Buying a home can be confusing and daunting enough, then everyone starts using real estate jargon and expects you to keep up. In the second episode covering real estate terms, language, and definitions from A-Z, David Sidoni discusses the letter ‘B’.
First Time Home Buyer Terms And Definitions From A-Z – “B”
Definitions And Explanations Of Real Estate Terms And Language
Welcome back to everything you need to know about buying your first home from A to Z. In this episode, we’re going to cover the letter B, as in bitch-in, which is how you’re going to feel after learning all the real estate terms and definitions to buy. That’s a B-word. You can buy like a pro. Alphabet fun time, let’s go.
Welcome back my How To Buy a Homies. This episode is an alphabet fun time for buying your first home. We’re going to jump in the alphabet and go into the B definitions. B for Buy your first home. This is going to be adding to your resource library to help you crush the confusion and become an educated and empowered first-time home buyer because you’re good enough, smart enough and you deserve the real-real in real estate.
The Balance Sheet
Our first B is Balance sheet. This is usually used in business terms to determine the true financial status of where business is. When you’re buying a home, it’s good to think of yourself as your little company because the bank is going to be looking at you to see if you have the financial means to take on this ginormous debt. The good news is if you pay rent, you’re already showing that you can do this.
The biggest misconception that renters have is their actual borrowing potential. Most people think that it’s a huge leap to buy a home for hundreds of thousands of dollars because the largest asset that you pay for might be a car or maybe a $500 payment on a $30,000 asset. How can you make a jump to a $400,000 home?
This is what you need to remember. Think of yourself as a business and remember this B-word, the Balance sheet. This financial statement shows the assets, liabilities and net worth of a business or, in your case, a person on a specific date. Remember this key piece of information when you’re thinking about your balance sheet. As a renter, when you went to pay for a car and go over a car, you were adding $500 a month if that was your car payment. That’s on top of the balance sheet that you already have.
If you’re going to apply for a home loan, you all might already have $2,000 a month on your balance sheet. When you ask them for a $400,000 loan if you put 5% down, your balance sheet shows that if you can afford the 5% down the closing costs, you already have a $2,000 payment on your balance sheet. You are simply replacing it. If you did that at 5% interest on $400,000, you were replacing $2,000 with $2,635.
Don’t think about the fact that I’m buying a $400,000 loan. Think about the fact that you need to show the bank, “I can afford $635 more a month.” That’s the PITI, the mortgage, Principal, Interest, plus your Taxes and Insurance. It’s only $635 more than the rent you might be paying. You’re not taking on a $400,000 brand new debt to your balance sheet. In the example I gave, you’re adding $635 a month. Change your mindset. Even to those banking nerds who you think are going to scrutinize you all up and down, you’re way closer than you think.
Backend Debt To Income Ratio
Our next B is Backend debt-to-income ratio. There’s a difference between the backend and front end. That has something to do with the way lenders look at things. I’m going to tell you what this backend debt-to-income ratio is. This is a fancy mortgage term that you’re going to hear when the lenders are calculating your loan approval. Most of the time, they’re trying to get your maximum loan approval. This is one of the main factors in calculating your creditworthiness, which is the thing.
Did you know that creditworthiness is spelled as one word? It’s a total thing. This is the way that they calculate and reduce your entire life’s work, your career and everything about you into one lousy number. It’s a percentage. If your backend debt-to-income ratio is 21%, you’re golden. Bankers go crazy for you. If it’s 35%, you’re still in great shape. Even if it’s size 42%, you’re getting close to maxing out but you can still get a home loan. What your debt-to-income ratio does is compares your monthly debt payments to your monthly income.
You divide your monthly minimum debt payments, excluding your rent or mortgage by your monthly take-home pay. This includes student loans. Those big giant numbers that scare you are irrelevant. Gross numbers are gross. We don’t care about them. Monthly minimum payments are what make up your debt-to-income ratio and what create your magic numbers, 21%, 35% and 42%. It’s all based on your minimum monthly payments. This number is the standard to decide how creditworthy you are. That tells you how large alone you can get.
Start your plan and work the system to your advantage.
Our next B-word is Backup offer. This is a tricky one. It’s not tricky because the definition is confusing but because the concept seems like a great idea. It’s a big waste of time for you and your realtor. You can get caught up trying to chase things that are already gone. A backup offer is submitting an offer on a home that already has a current offer under contract. They will take backup offers in case the first offer falls apart.
That was easy for me to say but you understand what I’m saying. I’m not saying you shouldn’t ask your realtor to submit a backup offer on a home if you truly love it, you missed out and it’s already under contract. I’ve seen too many first-timers get anxious or upset at the process. They start to think that the best strategy is to cover all the bases and throw everything out there. You can’t just throw your hat in the ring for every single home that you want, even if they’re under contract and hope that you’re going to get it.
That brings us to another edition of, “Why do we say that?” Throw your hat in the ring. What does that mean? It comes from boxing. How many of you knew that? Raise your hand. Are you on the treadmill raising your hand? You look silly. Put your hand down. If a person wants to challenge another person in the next match, they would use it correctly. Take their hat, throw it in the ring and tell the ref they got next. How about that?
In real estate, throwing your hat in the ring for a backup offer is a better strategy to get fully prepared with your unicorn realtor long before you’re ready to start making offers. Understand the current market patterns when homes go on the market and when the offers get in for what we call active homes. You need to learn how to position yourself to be able to present an offer on homes but ones that you like while they’re still active. That will help you avoid being a backup, hoping and praying for some other buyer to have great misfortune in you to sweep in.
In the market with our multiple offer situation that’s been going on in 2021 and 2022, backups seem to happen a lot when your offer is not the chosen one. That can be a great thing. Always have your realtor thank the listing agent for considering your offer, even though you’re crawling up under your covers and crying in your bed. Asked to be held as a backup. I can’t tell you how many times I was on the listing side. I went to the backup offer where the realtor, the lender or both of them had reached out to me. I had a good relationship and they were so excited that we came back to them.
My sellers were so excited because I didn’t have to put the home on the market again, have an open house and have one million people traipse through. We canceled one and went right to the other without even going back on the MLS. Legally and technically, there can only be one backup offer that is signed as a backup. You can’t be a backup on a backup but your realtor and lender can still keep in touch with the listing agents as they’re under escrow or contract, depending on what part of the country you’re in. Make sure that if something happens, you’re going to be the first phone call they make.
Balloon Loan Or A Balloon Mortgage
Our next B term is Balloon loan or balloon mortgage. The balloon term gets its name from the large size of the payment, which is weird because balloons aren’t that big but I guess what they mean is ballooned up. It’s more the verb tense. This is the banker’s definition of a balloon payment. A mortgage with monthly payments is often based on a 30-year amortization scale. With the unpaid balance due in a lump sum payment at the end of a specific period, usually 5 to 7 years, the mortgage may contain an option to reset the interest rate to the current market rate and extend the date due if certain conditions are met.
Can we do that in real people’s terms? Here you go. In laypeople’s terms, this is a mortgage with a low-interest rate at the beginning that stays level for a short time, 5 to 7 years, then you get that fatty balloon payment that you either have to refinance and do the whole loan all over again at whatever rates are in 5 to 7 years or you have to pay off that balloon payment full. If you can’t pay off that balloon payment, then you either have to sell your home or face foreclosure. This is why balloon payments suck. They can often pop in your face and make for a big old mess. You best know what you’re doing if you’re going to mess with a balloon payment.
The next B is a fun one. Everyone’s going to be excited about this. It is Bankruptcy. There is a little silver lining in what I’m going to talk about. Bankruptcies are legally declared unable to pay your debts. It will impact your credit and ability to borrow money but here’s the silver lining. They do not limit you from being eligible to get a home loan as long as everything else.
Every one bankruptcy says seven years. That’s what it takes. With government back loans like a USDA loan or an FHA loan, you only need to wait three years. I know a lot of people use bankruptcy to hit the reset button and start over. If you’ve done everything right, you might be able to get an FHA or a USDA loan in 3 years or a VA loan that’s only 2 years.
Before-Tax Income, Bi-Weekly Payment Mortgage
The next B-word is Before tax income. Do I have to explain this to you? Yes, I’m going to. The definition of before tax income is gross. It is income before your taxes are deducted, also known as gross income. Get it? It’s gross. Moving on. Bi-weekly payment mortgage, a mortgage payment due every two weeks instead of monthly. A quick side note, I have to tangent on this. This whole bi-weekly by monthly thing has been freaking me out for years.
The definition of bi-weekly is dumb. I looked it up when I was getting ready to do this episode. When I found the real definition of bi-weekly, it pissed me off. Did you know that bi-weekly is either twice a week or every two weeks? Pick a lane. Make up your mind. It’s the same with bi-monthly, which is either twice a month or every other month. It’s so stupid.
A bi-weekly plan, which I’m never going to call bi-weekly again because it could mean one or the other, is so ridiculous. What I’m calling a twice a month payment plan, the mortgage servicer is collecting half of your monthly payment every two weeks. Why would that change anything? That means it’s going to result in 26 payments over the year, totaling 1 extra full-month payment each year.
By making those additional payments and applying your payments to the principal, you’re going to be able to pay your loan off earlier. Choose those two times a monthly payment, what they call bi-weekly. Be sure to review your loan terms to make sure that you’re not subject to pre-penalties if you do that and also check with your servicer because sometimes, they might charge fees for a program like this. If it works out for you, you might be able to accomplish the same goal each year as you would by making one extra monthly mortgage payment. If they have regulations against it, then ask if you can do that one payment as opposed to twice a month.
The next B is called the Blind offer. This isn’t usually recommended but sometimes, it’s necessary, especially in a competitive market like 2022. Attempting to be the first offer in and you can try to win the bidding war before it even starts, is making an offer without seeing the home, thus blind. Get it? It’s getting more common as online photos and videos are getting better, especially if the buyers are familiar with the condo complex or the track of homes. You’re like, “That’s the last one. Let’s put in an offer.”
The next definition is for Bonafide. Believe it or not, this term is used a lot in real. It means good faith without fraud. Bonafide is legit. Our next term is Borrower. I know this is going to sound weird but I wanted to make sure you understood this definition because a lot of buyers get freaked out when they get into a deal because to the lender of the banks, this is what you are.
The real estate people are talking about, “I have a buyer for this and that.” Once you get working with the lenders and the banks, that’s who you are. You’re a borrower. It changes your complete identity. Get used to it. You have no personality, identity or name. You’re a thing and you will be labeled as such. Deal with it.
The next one is Bridal registry. This is a real estate term and has a pretty dope function. Why register for China that you’re rarely going to use? A juicer or a food processor? You can ask for people to help fund the down payment of your home, for real. It’s an FHA program that allows couples to open a bridal registry account into which families in France can deposit gifts of cash. The funds in this account can be used for a down payment on the house. I don’t know if you have a commitment-phobic partner. This could be the tipping point to put a ring on it. Do you know what I’m saying?
Dig deep, seek the truth, find a trusted pro, and use the force. You do all that, and you can do this.
How about a bridge loan? This isn’t a term that people have asked me about all the time. It’s usually because their parents or grandparents told them about it. It’s an awesome thing. I wish they happened more often but they’re not being used anymore. It’s for people selling one home to get the money to buy another home before they close the sale of their home. It bridges between the two and you get that short little loan that once you pay off. That’d be great.
Wouldn’t it be awesome for a bank to give us all this money in our pockets so we could go out and buy another home, even though we haven’t sold that one? It’s not happening that much anymore. They’re more difficult. If you do figure out a way to do it, they’re expensive with lots of extra fees and stuff like that. There are plenty of new options, tools and techniques that have been replacing this type of loan. A good realtor and mortgage pro can walk you through them.
Our next B-word is Broker. You hear the word broker a lot. What broker means is an individual or a firm that acts as an agent between providers and users of products or services, such as a mortgage broker or a real estate broker. That’s the Webster, Google definition but here’s the way it works in real estate. The big companies that you know about, like Century 21, eXp, Coldwell Banker or RE/MAX are real estate brokers and brokerages.
On the mortgage side, a mortgage broker is a lender that offers the buyer more options and potential mortgage plans and programs at different rates than your traditional big banks. There are the big four, Wells, Citibank, Chase and B of A. The mortgage broker can also offer you more than the credit union. This is my recommendation because most of the time, they’re going to have all the options the big banking or credit union have, plus more options that those guys won’t. That can be very beneficial to you as a first-time homebuyer.
Our next one is one that I have to explain to people a lot. This is Building code. It seems pretty easy, like you would understand it. The Google definition of building code is local regulations that set forth the standards and requirements for the construction, maintenance and occupancy of buildings. These codes are designed to provide for the safety, health and welfare of the public. You know what I’m talking about, a building that needs to be up to code. Here’s the real-real on this. Each state has a minimum requirement to sell a home. Most of them do not require a home to be up to code, so don’t expect that.
This is a fun one and one of my fun bees, Buydown. I’m going to start this with the definition that came from an exchange I had with an audience. The audience sent to me, “Buydown points, we had no idea this was even a thing. Your unicorn lender told us about it. You should tell people about this. The topic would be about when it will be a good idea to pay for the mortgage buydown points versus putting more money down on a down payment.”
That’s what the audience said, so fine, here I go. First, I’m going to give you an explanation of what it is, then I’m going to give you some context on how this can work for you as a buyer. A buydown is an upfront lump sum of cash. It’s a prepayment of interest to the lender at the closing. The reason you do that is it buys down the interest rate to a lower rate. You can buy down that rate with the cash upfront to decrease your monthly payment to make it lower and more affordable for you.
Also, because the loan is more affordable, the buyer is likely to meet the lender’s qualification standards, which sometimes means that by buying the rate down, you can get a bigger house. Some of these buy downs are temporary, lasting only for 2 to 3 years. They got cool names, so you can figure out what they are. They’re called 3-2-1 or 2-1.
If you’re thinking long-term and you want to use the buydown to buy down the rate permanently for 30 years of the loan and you’re looking to buy your forever home, this is how my audience said that they considered it, “By decreasing the down payment.” I don’t know what their down payment was. It could have been from 25 to 20, 20 to 10 or even 10 to 8. That 2% might’ve been enough for the buydown cost because that buydown cost is going to vary depending on the borrower. Remember, borrower, that’s you and the loan products and the available rates.
They were thinking, “If I decrease my down payment, paying for the mortgage points does make sense for us, especially if we’re going to stay there for at least six years.” That’s not the formula for everybody but here’s what they said, “We’re going to break down on the upfront cost over six years but we’ll end up saving money for the entirety of the life of the loan period with the 30 years in the end.”
It’s the same principles as buying an electric car. The upfront cost is a little bit more but you save money in the long run by not buying gas and charging the car. You have to figure out when that breakeven comes on the calendar and in their explanation, it was six years. It was a great explanation. I can’t take credit for it. Thank you to the unicorn lender and the audience.
Here’s a very simple subject to change because these can change all the time. This is a numbers breakdown directly from the California Realtor State Exam. This is what we got going on in California. As a general rule, buying down the interest rate permanently by one point is going to cost the buyer approximately six points. For example, if you’re buying a $200,000 home, where are they finding that in California? I have no idea but if they’re buying a $200,000 loan, 6% of that would be $12,000. The buyer pays the lender upfront and that reduces their interest rate by one entire point.
Remember, this is where the audience came up with six years. It’s a coincidence that you’re buying down 6% and theirs was 6 years. Your formula could be different. It’s not always 6 and 6. That has nothing to do with each other. If you have the extra cash upfront above and beyond your down payment, your closing costs or if you end up reducing your down payment to get some of that extra money to get that 6% of the purchase price, who knows? Maybe your 6% of the purchase price will be paid off in savings in 4, 5, 7 or 8 years. If you plan to stay in the home for 20 or 30 years, you’re going to save money once you cross that breakeven point.
The buyer chooses a temporary buydown. It’s going to cost a little bit less. This is a more common buydown that results in either a level interest rate reduction for a specific length of time. Remember the 3-2-1 or the 2-1 or it’s a guaranteed increase in the interest rate over some time until it reaches the stated rate, the rate that you get on the borrower’s note. That’s you. You’re the borrower and the note is your loan.
How do the lenders calculate the cost of these? Let’s say you use a 3-2-1 buydown. In that situation, you’re going to be purchasing a temporary three-year buydown. Let’s say the standard interest rate was 4.5%. The lender may determine that the buydown rates will be 3% in the first year, 3.5% in the second year and 4% in the third year. The interest rate for the remaining years on the loan, the other 27 years, is going to be 4.5%, which if you are on the regular loan that way, that’s what you would have got for 30 years.
If you use this buydown to calculate the cost of it, the lender is going to determine the difference between how much interest the borrower would pay at the regular rate, the 4.5 and how much they would pay for the reduced rate, which was 3, 3.5 and 4. You add them all up and that’s what you pay. Here’s an example with the numbers.
If we got a 3-2-1 buydown rate, the lender calculates that the lowered interest rate for the 1st year of your loan will be $10,000. For the 2nd year, it’s going to be $8,000 less. For the 3rd year, it’s going to be $6,000 less. $10,000 plus $8,000 plus $6,000 is $24,000. If you want to pay that much less in the first three years of your loan, you pay that upfront. I understand there’s a lot of math in this and a lot of future math, even if you’re deciding a temporary buydown makes sense for you.
One of the reasons people do this is they have a steady job, expect raises and are looking to buy a house. They’ve then got a little bit of extra cash at the beginning and are like, “Let’s put these cash in and we’ll pay less for the first three years we live here. My raises will kick in and we’ll be much more comfortable with our overall mortgage payment.” This could work for some people but it’s a lot of math. Talk to your pros.
When you attempt to be the first offer in, you can try to win the bidding war before it even starts.
You do always have the ability to pay that 6% upfront and get the 30-year permanent one-point buydown. Perhaps that is something that makes you feel comfortable. It means that forever, you can breathe a little bit easier while still reaping the benefits of owning a home versus renting. It’s a great thing to have in your back pocket.
My next B is Buyer’s agent, which is highly recommended. Remember, they are paid for by the seller through the seller’s commission, not paid for by the buyer. They have your best interest in mind to ensure that you’re treated fairly throughout the entire home buying process. They’re what we call a fiduciary in the real estate lingo. I have some news for you about this. There’s a giant lawsuit to get rid of buyer’s agents and make you pay for them. Hit the news.
I’m going to get into this more in a future episode but for now, you’re going to be fine for a little bit. We’re not going anywhere. Start your plan and work the system to your advantage. The lawsuit is going to take years. Many people think it doesn’t have any merit. It’s a big play by the online real estate companies because their entire goal is to eliminate the buyer’s agents. They want to eliminate the need for buyer representation so they can gobble up all the sellers and sell their homes on their websites, charge the sellers for it and sell the homes out there for cheap.
Things are changing. It’s going to be a slow-moving ship and they’ll change someday. If you’re reading this, you’re probably looking to plan to buy a home in the next couple of years. If you’re thirteen reading this show, what is wrong with you? I feel creepy talking to you but great. Maybe you’re getting ahead of the game but for the rest of you, you’re going to be fine. As you know, I’m going to keep you up-to-date with the information on how to beat this rigged game. It’s rigged and still beatable. If they change it, I’ll find a way for us to beat it back then.
It’s set up for the sellers, making you lowly buyers, pick up all the scraps but have no fear. I got you for now and in the future. I got ways to put you in the driver’s seat. If you’ve got any value out of these B definitions, rate and review on Spotify and Apple. Follow @HowToBuyAHome on TikTok. Drop me some comments at @DavidSidoni on Instagram.
If you ever have specific questions about your specific home buying situation, on HowToBuyAHome.com, there’s a big button that says, “Ask David.” That’s me. Ask me a question and I’ll get back to you. Don’t forget to check out the YouTube page, How to Buy a Home podcast. You can watch me. Maybe you’ll see the video of me and decide, “This guy has a face for radio.” I’m going to see you later. The C definitions are next.
Stay persistent, patient and prepared. Start your plan now. The more you plan, even years in and years out, the better you’re going to be set up to take advantage of whatever the wacky housing market is bringing to you when you’re ready to start making offers. Don’t believe the hype and don’t think that one hour of Google research is enough to find your path to homeownership. Dig deep, seek the truth, find a trusted pro and use the force. You do all that and you can do this.
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