This article goes behind the scenes to tell you all the secrets of the We Buy Houses craze sweeping the nation. I know that this article is controversial, but if publishing this information upsets anyone, then they are not running their business in an honest way and are not the type of person I’m going to worry about. My hope is that my honest insight from 11 years in this business breaks down a lot of the mystery and helps you make the best possible choice when selling your home. The knowledge you will gain by reading this article will give you a huge advantage no matter what you decide to do. That said, if you’re just looking to get a cash offer for your home and don’t care about all the details, just submit your information HERE and I’ll be in touch ASAP.
Definition of a Cash Buyer
Let’s start with defining a cash home buyer. A cash buyer is anyone who can purchase your home for cash without having to get approval from a lender. Cash buyers range in size from someone who has just enough money to purchase their personal residence without a mortgage, a small time investor who purchases a few homes as a side business, or even a corporation with millions of dollars buying hundreds or thousands of homes a year. The one thing they all have in common is the ability to buy your home very quickly without requiring any outside approval.
Since a We Buy Houses company is the most likely type of cash buyer that will purchase your home, they will be the main focus of this article. We Buy Houses businesses are a subset of cash buyers who make their money by purchasing homes at discounted rates and either reselling them right away to other investors, fixing them up and selling them with a Realtor on the MLS (Multiple Listing Service), or keeping them as rental properties. There are of course many other options, but these are the three most common. The key thing to know about We Buy Houses businesses is that they need to purchase homes at enough of a discount off of the full retail value to cover necessary costs and still make a profit. This means that to sell to your house to one of these companies will require you to give up part of the equity in your house. This of course begs the question, why would anyone sell their home for less than it is worth? Read on to find out why giving up part of your equity to sell your home quickly may or may not make sense for you.
There are many factors that go into determining what a house is worth. Time, location, condition, and many other possible circumstances can all greatly affect the price of a property. The goal of We Buy Houses buyers is to purchase homes from sellers where these other factors are more important to a seller than the price they receive for their home. If you have a house to sell and don’t have the money to fix it up, or the time to wait until it sells, then it could be worth it to give a We Buy Houses buyer a call to see how they are able to help. For those of you who have plenty of time and whose property is in excellent condition, a cash buyer may not be your best option.
Example of a We Buy Houses Offer
Since many of you may still be questioning why someone would take less for a home than it’s worth, let’s use an example to see what decision you would make.
Mary is a 45 year-old mother of two and a recent divorcee. In the divorce she received a house that would be worth $200,000 if it was in perfect condition. Unfortunately for Mary the home still has a $100,000 mortgage, $20,000 of deferred maintenance, and a leaky roof requiring $5,000 of work. Mary only has $5,000 in the bank and is already struggling to make the mortgage payments, much less pay for any repairs. Lucky for Mary, she received a job offer from a company in another state that would double her salary, but she must start within 30 days.
Mary now has a very short timeline to do everything she needs to do to move, including selling her house. She remembers receiving letters from a local We Buy Houses buyer and decides to call and discuss her situation. After providing all the requested information, the Web Buy Houses buyer offers Mary $115,000 in cash and the ability to close on her house in two weeks. At this point Mary has two options; she can either accept the $115,000, or she can attempt to sell her house herself for more money.
Let’s go over two possible outcomes depending on what Mary decides. If she takes this offer she walks away from her house without having to do any repairs, knowing she has a guaranteed $15,000 cash in the bank(after paying off the $100,000 mortgage), and can focus her attention on the dozens of other things she needs to do to prepare to move. If Mary decides not take the offer, she must borrow $25,000 to make the required repairs to get the house in sellable condition, hire contractors to do the necessary work, and list her property with a real estate agent. During that same time, she will be moving out of state and will likely be looking for a new home. She will then be responsible for two mortgages, taxes, insurance, and utilities for two homes for an undetermined amount of time, one of which is vacant with contractors working on it. If everything goes perfectly, Mary has the potential to make an additional $10,000 (I’ll explain this number later) by choosing this second option, but this does not factor in the stress and extra work on her part. What if something did not go as planned and her home did not sell for six months or more? What if the contractors discovered additional repairs were needed or didn’t do a good job without her supervision? What if the house was vandalized due to being vacant? What if she couldn’t get a loan to make the repairs? Would the risk be worth the possibility of an additional $10,000? Which option would you choose?
Read enough? Want a free and fair offer? Click here to get started selling your house.
The Other Shoe
While there are many similar examples to the one above where a We Buy Houses buyer is a great option, the majority of sellers have options other than selling to a cash buyer, that will likely result in them walking away with more money in their pocket. What if your home is already in good condition and does not need a lot of work? What if you’re not in a hurry to sell? What if you live in a hot market where houses are selling very quickly? Why would you want to give up so much equity in your home if you don’t have to? Changing Mary’s situation from above, let’s say she has $50,000 in the bank to pay for repairs and her new job does not start for four more months. Now Mary’s best option would likely be to have the repairs done by a contractor and list her property with a realtor. In spite of the many potential hassles and unknowns when listing with a Realtor, they are usually the best way to get the most money possible for your house when you have the time, resources, and desire to sell your house in the conventional manner.
How to Choose Which Cash Offer to Take
There’s an old adage that goes something like this, “Everyone wants quality, speed, and a good price, but you can only have two of the three.” If your house is in good condition (quality), then you can either sell your house quickly (speed), or for a lot of money (price), but not both. If your house is in poor condition, you will have to accept an even larger discount to sell it quickly, or just drop your price the cost of the repairs and wait a very long time to sell. Since it would take too long for me to go through every possible mix of quality, speed, and price when selling to a We Buy Houses company, I’ll just list a few questions you should ask yourself to help with the decision.
- 1. How fast do I need to sell my property? If the answer to this is less than 30 days, then a cash buyer is your only option. If the answer is less than 90 days then you should still consider giving calling a cash buyer as call, but you start to have other options.
- 2. Do I have the money to pay for the property for as long as it takes to sell? This is especially relevant if you will not be living in the home when it’s for sale. Look at homes in similar condition in your area and see how long they were on the market.
- 3. Does your home have a realistic chance of selling in its current condition? Don’t underestimate the cost and effort to get a home in sale ready shape. If your home needs any repairs or is just plain outdated, the only way to sell it will be to reduce the price by much more than the cost of the repairs. Outdated homes or ones that need repairs usually take much longer to sell, as buyers don’t want to have to do a bunch of work before moving in.
- 4. Do I want to deal with selling my house through a realtor or on your own? If you’ve ever sold a home through a realtor or for sale by owner (FSBO) before, then I don’t need to say more. While Realtors do make selling much easier than doing it on your own, you still need to consider repairs, cleanings, showings, negotiating, waiting, etc… When you sell FSBO you have to do everything on your own.
Questions when Considering a We Buy Houses Buyer Offer
- 1. Does the contract close when I need it to? Speed is the greatest advantage to a cash offer, so make sure it works to your benefit.
- 2. Does the offer amount cover my mortgage and other selling expenses? At a minimum you want to be able to walk away from the property free and clear. If this is not possible, are you able to come up with the difference?
- 3. How much more could I make by fixing and selling the house on your own? Put a lot of time in researching this question and make sure you factor in all the costs listed in the “Cost to Sell a Home” section below.
- 4. If you have more than one offer, how do the terms compare? As with going to a doctor for a major decision, I recommend calling more than one We Buy Houses buyer for an offer.
What’s the easiest way to find a liar? Just look for the man who says he’s telling the truth.
So if after reading the above you’ve decided you are a good candidate to sell to a We Buy Houses buyer, your next question is, “what’s the best way to go about doing that?” There are dozens of national We Buy Houses companies and probably a few local to your area. How do you know who to trust? I wish there was some crystal ball I could point you to for this answer, but that just doesn’t exist. The hardest part about figuring out who to trust is that there are so many variables to pricing a home and many of them are just estimates. It’s impossible to know if someone is trying to cheat you or if they just know something you don’t.
As I said before, We Buy Houses buyers come in all shapes and sizes, and just because one offers more money than another doesn’t mean the one with the lower price wasn’t making their best offer in good faith. Also there are other factors besides the final price. If one We Buy Houses buyer will pay you $100,000 cash, as-is, in one week, with no closing costs, that would be worth a lot more than another buyer who offered $105,000 cash in 60 days, but you had to empty and clean the house and pay closing costs. See how focusing solely on the price can end up costing you in the end?
You Don’t Know What You Don’t Know
Underestimating the cost associated with fixing, holding, and selling a house is one of the more common places that home owners get themselves into trouble when deciding how to sell their house. Often sellers just take the price of what a house down the street sold for, subtract 6% real estate commissions and think that’s the amount of money they will walk away with at closing. Unfortunately that is far from what actually happens, and it is possible for people trying to sell on their own to end up with less money than if they’d just sold to a cash buyer in the first place. Use the list below to get an estimate of what it will cost you to sell your home.
[table caption=”Example Cost Analysis of Rehabbing and Selling a $200,000 House” class=”table table-bordered”]
Expense,Estimated Cost,Total Cost
Real Estate Commissions,6%,”$12,000″
Taxes per Month,$100,$600
Utilities per Month,$300,”$1,800″
Loan Payments per Month,”$1,200″,”$7,200″
Rehab Costs (Average),”$40,000″,”$40,000″
“”,Total Cash After Expenses,”$132,400”
[/table]Note: As you can see from the above example, if you were to sell your home to an investor for $132,400, you would walk away with the exact same amount of cash as if you had taken all the risks and spent all the time and money fixing and selling the house yourself. And this doesn’t even factor in if you had to lower your price during negotiations with the buyer.
How We Buy Houses Buyers Come Up With Their Offer
If you’ve ever gone through the process of coming up with a suggested sale price for your house with your Realtor, then you know that it’s more art than science. Yes they look at comps (comparable sales) in your area and add or subtract for different amenities, but unless you live in a neighborhood where all the houses are exactly alike and in the same condition, the final asking price could realistically vary by 10 to 20% based on the many subjective factors.
So given the guess work that goes into pricing a house, how does a We Buy Houses cash buyer come up with their offer? The answer to that is like many things in this article, it depends. To start the valuation process there is one number that all buyers try to come up with as accurately as possible. That number is the After Repair Value (ARV). The ARV is the price the house would sell for in perfect condition when the seller is not in a hurry to sell. The ARV is the starting point from which the We Buy Houses buyer subtracts all the repairs, fees, and discounts to come up with their offer. While there are many methods to calculate an ARV, the most common is similar to the one used by real estate agents. Buyers take all the recent sales in the area and look for ones that are similar in square footage, bedrooms, bathrooms, and style of house. If they have time, they also look through pictures or visit the properties to gauge condition. Many cash buyers have access to the MLS for these comps, but some just use public sites such as Zillow.com and realestate.com. While these public sites have most of the information, they do not include any seller concessions such as how much the seller paid towards closing costs or if the buyer got cash back at closing. I’ve seen listings where the listed sale price was $200,000, but the seller paid the buyer $18,000 at closing, which means the actual sale price was $182,000. Public sites won’t have this information, which could lead a We Buy Houses buyer to value a comp at higher than it is actually worth, thus causing them to value your house at more than it’s worth. Once the buyer has this information, they add or subtract from the value of the comps based on things that are better or worse about those properties. The average of these comps gives the buyer the ARV.
The next number the cash buyer determines is the cost to rehab (fix up) the property. Most buyers are looking to restore the property to like-new condition, which means at a minimum replacing kitchens, bathrooms, carpet, and paint. Repair costs are the most often underestimated expense by sellers as they often don’t see all the work that needs to be done, or if they do then they underestimate the cost to repair. The cost of repairs varies by region, but the rule of thumb for an investor in a middle class house is it will cost $8,000 to $10,000 to replace a kitchen and $3,000 to $5,000 to replace a bathroom. I strongly recommend against using these numbers for your own repairs as homeowners will usually pay many times this amount for the same repairs. We Buy Houses buyers have spent years building relationships with contractors and their ability to send them regular business allows them to negotiate lower prices. I probably shouldn’t do this, but if you want a detailed price list of what many We Buy Houses buyers I know pay, shoot me an email at [email protected] and I’ll send you my latest copy. This information alone will greatly improve your negotiating stance with any cash buyer.
The next number the We Buy Houses buyer needs to determine is all the costs associated with buying, holding, and selling the property. A list of just a few of these costs are real estate commissions, points and interest on any hard money loan, taxes, insurance, utilities, maintenance, closing costs, and administrative fees. These are all the same costs you would have to pay if you were to rehab and sell your house, so if you’re thinking of rehabbing your own home for sale, make sure you don’t forget any of these.
The final number a We Buy Houses buyer needs to make an offer is the amount of profit they need to make on your house. This number can be different based on the required minimum profit percentage and what they are planning on doing with the property. Someone who is looking to rehab and sell will likely require a larger profit margin than someone who will buy and hold. Because of all the unknowns going into buying a house and the time and capital invested, the general rule of thumb is to have a minimum of 15% of the ARV as the profit. This would mean that for a $200,000 house, the minimum profit margin to purchase the property would be $30,000. That said, this number can go up or down depending on the condition of the property and the estimated time to be able to sell. For example, a cash buyer may accept less profit on a house that needs $5,000 work with an estimated month to resell than one that needs $40,000 work and will take at least six months to sell. The risk for the second property is significantly higher, so they will likely require more room to allow for the time and unknowns. 15% may seem like a large amount, but the primary reason for that allowance is to pay for the numerous additional costs that spring up when rehabbing a house. Things such as interest, taxes, insurance, and utilities can really add up. Rehabs never cost what you expect them to, and 15% allows enough room to pay for these expenses and still make a profit.
So after all this, the final offer price is obtained by taking the ARV, minus the repairs, minus the other costs, and subtracting the required profit. To use Mary’s property again, she has an ARV of $200,000, minus $25,000 in repairs, minus $30,000 in costs, minus $30,000 in profit, and you get an offer price of $115,000. These numbers may seem high, but it is very easy to overrun these costs in several areas when the unexpected happens. Considering the large amount of time, money, and experience that goes into each project, purchasing the house for much more than $115,000 would result in the cash buyer eventually getting hit by a bad deal that could cost them serious money.
What Not to Say to a We Buy Houses Buyer
The other big fear people have when calling a We Buy Houses cash buyer is saying the wrong thing that will cost them money. There is a difficult balance to maintain when answering a cash buyer’s questions as you want give them enough information so they can make you an offer, but you may not want to appear like you’re desperate, potentially leading to a lower offer. The problem is if you try and play it tough in an attempt to get a higher offer, the cash buyer may assume you’re not motivated to sell your home and decide it is not worth their time to research the property and make you an offer.
Also you have to consider how urgent your situation really is. If you seriously need to sell your home and have the cash in the next few weeks, you had better make that clear up front and expect a low offer. By letting the We Buy Houses buyer know your situation, it’s possibly you may receive a lower offer, but they are also more likely to take you seriously and actually purchase your home very soon. If you truly NEED to sell your house, let them know. If on the other hand you just want to sell your house and are fishing for an offer, you’re probably not going to receive the type of offer you are looking for. I know you were probably hoping for a clearer answer on what not to say to a We Buy Houses buyer, but like most things real estate it comes down to your specific situation.
Questions To Ask a We Buy Houses Buyer
Just as there are things you shouldn’t say to a We Buy Houses cash buyer, there are also questions you should ask them to ensure they know what they are doing and will actually buy your house. There are a lot of new investors out there that could have the best of intentions, but may not know enough about what they are doing to actually purchase your house. While I wouldn’t grill your potential cash buyer as this may end of driving them away, I would ask what assurances they can give you that you will actually purchase your house. I prefer to leave the question open ended as it allows the We Buy Houses buyer to come up with their own answer about what qualifies them. If you asked something specific like how long have you been buying houses or how many houses have you purchased, the answer could be that they’ve purchased 50 houses in the last 10 years, but that may not be what makes them qualified to purchase your home. Experience is definitely a plus, but you’re looking for them to either say they have the cash available and are buying the home themselves, or that they have a large pool of investors they work with who purchase homes on a regular basis.
The “We Buy Houses buyer” You Are Talking to May Not Actually be the One Buying Your House
Some of you may have noticed at the end of the last paragraph that it was acceptable if your We Buy Houses buyer has a “pool of investors they work with.” Why, you may ask yourself, are there other investors involved when I’m talking to a cash buyer? The answer to that is that many of the We Buy Houses buyers you may speak with are not the people who will actually purchase your house. A very common business these days is something called “wholesaling.” Wholesaling is when someone signs a contract with you to purchase your property at a certain price, and they then turn around and sell the right to purchase your house at that price to an actual cash buyer.
Take the earlier example where Mary was offered $115,000 to buy her house that was worth $200,000 in rehabbed condition. Instead of actually buying and fixing Mary’s house, a wholesaler would take that contract and assign it to a cash buyer for a higher price of around $120,000. This means that the cash buyer would be paying $120,000 for the property, of which $115,000 would go to Mary and $5,000 would go to the wholesaler. Mary is happy as she still gets all the money she was promised, the cash buyer is happy as he gets a house at a good price, and the wholesaler is happy as he gets $5,000 and didn’t have to spend any of his own money.
The one caution I will give about working with wholesalers is that there is a chance they may end up not purchasing your property. This doesn’t happen often, but most likely there is a clause in their contract that states it is dependent on investor approval. This means that if they are not able to find a cash buyer “investor” for your house, that the contract is null and void. As I said this shouldn’t deter you from working with a wholesaler as they can definitely be a great way to sell your house, but if you are able to get an offer from someone who is an actual cash buyer, it may be worth talking a little less money for the guaranteed sale.
Beware of Scams!
Just like everything else online these days, there are a lot of scams in real estate. There are unscrupulous people out there who will do whatever they have to do to make money, even if it means lying and cheating. I wish I could give you a magic “rip off detector”, but unfortunately that does not exist. The best defense I can give you against being taken is knowledge. Hopefully all the knowledge you’ve gained in reading this article will help you see through these schemes and avoid falling prey to someone who is less than honest, but you can always know more. I highly recommend reading some of the articles below on real estate scams to better protect yourself.
and-how-to-avoid-them/” target=”_blank” rel=”noopener noreferrer”>Forbes – Three Real Estate Scams and How to Avoid Them
Home Estates – How to Spot 10 Real Estate Scams
and How to Avoid Them” href=”http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/top-6-real-estate-scams-and-how-to-avoid-them/article13108985/?page=all” target=”_blank” rel=”noopener noreferrer”>The Globe and Mail – Top 6 Real Estate Scams and How to Avoid Them
Don’t Forget, You want to Sell Your House
After seeing the amount of money that a We Buy Houses buyer expects to make when buying your house, it’s easy to get caught up in thinking it’s too much and you’re going to try and squeeze out a higher price. By all means you should attempt to get as much as you can for your house, but don’t forget that you want these people to buy your house. We Buy Houses buyers often talk with many sellers each day and are only interested in working with people that are truly motivated to sell their house. By buying your house they are using a large amount of their money to take a big housing problem off your hands. If you truly want to sell your house fast for cash, you need to be willing to give up some equity to make it worth their time. We Buy Houses buyers are not in business to buy your problems for free, and if you go in expecting them to do so you’ll probably end up fixing your house yourself and listing it with a Realtor.
Secrets of A We Buy Houses Buyer Revealed
I truly hope that my 11 years’ experience in this business having bought and sold dozens of houses has provided you some insight into how the We Buy Houses business works. Yes it is one of the more potentially profitable types of real estate businesses, but it is also the one that has the most risks and takes the most amount of work. There has probably been more money made and lost in the We Buy Houses business than any other field in real estate. We Buy Houses buyers and wholesalers offer a great option for sellers that either need to sell fast or who don’t have the resources to fix their property to be ready to sell. That said, to take advantage of that option you have to expect them to make enough of a profit to make it worth the risk of taking on your problems. If you have enough money and time to sell with a Realtor, that option will most likely net you more money for your house. However, if you need to sell fast, submit your information on my website at SellMyHouseToSmith.com and I’d be happy to talk to you about all your options to determine if you would be a good fit to sell your home to a cash buyer.
Other We Buy Houses Resources
Laws Affecting We Buy Houses Cash Buyers
Even with all the real estate documents I’ve read and signed over the years, I’m still far from an expert. Even if I was, things change so often that whatever I’d write would be out of date as soon as I hit publish. For your benefit and mine, I’ll refer you to several sites where I’ve found good information. After reading what these sites have to offer, I strongly recommend speaking with a lawyer before trying to create any real estate documents.
- Legal Resources
Offical Department of Justice Website with information for all 50 states
HG.ORG Legal resource (Tons of detailed information on everything legal)
Realestate.findlaw.com (Simple easy to read articles about general legal topics)
- How to Sell Your House Fast
- Staging Your House
HGTV 30 Can’t Miss Staging Tips
HGTV Remodels Home Theater Lighting Ideas and Tips
BankRate.com 5 Dirt-Cheap Home Staging Ideas
HGTV FrontDoor – The Ultimate Staging Guide Checklist
USA Today – 5 Tips for Selling Your Home in Winter
- Marketing Your House
- What’s Your House Worth
- News on the State of the Housing Market
The Housing Bubble Blog – Great general info on the state of the market
InvestorPlace – News About the Housing Crash
HousingWire.com – More News the Housing Market Might Crash
Realtormag.realtor.org – Rising Prices Chip Away at Housing Affordability
Fortune.com – Is the Housing Recovery Losing Steam
Time.com/Money – China is Slowing. What If Its Housing Bubble Bursts?
- Real Estate Law
Watch This For Even More Insiders Secrets to We Buy Houses
appraised value: An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property. Since an appraisal is based primarily on comparable sales, and the most recent sale is the one on the property in question, the appraisal usually comes out at the purchase price.
After Repair Value (ARV): The value a property would sell for if it were in fully restored condition.
assumable mortgage: A mortgage that can be assumed by the buyer when a home is sold. Usually, the borrower must “qualify” in order to assume the loan.
Cash Buyer: Anyone that can purchase your home for cash without getting a mortgage
closing: This has different meanings in different states. In some states a real estate transaction is not consider “closed” until the documents record at the local recorders office. In others, the “closing” is a meeting where all of the documents are signed and money changes hands.
commission: Most salespeople earn commissions for the work that they do and there are many sales professionals involved in each transaction, including Realtors, loan officers, title representatives, attorneys, escrow representative, and representatives for pest companies, home warranty companies, home inspection companies, insurance agents, and more. The commissions are paid out of the charges paid by the seller or buyer in the purchase transaction.
comparable sales: Recent sales of similar properties in nearby areas and used to help determine the market value of a property. Also referred to as “comps.”
credit history: A record of an individual’s repayment of debt. Credit histories are reviewed my mortgage lenders as one of the underwriting criteria in determining credit risk.
default: Failure to make the mortgage payment within a specified period of time. For first mortgages or first trust deeds, if a payment has still not been made within 30 days of the due date, the loan is considered to be in default.
deposit: A sum of money given in advance of a larger amount being expected in the future. Often called in real estate as an “earnest money deposit.”
down payment: The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
earnest money deposit: A deposit made by the potential home buyer to show that he or she is serious about buying the house.
equity: A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.
first mortgage: The mortgage that is in first place among any loans recorded against a property. Usually refers to the date in which loans are recorded, but there are exceptions.
foreclosure: The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
Hard Money Loans and Points: Hard Money Loans are loans provided by institutions other than banks that usually charge higher interest rates, but can fund you your money faster and may have lower origination requirements. Points are an up front percentage of the total loan amount that is added to the amount owed. For example three points on a $100,000 would mean you would add 3% or $3,000 to the amount owed.
home equity line of credit: A mortgage loan, usually in second position, that allows the borrower to obtain cash drawn against the equity of his home, up to a predetermined amount.
home inspection: A thorough inspection by a professional that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser.
lease: A written agreement between the property owner and a tenant that stipulates the payment and conditions under which the tenant may possess the real estate for a specified period of time.
lease option: An alternative financing option that allows home buyers to lease a home with an option to buy. Each month’s rent payment may consist of not only the rent, but an additional amount which can be applied toward the down payment on an already specified price.
lender: A term which can refer to the institution making the loan or to the individual representing the firm. For example, loan officers are often referred to as “lenders.”
lien: A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.
loan-to-value (LTV): The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).
maturity: The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable.
mortgage: A legal document that pledges a property to the lender as security for payment of a debt. Instead of mortgages, some states use First Trust Deeds.
mortgage broker: A mortgage company that originates loans, then places those loans with a variety of other lending institutions with whom they usually have pre-established relationships.
Multiple Listing Service (MLS): Official National service used by real estate agents to list properties for sale
origination fee: On a government loan the loan origination fee is one percent of the loan amount, but additional points may be charged which are called “discount points.” One point equals one percent of the loan amount. On a conventional loan, the loan origination fee refers to the total number of points a borrower pays.
owner financing: A property purchase transaction in which the property seller provides all or part of the financing.
PITI: This stands for principal, interest, taxes and insurance. If you have an “impounded” loan, then your monthly payment to the lender includes all of these and probably includes mortgage insurance as well. If you do not have an impounded account, then the lender still calculates this amount and uses it as part of determining your debt-to-income ratio.
point: A point is 1 percent of the amount of the mortgage.
power of attorney: A legal document that authorizes another person to act on one’s behalf. A power of attorney can grant complete authority or can be limited to certain acts and/or certain periods of time.
pre-qualification: This usually refers to the loan officer’s written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings. The information provided to the loan officer may have been presented verbally or in the form of documentation, and the loan officer may or may not have reviewed a credit report on the borrower.
prime rate: The interest rate that banks charge to their preferred customers. Changes in the prime rate are widely publicized in the news media and are used as the indexes in some adjustable rate mortgages, especially home equity lines of credit. Changes in the prime rate do not directly affect other types of mortgages, but the same factors that influence the prime rate also affect the interest rates of mortgage loans.
principal: The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
purchase agreement: A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
quitclaim deed: A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
real estate agent: A person licensed to negotiate and transact the sale of real estate.
Realtor: A real estate agent, broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of Realtors.
second mortgage: A mortgage that has a lien position subordinate to the first mortgage.
seller carry-back: An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage.
sweat equity: Contribution to the construction or rehabilitation of a property in the form of labor or services rather than cash.
title: A legal document evidencing a person’s right to or ownership of a property.
title company: A company that specializes in examining and insuring titles to real estate.
title insurance: Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of a property.
title search: A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.
transfer of ownership: Any means by which the ownership of a property changes hands. Lenders consider all of the following situations to be a transfer of ownership: the purchase of a property “subject to” the mortgage, the assumption of the mortgage debt by the property purchaser, and any exchange of possession of the property under a land sales contract or any other land trust device.
transfer tax: State or local tax payable when title passes from one owner to another.
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