An Overview of Home Buying Terminology

Written by Posted On Wednesday, 09 July 2014 08:42

Buying a home can seem like a daunting process with all of the paperwork and financial details involved. And if you’re unfamiliar with the terminology associated with buying a house, the process can be even more overwhelming. A home sale involves a large number of people – real estate agents, attorneys, appraisers, inspectors, lenders and underwriters – and they all have their parts to play in the process. To help understand all of the complexities, here are a few terms that are important to know when you embark on your home search:

Mortgage. A mortgage is a home loan. In order to obtain a mortgage loan, you will need to contact a bank, credit union, or other lender. Lenders offer varying types of loans. Some carry fixed interest rates, while the rates on others are adjustable. Some loans, like VA (Veterans Administration) and FHA (Federal Housing Administration) are backed by the federal government. Loans also vary in their terms (length of the life of the loan) and the down payment required – 20% is a widely-held standard, but other options exist.

Amortization. This is the schedule to pay off a mortgage over a certain length of time – often 15 or 20 years. Payments are made in monthly installments. 

Credit Rating. Your credit standing, or simply your “credit” is used by your lender to determine whether you are a good risk for extending a loan. If you have a good credit rating (as determined by the three credit reporting agencies: TransUnion, Equifax, and Experian), your lender will view you as a good risk to pay off a home loan. A favorable credit rating also translates into a lower interest rate on your loan. To check your credit standing, contact the three reporting agencies. You are entitled to one free report annually.

Pre-Approval. Being pre-approved for a mortgage loan can help land you in your dream house. When you initially contact your lender, ask about obtaining a pre-approval letter to have on hand when you make an offer on a home. It’s important to note that pre-qualification (an estimate of the amount of loan you can obtain) is different from a pre-approval, which requires an extensive assessment of your financial situation, resulting in a firmer commitment of the loan amount your lender is willing to extend to you.

Down Payment. A down payment is the cash amount paid up front on a home purchase. The remainder of the purchase is financed by your mortgage loan.

Earnest Money. This is the amount of money included in an offer letter to prove that a homebuyer is serious, or “earnest,” about the purchase.

Contingency. A contingency is a condition included in the contract when a home is purchased. It is meant to protect the homebuyer. Some common types of contingencies include securing home financing, a satisfactory inspection of the sale property, and the sale of the buyer’s current home.

Title. A property title is a legal document verifying the ownership of a home. It proves that there are no liens or claims against the property at the time of sale.

Appraisal. A home appraisal is an assessment of a property’s value as determined by a professional. 

Escrow Account. Your lender will create an escrow account to pay “extra” above the loan principal and interest. Homeowner’s insurance and property taxes are paid from this account.

Closing Costs. Closing costs are one-time fees due at the time of the close of sale. They differ from sale to sale, and may include payment for appraisals and home inspections, attorney’s and recording fees, title service costs, taxes, and pre-paid homeowner’s insurance. Depending on the terms of the sale, closing costs may be paid by the buyer, the seller, or divided between both parties.

Points. Sometimes called “discount points,” points are a percentage of the loan paid at closing in exchange for a lower interest rate on the loan.

Every home sale is different and some terminology may be straightforward, while some might require more explanation. If you have questions regarding the nuances of the process, ask your real estate agent for a comprehensive explanation so that you can understand every aspect of buying your new home.

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