Glossary of Terms
The term for determining the monthly payment. A loan with a 30 year term will have the same payment as a loan with a 30 year amortization period. But the amortization period has nothing to do with the term. You can have for example a loan that comes due in two years, that has payments for those two years as if the loan were for 30. Long amortizations are used to lower payments on short-term loans.
Arms Length Transaction
A transaction in which the buyers and sellers of a product act independently and have no relationship to each other. It is one of the keys for avoiding fraud.
After Repair Value. A way of determining value for a fix-up property used by lenders. If a lender will lend 66% LTV based on the ARV, he will lend 2/3rds of the total value of the house as if it were fixed already. ARV based lenders typically like fix-ups.
A lender that lends on the as-is value will also lend on a fix-up, but will not for purposes of determining the loan size. He will not determine present value based off of what the house may be worth after fix-up.
When the loan becomes due and payable and the amount of money due exceeds a monthly payment. So in the above example in amortization period, we have a balloon because even though the payments are spread out over thirty years, the full amount must be paid back in two. This means a large sum of cash must pay off the loan at the end of that two-year period.
Based on Appraisal
This is better than based on purchase price. In the above example the lender would lend 65K instead of 32,500. Keep in mind, this is as good as it gets in the case of a non-fix-up.
Based on Purchase Price
Loan size is based on the purchase price instead of the appraised value. A house worth 100K you got for 50K at an LTV of 65% would only get you a loan of 32,500 if value was based on purchase price.
BPO or CMA
BPO stands for broker price opinion. If you are talking to a lender this is what they will understand. When requesting one from a broker (or agent), instead ask for a CMA. This stands for comparative market analysis. In order to get a full BPO the broker is supposed to drive out to the comps in the CMA, but in my experience this never actually happens. In virtually all cases, they just go online and get sold comps and come up with some kind of average number +/- about 20% for your probable value.
Someone who lends in a second position or who otherwise pays your down payment for you. A term I made up to convey that it is always important to deal with these people with respect even if they seem temperamental or paranoid. The gods will seem fickle at times, and often easily anger. In business financing they are called Angel investors. They are sometimes called Joint Venture or JV partners. We used to call them cash gods all the time, but some of the religious ones got really angry about being called that, so if you like the term, you may need to keep it to yourself at times.
These are fees charged for various services at close of escrow. They include application fees, title fees and appraisal fees among others.
Conflict of Interest
A buyers agent working for a percentage based commission gets paid more if the buyer pays more. A cause of bubbles in home prices.
High LTVs, low interest rates, and long amortization periods without balloon payments are all the hallmark of conventional financing. Typically, 2 years of provable income is needed, a credit score in the high 600s or better is typical, and a debt-to-income ratio that allows for the home payments including taxes and insurance not to exceed a third of total income. You can get four such loans before they start drying up. Often federally insured, these loans are very safe for banks to make. Close to 100% LTV is possible if using special federal programs like VA and FHA.
A way to line up back-to-back two purchasers, such that the first becomes a middleman for the second. If handled correctly, its a good way to structure a deal around the problem of a non-assignable contract. Can carry a risk of fraud without an 'arms-length transaction'. See above.
Process by which the listing agent's fee doubles and a middleman is reduced to one from two.
Escrow vs. Closing
Often confused, they tend to mean the same thing to the real estate agent. The escrow is the whole process that the title agent goes through as they transfer title. It can include holding funds as a third party to smoothly conduct the process of moving title to the property from the seller to the buyer. The closing is generally the term for the final signing of documents by all parties.
How you present your finances. If to a lender this is usually done on form 1003, pronounced 'ten oh three'.
Between conventional loans and hard money, lies a grey area that i like the best. This kind of financing has middle range (2-7 year) terms with balloon payments, closer to conventional interest rates (3-4% above conventional), but closer to hard money in terms of the qualification process. These loans are rare and sometimes involve sacrificing some equity, but are worth it if you can't qualify for conventional. Close to 100% LTV is possible. Formerly these were known as subprime and ALT-A, and are widely regarded as having caused the crash of 2008.
Low LTVs, high interest, no qualifying loans. Typically, hard money would be 50-65% LTV, 13%-22% interest, and often 2-5 points. Term lengths are 6 months to 2 years usually. I’ve put my research on hard money at my site Hard-Money-In.com. I organized it by state, so click on the left before scouting through lender names. If you come across any I missed, please bring it to my attention and I will update the site.
Horsemen of the Apocalypse
Meth labs, black mold, building inspections.
Most of us know what this means, but there are two concepts to understand, one is simple interest and the other is compound interest. Without overcomplicating the issue, simple interest costs the borrower way less money over the long term because interest on interest is not charged.
Interest only vs. Principal and Interest
An interest only loan will have payments that are lower than a 'standard' or principal and interest payment loan. But equity will not build due to making those payments either. That is the key tradeoff.
Learning to Earning Ratio
An idea that exposes the value of time. If you spend more time learning about investing than earning money at a job, it is in balance.
Long Term Transactional Funding
A rare, highly useful, and desirable kind of funding that allows for enough time to make a few minor repairs or improvements to a property. May require a lender level group member.
Stands for 'loan to value'. It is the percentage of the value of a property that a lender is willing to lend up to.
Proof of funds letter
A fee the lender charges. This fee is either paid in cash at closing as part of the closing costs, or it is amortized into the loan. Amortized loan costs are said to be 'rolled into’ the loan (spread out across all the loan payments).
Position indicates who gets paid back in the event of a foreclosure first. The first position is best. He gets the first of the money released from the auction of the property. The second, third, fourth and so on positions are less valuable because they have to 'stand in line' in the event of a foreclosure auction. So the lower the number of the position, the lower the risk from the lenders perspective.
Put Down the Ducky
A sesame street song that teaches the value of sacrifice. Investments are sacrifices, and can be scary to make.
On houses it usually means that the domain can't be occupied, on meters it means inspection must be done prior to utility turn on.
Weapon used to make you feel like your offer wasn't high enough
Single family residence, in short a house. No shared walls, not a trailer, not a manufactured home, not a plex. just a good old fashioned house.
Skin in the Game
A lending term derived from the expression ‘a pound of flesh’, from William Shakespeare’s ‘The Merchant of Venice’. In it, the character Shylock demands a pound of flesh for failure to repay a debt. Skin in the game means that the down payment serves as a prepaid pound of flesh. It is called skin because it must come directly from the borrower and not from the seller or some other third party.
Seller Property Disclosure Statement - An addenda to the main contract listing any and all defects known by the seller.
Not to be confused with terms (a generalization designed to describe all aspects of a loan except interest rates.), term denotes the length of the loan in time.
A way to search by price per square foot. Minimum value is footage, maximum value is price.
A type of loan that exists to cover double closings. A transactional funding will never leave escrow and typically is only in effect for a few minutes. It can create an 'arms-length transaction'.