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Abbreviations for homebuyers
COO (certificate of occupancy)
A document issued by a local government stating that a building is ready for occupancy. It verifies that a building is compliant with its local building codes. You probably won't need to know this unless you’re buying a newly-constructed home.
DTI (debt-to-income ratio)
Your debt-to-income ratio is one of the key factors lenders consider when determining your eligibility for a mortgage. There are two possible DTI ratios you’ll need to know:
Your front-end DTI is your future mortgage payment as a percentage of your pre-tax income. For example, a $1,000 mortgage payment and a $5,000 monthly income would translate to a front-end DTI of 20%.
Your back-end DTI is all of your monthly obligations, including your mortgage payment, as a percentage of your pre-tax income. If your expected mortgage payment is $1,000, you have other monthly obligations of $500, and you earn $5,000 monthly, you have a back-end DTI of 30%.
FHA (Federal Housing Administration)
A division of the U.S. Department of Housing and Urban Development (HUD). It's also the world’s largest mortgage insurer. When you’re buying a home, you’re likely to see the abbreviation come up in the context of an "FHA loan."
The FHA doesn’t actually make these loans itself. The term refers to loans that are eligible for FHA mortgage insurance, which protects lenders against losses if the homeowner defaults. This is why FHA loans are generally easier to get than conventional mortgage financing.
HOA (homeowners association)
If the home you’re planning to buy is located in a community with an HOA, you can expect to pay an additional monthly or annual fee to the association. HOAs perform a variety of functions, such as maintaining common spaces, adding amenities for residents to use, and setting guidelines for acceptable home modifications.
While it can seem like a pain at times, it’s important to note that HOAs have one primary mandate -- to increase (or at least maintain) property values. HOAs are common in communities and condominiums with lots of common areas and amenities such as swimming pools. In condo associations, your HOA dues will also likely cover the cost of building insurance.
HUD (U.S. Department of Housing and Urban Development)
A government agency that provides several home-related functions. For example, there are HUD programs designed to help Americans buy homes (FHA mortgage insurance), avoid foreclosure, find suitable rental housing, and more.
HUD also has programs designed specifically to help veterans and senior citizens buy homes.
Abbreviations for investors
ARV (after-repaired value)
If you’re planning to buy a property and immediately renovate it, lenders will typically consider the property’s ARV, or after repair value, when determining how much to lend. This is common in fix-and-flip transactions as well as in situations where the property is bought as a rental but needs considerable work to get to rentable condition.
Let's say your lender will loan you as much as 80% of a property’s ARV. The property is estimated to be worth $200,000 when all renovations are complete. So the maximum loan amount you’ll be able to get is $160,000.
FMR (fair market rent)
The monthly rent an investment property can be reasonably expected to produce. FMR is partly a matter of opinion, and there are several sources you can use to determine FMR. Two of the best ways to determine a property’s FMR are by having a local property manager find the actual rents of comparable properties, and by having a property appraisal done that includes a rent estimate.
GRM (gross rent multiplier)
The price you pay for an investment property expressed as a multiple of the monthly rental income it's expected to generate. For example, if you pay $100,000 for a rental property and it rents for $1,000 per month, your GRM is 100. Lower is better. This metric can be quite useful when doing a preliminary analysis of listed investment properties.
IRR (internal rate of return)
A metric often used in real estate investing to assess the expected return of a particular property. The mathematics of calculating IRR are complex, and it’s easiest to use an IRR calculator.
The key point to know is that IRR combines cash flows (such as rental income) with the eventual profit from selling a property. This produces an expression of the property’s total return.
ROI (return on investment)
A broader term that refers to an investment’s returns relative to its cost. For example, a $100,000 investment that has increased in value by $8,000 would have an 8% ROI.
NOI (net operating income)
A metric of the profitability of real estate investments on an ongoing (cash flow) basis. It's a property’s revenue from rent and other sources minus its operating expenses. If your property takes in $15,000 in rental income and you spend $5,000 in operating costs, your NOI is $10,000.
General real estate abbreviations
CRE (commercial real estate)
A broad term that refers to any type of property other than single-family and two-to-four-unit residential properties. Office buildings, warehouses, hospitals, hotels, apartment buildings, and data centers are all examples of commercial real estate.
MLS (multiple listing service)
A database used by real estate brokers to share information about properties for sale and work with other brokers. While listings are generally available on non-MLS sources, such as Zillow, your local MLS likely has the most information of any source.
For example, you'll need to go through the MLS to read a broker’s comments about a property. Unfortunately for buyers, MLS access is restricted to real estate professionals.
REO (real estate owned)
While most real estate is "owned" by someone, REO is used to describe properties that are owned by a lender. This typically means that a lender foreclosed on a property and now owns it. In practice, the terms "foreclosure" and "REO" often mean the same thing when you see them in a real estate listing.The Foreclosure Process in 5 Steps
SFR (single-family residence)
When it comes to residential real estate, there are three main classifications. If a home has one living unit, it is classified as a single-family residence, or SFR. If there are two to four living units, it's a multifamily property. If there are five or more living units, the property is commercial in nature.
APR (annual percentage rate)
This includes the interest you’ll pay plus the other costs of borrowing money, such as the loan’s origination fee. In other words, APR helps provide an apples-to-apples comparison of the cost of borrowing money. Many people compare mortgage offers by their interest rates, but APR is a more accurate method.
ARM (adjustable rate mortgage)
A mortgage with an interest rate that can change periodically, based on a certain benchmark index.
Most mortgages originated in the United States have fixed interest rates. That is, if you get a 30-year fixed-rate mortgage with a 4% interest rate, your interest rate will remain at 4% for the entire term of the loan.
PMI (private mortgage insurance)
This is an insurance product that protects your lender (not you) in case you default on your loan.
The industry standard 20% down payment is by no means a set-in-stone rule. In fact, it’s not too difficult to get a conventional mortgage with 5% or even 3% down. However, if you put less than 20% down when you buy your home and you’re not in a loan program that specifically doesn’t require it, you’ll probably have to pay private mortgage insurance, or PMI.
LTV (loan to value)
A common metric used to determine how much you can borrow for a particular property. A property’s LTV is the amount of your mortgage expressed as a percentage of the home’s value (which is typically defined as the price you pay for it).
For example, if a lender will approve you for a mortgage with an 80% LTV and you want to buy a $300,000 home, this means that you can borrow $240,000 (80%). You'll have to pay the rest as your down payment.
PITI (principal, interest, taxes, and insurance)
Most mortgage lenders require borrowers to pay a prorated portion of their annual property taxes and hazard insurance along with their monthly mortgage payment. Your mortgage payment is likely to be made up of these four components, often abbreviated as PITI. In other words, your PITI is what you’ll actually have to pay to your lender each month.
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