Real Estate terms. And what is a FICO Score, anyway?

Like most industries, there’s a lot of jargon in real estate. It’s easy for those of us who use the terms every day to forget that most people rarely use these words, or haven’t heard them at all. What follows is a simple and not nearly complete list of some words and phrases across which you may come in the process of looking for and buying a house. Feel free to request others or for clarification:

FICO Score

This stands for Fair Isaac & Company. They compile data about consumers and assign a “score” to each person based on calculations regarding debt/credit ratios, payment history and other factors.Lenders use a person’s FICO score to determine whether or not to extend credit.

What is considered a good score? That varies from lender to lender, product to product and can change depending on market conditions. The maximum score one can have is 850. Generally a score above 700 is considered quite good. A score below about 600 might be considered “sub prime”. (I hate to even use the word now).A FICO score is not the only factor a lender uses to make a decision about a borrower. It is a strong indication of how one manages money so will be looked at closely. Talk with a good lender to find out where you stand.

Earnest Money

This is money a buyer tenders with an “offer to purchase” for consideration. The buyer need not be truly an earnest person, though it’s nice when it happens. And some parts of the country call it a ‘binder’. It is presented with the offer to show the buyer is serious – or earnest – about the transaction. For a more detailed explanation, see this post.

Escrow

Technically, escrow means when something of value is help in trust during a transaction by a third party. In parts of the country a property is said to be “in escrow” when there’s a purchase contract. In my area of Greensboro, NC, that same situation is called being “under contract”.

There is also the case when the your lender holds funds in an escrow account in order to pay property taxes and home owners insurance premiums when due on your house. Typically these funds are collected with your mortgage payment each month and when the bills for property taxes and insurance go out, they’re delivered to the lender who then pays them. There will also usually be funds collected at the time of closing in order to start funding the the escrow account.

PITI

Stands for “Principal, Interest, Taxes & Insurance”or what is usually one’s mortgage payment. When you are looking to buy, you need to clarify with your lender what your total monthly payments will be. There are calculators online that will tell you what the principal and interest payment would be if you financed ‘x’ number of dollars at an interest rate of ‘y’. But that would only be part of the story if you’re not putting down at least 20% down payment. If you put down less than that, you’ll most likely be required to pay monthly installments into an escrow account held by your lender. These funds will be used to pay your annual property tax and home owners insurance premium. So, the “TI” part of PITI will vary and must be taken into consideration when looking at what you can afford.

PMI (or MIP for FHA)

Mortgage insurance that is paid by the borrower when they have less than about 20% equity in their property. Most lenders require PMI to help cover any loss that may be incurred if the borrower defaults on their loan. PMI is not the same as home owner’s insurance, which covers that actual structure. PMI covers the loan.

If it seems that the borrower pays an insurance premium to cover someone else – the lender – you’re right. Clever how the lenders worked that out, eh? But it is what it is. Unless you’re willing to put more money in the transaction, thereby reducing the chances you’ll let it get away from you, you’ll need to pony up the PMI. The premiums for this vary. Check with your lender.

Equity

The difference between what your property is worth and what you owe on any mortgages you have on that property. The more you have, the better. And once you have about 20% equity (usually determined by a certified appraisal) you may be able to drop any PMI premiums and may be able to stop escrowing your tax and home owner’s insurance.

(ex: Your house has a certified appraisal that says it’s worth $200,000. You owe $150,000 on your first mortgage and $10,000 on an equity line. You’re total property debt is $160,000, meaning you have 20% equity. Call your mortgage lender and see about removing that PMI!!)

Per Diem Interest

Daily interest paid on your mortgage. You don’t usually need to think about per diem interest except in regards to your closing day. Lenders charge the interest on mortgages in advance. So, at closing time, you’ll be charged interest for each day from the date of closing through the last day of that month. If you close on the 10th, you’ll pay 20 days interest at closing. If you close on the 20th, you’ll pay 10 days. If you close on the last day of the month – yippee! – you only pay 1 day’s interest. This money can mean a great deal if you’re watching your up front costs.

Debt/Credit Ratio

How much you owe on your open lines of credit in relation to the maximum amount of credit available to you. It’s a good thing to have plenty of lines of credit. It’s not a good thing to “max out” those lines. It looks like you’re living on credit rather than managing your finances. A good rule of thumb is to keep your debt/credit ratio below about 30%. That means, if you have a credit line of $1000, try to stay below $300 on your balance.

Deed Restrictions

Specific rules about what can be built on a parcel of land, or what can be altered or added. Deed restrictions can either be imposed by the county or by a developer of land, assuming the developer’s restrictions don’t interfere with laws or governmental restrictions already in place.

Examples of a deed restriction would be something like “Garage doors must not face street side of house” or “All houses must be at least 1400 square feet of heated living space” or ” No permanent part of the structure may be less than 100 feet from the street“.

While deed restrictions may seem, well, restricting, they are intended to help maintain property values by making for a cohesive neighborhood and making sure some joker doesn’t come in and build a hovel made of matchsticks next to your nice brick ranch. Deed restrictions can be our friends.