broker will facilitate the entire home buying process and will act as a negotiator on your behalf when finalizing a deal. In order to buy a home, one must have extensive knowledge in real estate law, financial planning, and a detailed understanding of mortgages. For first time home buyers, especially, having a real estate broker takes the pressure off of you, allowing you to focus on finding your dream home. Brokers will guide you through the paperwork, work with you on loan pre-approval, help you navigate the different types of mortgages, and negotiate you into a great deal.
Get pre-approved. Once you decide that you’re interested in buying a home, one of your first steps should be getting pre-approved for a loan. Your real estate broker will usually do this free of charge. It’s an important step to take early in the process because you may have to do some financial homework in order to get your credit score up to a desirable level. Further, getting pre-approved for a certain loan principle allows you to enter the home search with some delimiters already in place. If you have a good idea of how much money you can get from a loan, you can begin to narrow your search to houses that fit within that financial range. According to HUD, Housing and Urban Development, here are the following items to make sure you bring to your pre-approval: “1) social security numbers for both your and your spouse, if both of you are applying for the loan; 2) copies of your checking and savings account statements for the past 6 months; 3) evidence of any other assets like bonds or stocks; 4) a recent paycheck stub detailing your earnings; 5) a list of all credit card accounts and the approximate monthly amounts owed on each; 6) a list of account numbers and balances due on outstanding loans, such as car loans; 7) copies of your last 2 years' income tax statements; and 8) the name and address of someone who can verify your employment. Depending on your lender, you may be asked for other information.” Coming prepared will expedite the process of pre-approval.
Use a mortgage calculator to determine what an affordable monthly mortgage payment is for your individual budget. You can find mortgage calculators online in various places, including at www.lealrealtyonline.com.
Find a lender. Shop around for a lender. Make sure to give 3-6 weeks for a loan approval process. Different lenders will give you different loan packages, and its necessary to allow yourself enough time to examine each offer before making a final decision. Some real estate brokers are already connected to lenders, and thus, using a broker-lender pair may prevent potential communication snags in the escrow process.
Begin shopping around. Your broker and real estate agent will help you find the type of neighborhood that suits you and your family’s needs.
Numerous cities across California, including National City, Carlsbad, Chula Vista, and San Diego, have first-time homebuyer programs that can provide you with more detailed information as well as possible financial incentives. Check out these programs by visiting HUD’s website. 

Buyer Tips: 3 Things to Consider When Writing an Offer
What you need to know before you write an offer:
Buyers should be well aware of the particular neighborhood’s comps, or “comparables”. Comps inform the buyer as to the average price range that nearby properties have sold for within the past 90 days. These figures help to determine home value, which in turn can dictate property tax. The comps for a particular neighborhood will compare the selling prices of homes of similar age, size, and condition. Further, home value will be determined by numerous factors that are a result of the location of a home. For instance, good school districts, well-paved sidewalks, and low-traffic streets will have a positive effect on home value, especially if other properties in the area are in good condition and selling for high prices.
It is important that you are well aware of any needed repairs to the home. Not only will this play a role in determining the home’s value, but different types of loans will not finance the purchase of a home with certain structural problems. FHA loans are generally denoted as giving the strictest appraisals. According to the HUD-FHA website, any needed repairs cannot infringe on the following requirements: safety, security, and soundness. Safety refers to any deficiencies that could cause significant danger to home occupants. Security refers to deficiencies that might obstruct the security of the property. Soundness refers to any issues with the structural integrity of the home. Understanding both the appraisal requirements for your loan type, as well as the needed repairs for the home you are looking to purchase, are crucial components of a well-structured, winning offer.
Lastly, be sure to take note of any competing offers. Competition occurs in various ways, including actual price offered, type of deal offered—cash or loan, and how much the buyer is asking the seller to pay for in terms of closing costs and repairs. Understanding competing offers is necessary to writing a successful offer.

The key to writing a successful offer is to make sure your realtor and lender are productively communicating, so that the previously mentioned components of good offers are thoroughly examined and included within the purchase offer. Therefore, it is often to your benefit to look for realty companies that are partnered with lenders. For instance, Leal Real Estate, a realty company, partners with Bay Equity, a mortgage broker, which means that persons from both businesses work together closely to more efficiently and effectively take you through the entire looking, offering, and escrow process. However, regardless of where you choose to do business, paying close attention to these 3 suggestions will aid in the successful completion of an effective and competitive buyer’s offer.
For Sellers:
The Seller’s Advantage: 3 Ways to Beat the Banks

When about to put your home on the market, it’s important to recognize your potential competitors—the banks. Right now, foreclosures and short sales are leading the market because of the low prices these sales fetch. Yet, what individual sellers should remember is that they have an upper hand, the strength of which depends entirely upon their willingness to capitalize upon it.

Individual sellers are able to stage, fix, and remodel themselves into sales in a way that banks simply can’t. Banks are overrun with foreclosures, leaving them little time to sell the properties, let alone clean them up or mow their yards. Further, with the onslaught of busting mortgages, countless foreclosed homes have been forced to sit, unoccupied and depreciating, for several years. Consequentially, buyers view distressed homes as-is, with no cleaning, staging, touch-up paint, or landscaping, regardless of the property’s state. Buyers want to envision themselves in the homes they are going to buy, and the dilapidated, deteriorated properties that banks often show don’t entice such an image. It’s hard to imagine playing catch with the kids in a backyard that has been taken over by weeds and foot-high grass, and family dinners aren’t supposed to occur in bug-infested kitchens.
Ultimately, this can be seen as an advantage for the individual seller. Yes, you are up against discount prices, but there is potential to beat these prices by offering buyers a beautiful, renovated, clean, and well-kept home to explore. So, here are a few tips of the trade, things to do to increase the selling-appeal of your home.
1) Curbside allure is crucial: Getting the buyer out of the car and into the house is a must! Mowed lawns, trimmed bushes, clearly visible house numbers, and little landscaping additions, like pretty flowers, are small but vital factors that entice a buyer into the home.
2) De-personalize and stage: Once in the home, a buyer wants to see their living potential. Thus, family photos and personal memorabilia should be stored away. Allow buyers to imagine their own family photos on the walls, rather than stare straight into yours. Also, staging scenes within the home give the buyer the opportunity to see themselves, for instance, having a nice brunch on their back porch. All it takes is the proper positioning of some furniture and a little table setting to open imaginative possibilities in the buyer’s mind.
3) Smells are fatal: A bad smell will linger with a buyer, so be sure to take out the trash, avoid aromatic cooking, and be award of pet odor. Potpourri, air-freshener, or cinnamon sticks ensure a pleasing but non-invasive fragrance.
Although buyers may be trying to take advantage of low costs, what they look for in a home has not changed, and so, the best way to beat the banks’ discounts is to provide the personal touch that marketable homes demand.
Hardship Letters
Short sale negotiators are a recent addition to many real estate offices’ payroll because up until the housing crisis, short sales made up only a small percentage of real estate deals. However, USA Today reports that California has seen a sharp rise in short sales, which currently makes up 25% of all real estate deals. Thus, short sales have become “corporate”—an increasingly complicated and complex process due to the added stipulations and rules that dictate how a short sale can be completed.
What can make short sales so difficult is the required backwards underwriting process: instead of proving financial stability, a short sale hopeful must prove financial instability, financial hardship. According to the NY Times, proving financial hardship is still one of the most difficult hurdles to jump through in a sort sale process. Consequentially, here are some general tips for writing a short sale hardship letter.
Most important to remember: banks will not dig for hardship; it must be precisely explained in the letter and attached financial documents.  A good hardship letter will denote the exact financial situation of the home--original sale price, current value, monthly mortgage payment, interest, and amount still owed on the loan.  Then, you should specifically explain why you can no longer afford the home, as is, and give a brief description of any preventive measures you have taken to avoid default.  Finally, the letter should outline what has caused your particular hardship--divorce, illness, unemployment, etc.  It's important to note that banks will often look for circumstances that could potentially be remedied, such as unemployment.  So, you will have better luck of getting a short sale approved if you can demonstrate that your unfortunate situation will have significant long term effects on your finances.  Furthermore, do not spend too much time trying to invoke sympathy.  While details about your specific hardship are important to the letter, remember that all hardship letters are describing tough situations, illnesses, divorces, deaths, etc.  Banks see hundreds of these letters everyday.  What will get your short sale approved is providing clear evidence that the financial burden cannot be met by your current (and long term) income.

Ways to Improve the Value of Your Home: Energy Upgrades
If you’ve ever thought about energy upgrades, now is certainly the time to act because thousands of dollars in rebates are currently available from both local and statewide agencies.  The amount of money you can receive is determined by the percentage of energy saved by your upgrades.  Look into the Home Upgrade, Carbon Downgrade (HUCD) program, an offshoot of the Energy Upgrade California program. Both government-funded programs are designed to entice home owners into energy upgrades by offering large rebates for renovations that increase the efficiency of the property. The focus of HUCD and Upgrade California is to unify the various energy/air components of your house, such that the ducts, furnace, air conditioner, insulation, and windows all work cooperatively towards an efficiently sealed home. These upgrades are intended to enhance your quality of life, not force you into unpleasant deprivations. Upgrade California cites four primary reasons to participate in their program: save money on utility bills, make your home more comfortable, improve the air quality, and reduce your carbon footprint through conservation. The results will be drastic—lower utility bills, no more daily allergy meds, and an all-around more comfortable living environment
Furthermore, if you’re in the market to buy, sell, or refinance, energy upgrades should definitely enter into your realm of consideration due to FHA insured Energy Efficient Mortgages (EEMs). Nationally instituted in 1995, EEMs provide special benefits for the purchase of an energy efficient home or financing towards energy upgrades. Buyers can stretch their debt-to-income ratio when looking to purchase an energy efficient home, sellers can make their home more attractive to buyers by offering them low utility bills, and refinancers can incorporate energy upgrades into their mortgage through an EEM. Anyone who qualifies for a regular FHA insured mortgage can apply for an EEM.

Holiday Decorations While Your Home Is On the Market
If your home is on the market during the holiday season, it’s important to find a compromise between creating a decorated house that is still appealing to buyers and still enjoying your holiday season. Some people may say that holiday decorations are a don’t when your home is on the market because, if done incorrectly, they can be very off-putting to potential buyers. While there is some truth to this concern, I contest that buyers could actually be compelled by well-done decorations that highlight the home’s positive features. Here are a few tips to follow if your home is on the market during the holiday season:
Less is more. You should avoid, at all costs, cramping the space of your home. Buyers need to be able to move comfortably from room to room and oversized trees or excessive lights can make the home seem small and cluttered. Thus, I would suggest limiting your decorations to very specific areas of the home. Also, if you have a smaller house, opt for a smaller tree. Large trees immediately shift the focus to the room-size. You want to highlight the home’s good qualities, not draw attention to its downsides.
Outside lights should emphasize the architectural details of the home. Too many lights can be overbearing, but a few lights that line the perimeter of the home and the outlines of the windows can catch the eye of a potential buyer driving by. Also, consider classic, neutral colors, nothing too flashy.
Finally, be sure to take your decorations down!! Keeping decorations up until mid-January will create a confused atmosphere for potential buyers. You want your home to look fresh, not stuck in the already-passed holiday.

The holidays can be a great opportunity for sellers to have their home viewed by travelling buyers, buyers who may not have had the opportunity to see your home in person during other times of the year. Thus, embrace the spirit of the season, but be ever-cognizant of the atmosphere your decorations are creating.