Planning to Buy or Sell a Home? Familiarize Yourself with These Terms

Navigating the world of real estate involves understanding a variety of acronyms and terms. Here’s a quick guide to some of the most commonly used terminology.

Key Real Estate Acronyms

CMA (Comparative Market Analysis): An estimate of a property’s value prepared by a real estate broker or agent, often used to set listing prices or decide how much to offer.

DOM (Days on Market): The number of days a property has been listed for sale on the MLS before an offer is accepted.

• Higher Days on Market can often leave potential buyers wondering what's wrong. If they submit an offer, they are more likely to offer below asking. This is one of the reasons why it’s important to properly price your home when you list.
• If you see a potential property you like with a higher DOM, it could be a great opportunity for you to make a competitive offer.

DTI (Debt-to-Income Ratio): A measure of a borrower’s monthly debt payments compared to their gross monthly income.

• This is used by lenders to assess creditworthiness and how much to pre-approve a client for. Lenders typically prefer a DTI of 36% or less but may accept a slightly higher rate in some circumstances.

EMD (Earnest Money Deposit): A deposit made by a buyer to demonstrate their commitment to purchasing a property, which is typically held in escrow until closing.

• This deposit is put toward the final purchase price.
• If the buyer backs out without an “acceptable” reason, this deposit is often forfeited. A higher deposit can demonstrate a more serious buyer since they risk losing more money if they back out.

FHA (Federal Housing Administration): A government agency that insures mortgages, making homeownership more accessible by allowing lower down payments and more flexible lending criteria.

• FHA loans have a minimum down payment of 3.5% of the purchase price for borrowers with a 580 credit score or higher.

FSBO (For Sale By Owner): A property that is being sold directly by the owner without the assistance of a real estate agent.

HOA

 (Homeowners Association): An organization in a residential community that enforces rules and regulations and maintains common areas, funded by dues paid by homeowners.

LTV (Loan-to-Value Ratio): A ratio used by lenders to express the amount of a loan as a percentage of the appraised value of the property.

• For example, if you buy a $500,000 home with $50,000 down, your LTV ratio would be 90%.

MLS (Multiple Listing Service): A database used by real estate professionals to share information about properties for sale and facilitate cooperation between agents.

• The MLS will have the most up to date information on listings—3rd party sites like Zillow and Realtor.com syndicate from the MLS. 

NAR (National Association of Realtors): A professional association for real estate agents and brokers in the United States, which enforces standards and offers professional development.

• All Realtors® are members of NAR; any agent who is not a part of NAR must go by the term “real estate agent” instead of Realtor.

PMI (Private Mortgage Insurance): Insurance required by lenders when a borrower makes a down payment of less than 20% of the home’s purchase price, protecting the lender in case of default.

• Once you have 20% equity in your home, you can request that your lender remove your PMI.

REO (Real Estate Owned): Properties that have been foreclosed upon and are now owned by the lender, typically a bank or mortgage company.

• REO sales can be slightly more tricky—this is another reason why working with a real estate agent is crucial.

SFH (Single-Family Home): A residential property designed to house one family, as opposed to multi-family housing like duplexes or apartment buildings.

VA (Veterans Affairs): A government agency that offers home loan benefits to veterans, including zero-down payment options and competitive interest rates.

Essential Real Estate Concepts

Appraisal: A professional assessment of a property’s market value, often required by lenders before approving a mortgage.

• If a home appraises for under the offer price, you’ll have to discuss ways to either bridge the appraisal gap or cancel the sale.

Coming Soon: A designation for a home that’s about to “officially” be on the market but isn’t yet open to showings.

Lien: A legal claim or hold on a property, typically used as collateral to satisfy a debt.

• A mortgage becomes a lien if the borrower defaults on their payments.

Pending/Under Contract: A status indicating that a property has an accepted offer and is in the process of being sold, pending the completion of all contractual obligations.

Pre-Approval: A lender’s conditional commitment to loan a certain amount to a borrower, based on an initial review of their credit and financial information.

Pre-Qualification: An estimate of how much a borrower might be eligible to borrow, based on self-reported financial information.

• A pre-qualification is not as strong as a pre-approval.

Title/Deed: Legal documents that establish ownership of a property; the title represents the legal ownership rights, while the deed is the official document transferring those rights.

• Legalities around title and deed vary state to state.

Underwriting: The process by which a lender evaluates the risk of lending money to a borrower, considering factors like credit history, income, and property value.

Understanding these terms is a huge leg up for anyone involved in real estate, whether you’re buying, selling, or investing. Familiarity with this vocabulary can help you make informed decisions and navigate the real estate market more confidently.

Investor Real Estate Terms

Did you know Newfound (Houwzer's parent company) offers unique services for real estate investors? You can learn more at Newfoundenterprise.com.

1031 Exchange: A process allowing investors to defer capital gains taxes on the sale of an investment property by reinvesting the proceeds into a similar property.

Capital Gains Tax: A tax on the profit earned from the sale of a home, calculated as the difference between the selling price and the purchase price.

Capitalization (Cap) Rate: A measure of an investment property's potential return, calculated by dividing the property's net operating income (see below) by its current market value.

Distressed Property: A property that is under foreclosure or being sold by a lender, often at a discounted price, due to the owner's inability to meet financial obligations.

• Distressed property sales are often complex and can be lengthy, so be sure to touch base with your agent often when trying to purchase one.

LLC (Limited Liability Company): A business structure that provides its owners with limited liability protection, often used by real estate investors to hold property.

Net Operating Income (NOI): The annual income generated by an investment property after deducting all operating expenses, but before accounting for taxes and financing costs.