David Sidoni is back at it! This time, he goes through the glossary for J, K, & Ls. So tune in and enrich your vocabulary and learn important terms and definitions as you dip into the verbiage of real estate and make your first-time home buyer’s journey memorable and a lot less complicated and confusing.
First Time Home Buyers Terms And Definitions From A-Z – “J, K & L”
The Glossary Of Terms You Need To Know When Buying A Home
Welcome back to another edition of the terms and definitions you need to know when you’re getting ready to buy your first home. This series started in episode 94 and it was terribly and rudely interrupted by some real-life interviews of first-time home buyers to hear what they did to make it happen and as well as some urgent updates on the housing market and our teetering economy but let’s take a break from all that. We can focus on the vocabulary that you need to know. These are J, K and L. That’s our next step in the home-buying alphabet soup. Let’s do it.
If you are brand new to the show, you picked a weird place to start because we’re right in the middle of the alphabet. If this is your first time, I recommend stopping and going back to episode 94. Start at A, the beginning. It’s a very good place to start. Unless, if you’re one of those weirdos who eats a sandwich from the middle of the sandwich out to the crusts. I can’t help you if you’re that weirdo but I can’t help all of you with the language of real estate. We’re going to be doing J, K and L.
Let’s start with the Js. The first one is a nasty term. Our first J is Judgment. If you hear that word, you are either in trouble with a home that you already own, the seller of the home that you own is in trouble or the seller of the home that you’re trying to buy is in trouble. As far as property goes, a judgment is a legal decision rendered by a court. The judgment requires the debt to be repaid before the ownership can be transferred. That means that your attorneys, title companies and all the people involved with your transaction are going to make sure that all the judgments are cleared before the transaction or the transfer of possession can happen.
This is the legal stuff that can make a for sale by owner pretty sketchy if you don’t have somebody who knows what they’re doing taking a look at the whole deal, especially if the home has a judgment on it because sometimes the judgments can have a property lien and that’s going to secure the creditor’s claim by providing the home as a collateral source.
It means it’s going to be a big old messy mess. That brings us to our next J, a Judgment lien. That’s where they put that lien on the property and it’s the result of a decree from the court. Someone in court says, “Mr. Debtor, you owe people so we’re going to put a lean on your property.” We’ll get more into the liens when we get into the Ls.
Back to the Js. Let’s do a little more fun. J for Jumbo loan. That’s a loan that exceeds the mortgage amount for the home to be able to be purchased by Fannie Mae or Freddie Mac. If you get the loan below the limits and you don’t have to get into a jumbo loan, we call that a conforming loan and those can be purchased by Fannie Mae and Freddie Mac. They end up having better terms and can work out pretty well for you. Better rates, better terms.
Each year, Fannie Mae and Freddie Mack and their regulator, the Federal Housing Finance Agency, that’s the FHFA, we talked about that back in the Fs, they’re going to set a maximum amount for the loans that they’re going to have Fannie and Freddie buy from the lenders. Those loans get the better deals and they set a different price limit for each area. In 2022, the conforming loan limits in most areas increased to $647,200. Why? I don’t know. That’s the dumb number they chose. It’s random.
If you go above that $647,200, then you’re going to get into what they call a non-conforming loan, which is the jumbo loan. It took a minute to get to what a jumbo loan is but that’s what it is. The conforming loans, that’s the loans below the jumbo, are going to have different prices in different parts of the country. That’s why you want to get to your mortgage pro early and get all these facts.
The logical rule of thumb is that if you have to go above that conforming into the non-conforming jumbo loan category, that usually means you’re going to get higher rates and more of a down payment. A lot of times, the buyers have to show more assets as well as you have to show larger reserves required but that changes all the time depending on the market. In some markets with the conforming or the non-jumbo loans and the non-conforming or jumbo loans, we’ve seen their rates be almost identical. It depends on the market, what’s going on and what the banks are trying to sell. Be sure to check with your mortgage pro to determine which loan is best for you.
Here’s some real insider stuff for you. If you’re someone who is looking to buy a home and you’re near that jumbo loan line, you’re maybe going to have to cross over from a conforming to a non-conforming, which means a non-jumbo to a jumbo loan. If the rates and terms are different, then this could be something you have to think about.
If the jumbo loans are more expensive, got a higher rate and take more qualifications to get them, sometimes buyers are going to end up changing their down payment to get their loan amount below that weird $647,200 cap. Let’s say you’re close to the cap, then you and your lender should work way ahead of time before you start putting offers because what if things change in the counter offers?
Imagine you’re trying to buy a $675,000 home with 5% down. You need to stay under that weird number of $647,200. 5% down on a $675,000 home means your loan is going to be $641,250. $641,00 is below that weird $647,000 but you put that offer in and there are other buyers on the house. Your $675,00 with 5% down suddenly jumped up and you’re offering $700,000. $700,000 with 5% down means your loan is going to be $665,000, which means you have jumped to a jumbo loan.
Most buyers look into the strategy of not putting that exact 5% down but rather, they’re going to pay the exact number from the purchase price to get to whatever that cap is before they go jumbo. If you’re in that fortunate place where you are able to afford a home and your loan is going to be near the non-conforming jumbo cutoff, be sure that you have done all the math. Go through every possible scenario beforehand so you can figure out how much you need to adjust and stay under that cap. This can save you boatloads of cash.
Our final J is Junior mortgage. That’s not a mortgage’s little offspring. It’s a loan that is subordinate to the primary loan or the lien mortgage. It’s commonly referred to as a 2nd or a 3rd mortgage. Sometimes a 2nd note or 3rd note. It’s something good for you to know. Moving onto our next letter, K. There are no real estate words with K.
Moving on, the letter L. This is the L word, Land lease. Traditionally, when you purchase a home, you’re going to own the home and the land on that the property is built. There are some circumstances that involve a land lease. That means you’re going to own the home while you’re paying rent or a lease on the land. The reason this is so important is that means the loan approval that you got is going to deduct that lease payment from your monthly approval number. That monthly approval number determines how much home you can buy.
[bctt tweet=”Conforming loans have different prices in different parts of the country. You’d want to get to your mortgage pro early and get all these facts.” via=”no”]
For instance, let’s say you’re approved for $1,248 a month. That buys you $200,000 worth of home but if the home has a $300 land lease that you need to pay each month, then you need to subtract that $300 land lease from that $1,248. Suddenly, you’re only approved for $948 and that is only worth a price of $145,000. You lost $55,000 worth of buying power.
This is a super big one to be aware of. I cannot tell you how many first-time buyers have called me, emailed me or texted me over my career freaking out because they found a home online where the home looked way underpriced for the area. As I always say, if it looks too good to be true, that’s because they’re on the land lease. The land lease is the ultimate psych out.
I hate that the real estate industry doesn’t put the land lease in a big font right next to the price because that price is affected by the land lease but they don’t. Beware of super low price that doesn’t fit in the values of the area. It might have a land lease for $500, $600 or $700, which means that with the extra payment, you could afford $100,000 more in the price of a home.
The land lease concept and renting the land that the property is on is also an extremely important piece for everybody looking at manufactured homes on lease land or especially mobile homes and mobile home parks because a lot of those places, each of the owners rent the land and its part of your monthly payment.
If you’re starting and trying to figure all this out, make sure you’re not comparing the price of an entry-level condo townhome or even a small entry-level house to a manufactured home or a mobile home that’s on a land lease if you don’t understand the math of that. You’re going to see much lower prices and think you can afford it when in actuality, once you add in the land lease, you could be buying something else for $50,000, $75,000 or $100,000 more.
Our next L is something that fortunately many of you might be aware of. It’s called Late charge. I’m going to talk to you about this in mortgage terms. A late charge is imposed by the lender when a borrower fails to make the scheduled payment on time. When it comes to your grace period in buying a home, it’s usually 10 to 15 days.
Here’s the big thing about late charges. You’re going to get a charge if you go past 10 or 15 days. It’s what most lenders do but it’s not going to hit your credit as a late payment until you hit 30 days. If you’re having a bad month, don’t freak out about a hit on your credit. You’ll have to pay the extra fee if you go from 10, 15, 20 or 25 days if that’s what the contract with your lender says but it’s not going to hit your credit until you hit 30 days.
Lease Purchase Rent To Own Agreement
This next L is something that I get asked about a lot. I’m going to be referring a lot of people back to this episode. Especially you guys reading in 2023 and 2024, I probably sent you back to this episode because everybody asked me about this one. This is a lease purchase or a rent-to-own. While we’re here, we’ll talk about the lease-purchase option.
The definition for the lease purchase or the rent-to-own is where you are renting the property for a little while, a little bit of money goes towards it and then eventually at some contracted time, you’re legally bound to purchase the home once your lease terms are up. The lease option gives you the option to buy the home or bail on the lease at some point. Do these exist? Yes, these exist. Are they a good idea? Usually, they’re not.
I could do an entire episode on this but instead, I’m going to tell you that, in general, these fall under the too-good-to-be-true category. I wish they could be something that was going to work out for you but for all the time I see everyone on social media bagging on the boomers, you got to take the good with the bad. This is a boomer idea or philosophy and this does not work in the present world. If you’re saying, “I heard my friend about,” no, that’s a boomer talking. Let it go.
Here are the real basics behind it so you understand. When you’re talking about a rent-to-own, lease purchase or lease option, you are in the weakest position out of everybody in that transaction. Most people ask about a rent-to-own, a lease option or a lease purchase because they can’t get approved at the time that they start or want to start this contract. They think that they’re at least getting something towards owning the home and that’s better than renting.
I love that idea. I love creative thinking but in all things in life, your self-awareness is going to benefit you greatly. Understand where you are. You are in the worst position. You don’t own a property and you want to own the property and everyone knows that. The landlord owns the property and rather than sell the home to a qualified buyer out there, they instead enter into this deal with you. Ask yourself, “Why would they do that? Where do they benefit?” Remember, be self-aware and understand that at this current time, you are in a weaker position. No judgments. That’s where you are. Don’t be ignorant about where you are. Be understanding and realize how strong their position is versus yours.
This is by no means everything but a quick list of the disadvantages that you should be very aware of and will help you take a second look at this whole process. Number one, you’re probably going to pay more in rent every month than you would if you were a regular old renter. You may think that all that extra is going towards ownership but most of the time, not all of it is. In fact, not as much as you think it is. The landlord is going to take a little extra fee out of that. You’re still going to pay your full rent then they’re going to take the fee out. That fee is a service fee that the landlord is taking to hold and save your money for you. That’s a convenience fee.
Number two, you are paying far less towards the actual down payment and the purchase of the home than you think. You always need to check the numbers. I’ve seen some of these that you only pay out of your full rent like $100, $200 or $300 towards what you’re trying to purchase. At the end of the whole year, you’ve saved $2,000, $3000 or $4,000. It’s a small drop in the bucket.
[bctt tweet=”When you’re talking about a lease purchase or lease purchase option, you are absolutely in the weakest position out of everybody in that transaction.” via=”no”]
Here’s the biggie. Number three, most rent-to-own contracts require a non-refundable upfront fee. This one is the big fat killer. I hope you can pull together and get approved by the time that your contract is finished but if you can’t, you’d lose that deposit. The landlords are counting on that. Remember when I said to be self-aware and understand why they get into it in the first place? This is why they get into it in the first place.
What would you rather do if you were a landlord? Would you rather rent the home for 3 years and know what you’re going to get or roll the dice and try to rent-to-own or lease purchase and have somebody try to do this for 3 years, not be able to get their stuff together and then you got 3 years’ worth of rent and that big fat non-refundable bonus? Those three pieces alone should be enough to help you understand how it feels about this whole process and how this process, most of the time, is not to your advantage but for those of you stubborn folks, fine.
Number four, you might lock in at a bad price. Prices change and you’re going to lock in at the price that the start of the contract you agreed on. That means you’re going to be negotiating and choosing a price at the time that you are someone who is unable to be approved for your loan purchase at the time. If you, at that time in your life, are unable to get approved for a loan for a home but you feel like you’re in the position where you can negotiate the correct price for where a home’s going to be in 1, 2, 3 or 5 years, then you’re better than every investor since the beginning of time.
We go to number five. Do you think it’s hard to get your current landlord to put any money into repairs when you’re a renter? Wait until you are a rent-to-own renter and the landlord sees the light at the end of the tunnel and doesn’t want to pay for anything. Number six, late or missed payment cancels the whole deal and you’re out. End of story.
Number seven scares the crap out of me and this is why I freak out about this. The rent-to-own setup is probably one of the biggest areas we see scams and shady deals happening in real estate. According to the consumer information report, defrauded rent-to-own tenants have found out a little too late about some of these terrible things. The landlords can’t legally sell the house because they don’t own it. The landlord and the seller have several years of unpaid property taxes to find out that the house is in major disrepair but you haven’t done an inspection because you’ve been living there and you didn’t get a chance to go up in the attic and find out that everything is broken.
The one I see a lot is the house is headed towards foreclosure and the landlord’s been taking your rent while he’s not even paying his mortgage. The bottom line with the lease option or rent-to-own is that as the tenant, you take on most of the risk. Even if you’re a perfect tenant, you follow everything from the letter of the law to the contract. The landlord still has tons of outs or they might not even own the place. There are tons of ways this can go wrong for you.
In general, I’m not a fan of these. If you start your bonafide savings plan, debt reduction plan and credit score improvement, all on your own, you’re going to be far better off biting the bullet and renting a regular old rental for 1 year or 2 and get yourself together so you can get approval and do it with you in control.
Our next L word is Lender. A lender is a financial institution or agency that loans you money. Another thing you might find out is a lender is sometimes the dude, the lady or the non-binary person that helps you. Sometimes they’re referred to as the lender or the loan officer. These officers don’t have a badge but they best have a license if they’re helping you with a loan.
The next deal is the Lender’s title insurance, which protects your lender against problems with the title to your property, such as someone with a legal claim against the home. Bear in mind that this is different from an owner’s title insurance policy. Check with your lender and realtor to find out exactly what you need. That’s why you need good unicorn lenders and realtors.
Our next L is Liabilities. When it comes to the world of finance and financing a home, liabilities are your debts and other financial obligations. It’s what you owe. For the purpose of this home purchase and your home approval, this is not your psychological or personal liability. That’s different and not for me to judge.
That leads to another one, Liability insurance. This is something that you need to make sure that you have. In your homeowners’ insurance policy, make sure you’ve got liability insurance because you’ve been trying to get away from landlords for so long but when you own a house, you’re like a landlord. If someone trips on your step or carpet and they deem that it was unsafe, you are liable for that. Make sure you have insurance and a ring camera that shows that your friend was drinking half a bottle of tequila before they fell on your porch.
We’re getting towards the end of the Ls here but we’re going to get into some major real estate nerd category. It’s the LIBOR index. It is gone but I figured this is a good place for me to talk about it because LIBOR is what everybody knew. You’re going, “Who’s everybody? I’ve never heard of this thing.” I understand and I get it but this is important for you to know. LIBOR is the old acronym and the new acronym to help you feel even more confused is SOFR. It stands for the Secured Overnight Finance Rate and is produced by the Federal Reserve Bank of New York.
SOFR index is something you need to know if you’re going to be working with an adjustable-rate mortgage, our good friend, the ARMs. When you’re doing an ARM, the lender calculates your full interest rate using two numbers, the index from SOFR and the margin. The index is the benchmark rate that reflects market conditions. That used to be the LIBOR and then it’s SOFR.
An easy way to think about it is this. In an adjustable-rate loan, your mortgage interest rate is the index plus the margin. That margin is determined by your lender. That’s a judgment on your ability to repay the loan, credit and all that stuff when they set up the loan. That margin is set at the original loan agreement and it doesn’t change after you’re closing. Margin is the number of percentage points that are added to the index and the index comes from the SOFR. That’s how you get your total interest rate. For those of you who are trying to get an adjustable-rate mortgage, someday, you’ll go back and read this.
[bctt tweet=”A lien against a property you’re trying to buy has to be satisfied before it’s sold, so you’re not going to get stuck with a lien. ” via=”no”]
The next L is Lien. The Google definition for a lien or a property lien specifically is a claim or a charge on the property for payment of a debt. When you got a mortgage, the lender has the right to take the title of your property if you don’t make the mortgage payments so they can put a lien on it. Also, it’s good to know that a lien against a property when you’re trying to buy it has to be satisfied before it’s sold so you’re not going to get stuck with a lien. You need to make sure of all this with your real estate attorneys, title companies, escrow companies or whomever you’re using.
Our next L term is going to jump us back into our good friends, the Adjustable-Rate Mortgage, the ARM, which is a Lifetime adjustment cap. The cap determines how much the interest rate can increase in total over the lifetime of the loan. Next, L is Liquid assets. That’s the cash asset. The money that you got or sometimes they will consider something a liquid asset if it’s an asset that can easily be converted into cash.
Our next L is Loan. It’s important if you’re looking to buy a house. A loan is money borrowed that’s usually repaid with interest. As we discussed, you should know all about conventional loans versus government loans and conforming loans versus non-conforming. The next L is Loan contingency. This is an important one. A loan contingency is a cause or an addendum also known as a mortgage contingency. It’s in your contract and offer. It allows the buyer to back out of the deal and keep their deposit if they’re unable to secure the mortgage with the specific terms during a fixed period in your contract.
It’s very important that you, your lender and your realtor discussed not only your liability in all your contract timelines but in competitive markets, you might want to talk about this ahead of time before you write your offer if you’re thinking about maybe shortening these periods or in some cases, if you’re solid on your loan, maybe even removing it.
That way, your offer looks more attractive, put together and a stronger and more competitive offer when you got a bunch of people trying to buy the home. This can be a big advantage for you because not everybody out there got me in their eye holes telling you that they should prepare and get ready way before they even go out to look at an open house, which you are doing.
Moving on over next L is the LE, the Loan Estimate. You might have heard this as a good faith estimate, a GFE or something else in the past but the new term as of 2022 is the LE. A loan estimate is a three-page document. It’s a form that you receive after applying for your mortgage. It’s a disclosure to help consumers, that’s you guys, understand the key loan terms and the estimated costs of a mortgage.
The LE gets compiled after you submit six elements, your name, income, Social Security Number, property address, estimated property value and desired loan amount. Get all that in and the lender is required to provide you with this form. This is for your protection. It’s a newer thing in real estate brought to you by our good folks at the CFPB, the Consumer Financial Protection Bureau. All the lenders are required to use the same standard LE form to make this easier for consumers to compare and shop for a mortgage.
Our next L is Loan fraud, purposely giving incorrect information on a loan application. Here’s a little tip for you. With the investment schemes, Airbnb money makers, buying your second homes and investment homes that you see all over social media, many of those strategies are loan fraud. I want you to know that.
The next L is Loan modification. A mortgage loan modification is a thing. I’m not going to bother to define it in detail here because the truth is when things change in the market like when the market crashed from 2008 to 2010 or when the pandemic hit in 2020, the banks rewrote all the loan modifications rules to adjust with a crashing or changing market.
They’re going to do it again whenever or whatever happens next. You need to know that a loan modification or what people call a loan mod is a thing. Foreclosure is not your answer. At some point, depending on what’s going on in the current market, you could potentially apply and get a loan modification to change your terms so you can still honor your contract.
Loan Origination Or Loan Origination Fee
Next up is the Loan origination. This is the process in which a loan is made. It may include taking a loan application processing, underwriting the application and closing the loan. You’re also going to hear about the loan origination as the loan origination fee. This is the service fee that the lender’s charging you. It’s a very good thing to ask when you’re shopping for lenders but be wary, this is not the only way the lenders can charge you but the origination fee is something you should know.
When you get a loan, you’re going to hear a lot about loan servicing. There’ll be different companies that will service your loan which means that it’s the management of the loan. Sometimes your loans will get sold from one servicer to another. A lot of people freak out when they hear, “I did all this work to find my lender and then they sold at someone else.” They get sold all the time but they get sold with the exact same rates and terms. It is funny when I see people freak out that they worked so hard to get a lender and then a month later, their loan is sold to somebody else. They didn’t care about you.
Loan To Value Ratio
Our next L is the Loan-To-Value ratio, also known as the LTV. This is a big one. You got to know this one. LTV is the ratio that you need to know and here’s how you calculate it. This is the number that you use to eliminate your PMI so you want to learn this one. The Loan-To-Value or the LTV is the amount borrowed compared to the appraised value or if you bought the place, the sales price of the property.
Here’s how it works. You put 20% down on the home and it got value to your list price. The day you close on that, you got 20% down on the purchase price so that’s the appraised value. Your LTV is 80%. Your loan to value in that situation, if you’ve got 20% down and an 80% LTV, you have no PMI but if you put 5% down, then your LTV is 95%. Most of the banks are going to say that you’ve got to have 80% at least to have your PMI not happen but if you purchase a home, sometimes they’re going to say, “We’ll take it away but you need to get it to 78% to dump the PMI.”
[bctt tweet=”Any form of loss mitigation is something to help you avoid foreclosure.” via=”no”]
The way that happens is you monitor your LTV. What you’re doing is watching your principal reductions to the loan. That happens when you make payments on the loan, as well as you’re watching the appreciation because that changes the appraised value. Your loan-to-value is the total loan that you still owe after some payments compared to what the home is worth.
We’re getting to the end of the Ls. We got the Locked-in rate. This is one that I hear a lot of people talk about and it seems there is some major confusion on this one. A lot of people think that when you get the traditional loan approval, that’s good for 90 days but they seem to think that their rate is locked in without approval. It’s not true.
These are two different things. If you don’t have a property that you have an offer on and accepted, your approval is that thing you get before you go out shopping and that approval doesn’t have a rate locked in. That approval is subject to you getting a home that you’re under a contract with and then you can lock your rate. You got 90 days and your loan approval says, “You can buy X amount of home for 90 days,” but they’re doing that based on the rates at the time that you do the approval but not guaranteeing you anything that those rates change in that time.
Locking your rate becomes very important. Once you are under your contract, you can lock in the mortgage rate for a specific amount of time with most lenders. Times and terms will vary with your specific loan product and lender. Keep in mind that you don’t lock in your interest rate with approval but you do need to get to that approval way ahead of time, which means while you have that approval in your home shopping, you and your unicorn lender should be doing lots of work, following the loans, seeing how the payments change and understanding everything so that when you get under contract, you’ll be able to lock that rate in something that you are already prepared for.
Our next L word is a word that some people think is ugly but I see it as a little bit of salvation. It’s called Loss mitigation. Mitigation is your salvation. Any form of loss mitigation is something to help you avoid foreclosure. The cool thing is some of them will help you stay in your home. Some of the options with loss mitigation are a deed in lieu of foreclosure, forbearance, payment plan, short sale or a loan modification. The big thing about this is to remember that even if you miss one payment, call them right before it gets any worse. This is going to help you tremendously if times get tough.
Our last L word of the day is the Low down payment. Yes, they exist. That’s it for this episode’s letters. That was a lot of them. We got more to come. If this was helpful to you at all, rate, review and share so I can keep recording these random glossary episodes for all you confused and curious peeps out there. Stay frosty. You can do this.
- Episode 94 – First Time Home Buyer Terms And Definitions From A-Z…Well, Just A Actually – Past Episode
This podcast was started for YOU, to demystify things for first time home buyers, and help crush the confusion. After helping first timers for over 13 years, I knew there wasn’t t a lot of clear, tangible, useable information out there on the internet, so I started this podcast. Help me spread the word to other people just like you, dying for answers. Tell your friends, family, and perhaps that random neighbor you REALLY want to move out about How to Buy a Home! A really easy way is to hit the share button and text it to your friends. Go for it, help someone out. And if you’re not already a regular listener, subscribe and get constant updates on the market. If you are a regular and learned something, help me help others – give the show a quick review in Apple Podcasts or wherever you get your podcasts, or write a review on Spotify. Let’s change the way the real estate industry treats you first time buyers, one buyer at a time, starting with you – and make sure your favorite people don’t get screwed by going into this HUGE step blind and confused. Viva la Unicorn Revolution!