When I bought my first house I knew some things when it came to real estate terminology just from reading lots of articles, my parents, and from watching hundreds of hours of HGTV (hey you can learn things from that channel). But I didn’t know everything and there were some things that my real estate agent and loan broker had to walk me through. I also did some research online to learn some more.
Related read: How To Financially Prepare As A First-time Home Buyer
If you’re looking to buy your first or even your second home there are some key terms that it’s helpful for you to understand. Knowing these seven terms will help you feel more confident and knowledgeable during the process which can help you make better decisions.
Appraisal
A home appraisal is when a neutral third party calculates the value of a home. The third party is a licensed professional who is trained on how to calculate a home value.Appraisers look at things like the home’s age, location, square footage, any upgrades that were done, and recent home sales in the area.
Appraisals are typically required by mortgage lenders as they want to make sure the value of the home is in line with the amount they are lending.
Closing costs
Closing costs are fees that are paid to multiple third parties on the closing date to finalize the sale/purchase of a home. Closing costs are typically paid by both the buyer and seller with the buyer typically paying more of them.The total amount in closing costs you pay can vary (some estimates I’ve seen online are between 3-4% for home buyers) and the final amount is provided to you by your lender.
Closing costs typically include fees such as the home appraisal, home inspection, processing fee for the application, initial insurance payment, some HOA payments, initial property taxes, and more. This is not an exhaustive list and as mentioned before any closing costs you have will be provided and listed out by your lender.
Related read: How I Saved The Down Payment For My First House
Down payment
This is the portion of the home price that you are paying with cash. The amount of the down payment you pay can vary depending on the type of loan you get but it’s always recommended to put at least 10% - 20% down. Having a higher downpayment of 20% or more has many advantages- You avoid PMI (private mortgage insurance) which is insurance for the lender that you pay every month
- Your home offer is more competitive and looks more attractive to the seller because you’re financing less of the purchase
- You’re more likely to get a better interest rate because you’ll look like less of a financial risk to the lender
- Your monthly payments are less because you’re borrowing less and have a better rate
- You start off with greater equity in the home because you’re borrowing less
Escrow
This is a weird word, isn’t it? So escrow is an account managed by a third party to hold cash until the completion of a transaction between a seller and buyer.There are two typical types of escrow accounts when it comes to buying a house
1. When buying a home
Buyers are asked to put down what is called an earnest money deposit that will be put in an account with a 3rd party escrow provider. The point of this is to show how serious you are about buying the house and the seller takes the house off the market to start proceeding with the sale. This is typically a small percentage of the selling price. The escrow provider will hold on to this until the sale of the house is final.2. After buying a house
This is an account in your name that is where you pay your home insurance and taxes and then the lender takes that money and makes the payment for you. Some lenders require this and others don’t.House Title
This document shows who legally owns the property and has a claim to it when it’s being sold and after it’s sold.To make sure there are no issues with the title that could prevent the sale from moving forward or cause you to lose the home after the sale it’s important to do a title search. It’s also good to get title insurance which can protect you from any financial loss should there be an issue with the title after the sale goes through.
Related read: 8 Of My Favorite Financial Bloggers
Mortgage
We’ve talked about pre-approvals for a mortgage but what is a mortgage? Simply put it’s a financial agreement between you (the borrower) and a lender that the lender will front you the money to purchase a house and you will pay the lender back over a specified time period plus interest. If you don’t meet the mortgage terms the lender can repossess the house.There are several types of mortgages out there but the best one is a fixed rate because the rate doesn’t ever change, it’s locked in for the length of the loan.
Adjustable rate mortgages (ARMs) are the worst types of mortgages. They start off with a low rate and then the rate increases after a few years. I’ve known some people who lost their homes because they had an ARM.
Pre-approval
Before you even start looking for a house you’ll want to get preapproved by a lender for a home loan. A mortgage pre-approval is when a lender has looked over all of your finances (typically your credit history, income, current debts, and assets) to make a determination on what you can afford to borrow and what your interest rate should be.Unless you’re buying the home completely with cash most real estate agents won’t work with you and sellers may not entertain your offer. Having that piece of paper showing that you are pre-approved gives real estate agents and lenders peace of mind that you aren’t wasting their time and can purchase the home.
A few things to note about pre-approvals
- They don’t guarantee that you will get a loan
- There are several documents you have to share with the lender to prove your identity, your income, and current assets. A good lender will walk you through all of that
- They typically last 60-90 days. Once it expires you’ll have to get pre-approved again
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