If you've been preparing to take your real estate exam, you should know that part of the test will include vocabulary and terminology related to real estate finance.
While they might seem complicated to understand without the proper context, it's crucial to have a basic understanding of what these words mean and how you'll see them in your career:
Read on to understand these vocabulary words and how you'll see them on the exam.
What is a Beneficiary?
When you obtain a mortgage, the party benefiting from your payments is the beneficiary. In most cases, this is the bank or lender that you're borrowing money from to buy the house. This is because you promise to make payments back to the lender, and they, in turn, benefit from the payments, including the interest on the loan.
What is Equity?
Equity is the difference between what you owe on a property and the house's current market value. Generally speaking, the more time that has passed since you bought a property, the more equity you'll have in the house. Then, when you go to sell the house, you'll be able to cash out on this value and benefit from your investment.
What is an FHA Loan?
An FHA loan is a type of loan insurance that the Federal Housing Administration backs. This program was created in 1934 by the Housing and Urban Development department to make it easier for people to buy homes, as it requires a smaller down payment than conventional loans.
Today, buyers securing an FHA loan only need a 580 credit score and 3.5% of the home's cost as a down payment. This is why FHA loans are ideal for first-time homebuyers, as they require less up-front cash and are better for people establishing their credit.
However, all FHA loans require mortgage insurance to protect your lender against losses. So make sure to consider this added cost when considering an FHA loan!
What is a Lien?
A lien is a legal right to possess another person's property until their debt has been paid. Usually established by a creditor or legal judgment, a lien is meant too satisfy your obligation to pay off a debt or loan by using the property as collateral.
There are many different types of liens, but general and specific are some of the more common types in real estate. In a general lien, all your property - including your house and additional personal property - can be seized to pay off a debt.
However, a specific lien is used only to seize one specific property applicable to the debt - like a house. This does not cover all the personal property or items a debtor may own.
What is a Mechanic's Lien?
Created by Thomas Jefferson in the early days of our nation, a mechanic's lien is a legal document that ensures a supplier's or worker's right to enact a lien to ensure payment.
A mechanic's lien can be used by subcontractors or builders who have done work on a property and are seeking the appropriate payment. A property with a mechanic's lien cannot be sold and must be settled before putting a house on the market.
What is an Acceleration Clause?
An acceleration clause is a term in a mortgage agreement that permits the lender to accelerate repayments, usually only invoked when the borrower misses payments or is in violation of the loan agreement.
Otherwise known as a mortgage acceleration, these standard protections are implemented to prevent the mortgage lender from defaulting on a loan.
When enacted, the borrower is responsible for paying the amount owed, including any accumulated interest since your last payment. If not paid by a set date, your lender can begin foreclosure.
What Does Underwriting Mean?
When you obtain a mortgage, your loan will go through a phase called underwriting. Once under contract on a property, a person called an underwriter will go through the process of assessing the risk of lending the borrower the loan.
During this process, the underwriter will not only evaluate the borrower applying for the loan — but will also assess the condition of the property being purchased.
The bank is looking to ensure that the borrower's and property's qualifications are up to standards and will consider the risk involved with loaning money for the purchase.
The borrower must submit documents verifying their financial statuses, like bank statements, proof of employment, and tax returns. Additionally, the underwriter will use the appraisal to evaluate the property to ensure it is in appropriate condition and worth the amount of money you're purchasing it for.
What Does Hypothecation Mean?
A hypothecation agreement is when a borrower agrees to offer an asset as collateral in exchange for a loan. Used frequently in mortgages, while a borrower technically owns the house, a lender can seize a home as collateral if debts are not paid or the terms of the loan agreement are not met.
While the bank owns the property, it cannot claim any income or cash flow generated from the home unless the borrower defaults on their loan.
What is the Debt-to-Income Ratio?
Your debt to-income ratio compares how much you earn every month versus how much you owe. This considers your wages pre-tax, then calculates expenses like rent, mortgage, car payments, student loans, or other types of debt.
When purchasing a home, your lender will look at your debt-to-income ratio when determining how much you can afford.
What is a Fixed-Rate Loan?
A fixed-rate loan is a mortgage loan where the interest rate stays the same throughout the loan's lifetime.
This can be beneficial because you'll always know how much you owe, as monthly payments won't change over the length of the loan. In addition, if interest rates are currently low, obtaining a fixed-rate loan can be an intelligent financial decision.
Final Thoughts on the 10 Real Estate Finance Vocabulary Terms
As you prepare to take the real estate exam, studying and understanding these words is crucial to your success as an agent. Continue to research and prepare for your real estate exam by making flash cards or reviewing these vocabulary terms.
While these words may seem unusual and foreign right now, you'll become more familiar with each transaction you complete!