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Glossary of Home Buying Terms

I know, I know. Real estate can seem like you're trying to learn a whole new language in the midst of also looking for your dream home. Check out the glossary to get you up to speed.



Appraisal

A document that gives an estimate of a property’s fair market value.


Appreciation

An increase in the market value of a home due to changing market conditions and/or home improvements.


Closing

Also called the “settlement,” when all papers are signed and the ownership of the property transfers from one owner to the next.


Closing costs

In addition to the final price of a home, there are also closing costs, which will typically make up about two to five percent of the purchase price, not including the down payment. Examples of closings costs include loan processing costs, title insurance, and excise tax.


Contingencies

Particular conditions that must be met prior to closing a real estate transaction such as a home inspection (to ensure the home has no serious defects), a financing contingency (which releases a buyer from the sales contract if their loan falls through), or a contingency that a buyer must first sell their current home. In general, the fewer contingencies required of a seller, the stronger a buyer’s negotiating position, in terms of getting the best price.


Counter-offer

An offer made in response to a previous offer. For example, after the buyer presents their first offer, the seller may make a counter-offer with a slightly higher sale price.


Debt-to-Income Ratio

A comparison of gross income to housing and non-housing expenses.


Down Payment

A cash portion of the payment for a property that is due at the settlement; many conventional loans require a down payment of 5 percent, 10 percent, or 20 percent, while FHA loans require 3.5 percent; some VA loans are available with zero down payment.


Earnest Money

Money put down by a potential buyer as good faith to show that he or she is serious about purchasing the home; it can be used as part of the down payment or closing costs if the offer is accepted. This is normally 1-3% of the total purchase price.


Equity

The value in your home above the total amount of the liens against your home. If you owe $100,000 on your house but it is worth $130,000, you have $30,000 of equity.


Escrow

The holding of money or documents by a neutral third party before closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.


Home inspection

A thorough professional examination (at the buyer’s expense) that evaluates the structural and mechanical condition of a property (plumbing, foundation, roof, electrical, HVAC systems, etc.). This highly recommended step is a common contingency clause in real estate sales contracts. If the inspector identifies issues that may be expensive to remedy, these can be revisited with the seller before proceeding with the sale.


Home warranty

This warranty protects from future problems to things such as plumbing and heating, which can be extremely expensive to fix.


Interest Rate

The amount of interest charged on a monthly loan payment; usually expressed as a percentage


Mortgage

A mortgage is a loan, secured by the collateral of specified real property, that the borrower is obliged to pay back with a predetermined set of payments.

Mortgage Insurance

Insurance which protects the lender against loss which could result from a mortgage default.


Offer

A formal request to buy a home


PITI

Principal. Interest, Taxes, and Insurance – the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan. Property taxes are paid to the county in most cases and home insurance covers most damages to the property.


Pre-Approval

Lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.


Pre-qualification

Less “official” than a mortgage pre-approval, banks offer (at no cost or obligation) pre-qualifications to estimate the amount a buyer may be able to borrow. It is often used early in a buyer’s search to help determine a reasonable price range.

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