Home Buying Terms You Should Know
There are always a lot of terms getting thrown around during the purchasing process by bankers, real estate agents, and lawyers. We gathered some terminology that we frequently hear into a quick glossary in an attempt to de-mystify the process for you.
Annual Percentage Rate (APR) – This is the cost of your loan in terms of a yearly interest rate. The APR is often slightly higher than the published rate because it takes into account all of the costs associated with your loan (financing, closing or pre-paid points)
Appraisal – This is a estimate of the property’s market value. Appraisers look at local market conditions, the characteristics of the property and compare it with other sold property values to arrive at a market valuation.
Closing – This is the official transfer of property from seller to buyer. It does not necessarily always require a formal meeting between buyer and seller, but will typically be handled by a closing settlement agent. At closing, the buyer will sign all paperwork including a HUD settlement statement. At this time funds will be provided to the seller in exchange for signatures releasing the property to the buyer.
Closing Costs – These are all of the costs necessary to complete the transfer of ownership, aside from purchase price. These costs typically include fees for loan origination, appraisals and real estate agent commissions. They may also include prepayment of taxes and insurance.
Comparative Market Analysis (Comps) – This analysis estimates the current market value of a home by comparing it with recently sold homes in the area.
Contingency – Any condition that must be met before a contract can become binding. A common example of this is a purchase agreement that is contingent on the sale of the buyer’s existing home.
Counter Offer – If an original offer is rejected, a counter offer is a response to keep negotiations open with the intent to find common ground and reach an agreement.
Credit Report & Score – This is a report provided by credit bureaus (Equifax, Experian and Trans Union) that gives your lender a history of your borrowing and credit. It is like a report card of how well you have managed your debt in the past. Your credit score is typically the number you are most familiar with and will be based on this report. This score is computer generated and calculated to determine how likely a person is to repay a loan.
Debt to income ratio – This is also known as debt to earnings ratio. This percentage is calculated by dividing your gross monthly debt by gross monthly income. This is one of the key factors lenders will look at when considering your credit worthiness.
Deed / Title – This is a written document that shows ownership of your property. It includes the signatures of current owners and a legal description of the property.
Disclosures – This is information the seller provides about the property. It is the sellers responsibility to provide all information that they know about the property on the appropriate forms and schedules.
Down Payment – This is the money paid by the buyer to the lender at closing and is considered your initial equity in the home. Since you are paying this in advance it is not part of your mortgage. Down payments less than 20% of the purchase price typically require mortgage insurance.
Equity – The fair market value of the property less the remaining amount owed on the mortgage. Essentially if you sold the home at a given point, what would you receive in cash after paying the outstanding mortgage balance. Keep in mind there are typically fees that will need to be subtracted from this amount to cover closing costs and real estate commissions.
Escrow or Escrow Account – These are funds set aside and held by a third party, usually for payment of taxes, insurance or any other contingency.
Home Inspection – This is an inspection conducted by a third party that will result in a report of the home’s condition. Inspections should be conducted by a licensed inspector and cover all critical systems and structural features of the property. Fees charged by inspectors are typically paid by the buyer.
Homeowner’s Insurance – This provides protection against damage from fire, hail and other hazards. Lender’s will require this before closing on the loan and it is important to fully understand your coverages, deductible etc. in the event of different hazards.
Lock In or Rate Lock – This is a guarantee from a lender that a buyer will receive a specific interest rate for a specific period of time.
Purchase Offer – This is a detailed written document submitted as an offer to purchase a property. When this document is signed by all parties, it becomes a legally binding contract.
Underwriting – This is the lender’s process of analyzing a loan application to determine the amount of risk involved with the loan. It includes a comprehensive review of the borrower’s credit history and a judgment of the property’s real value.
Walk Through – This is a final inspection of the property by the buyer and seller. This typically will take place a day or two before closing. The intent is to ensure that any repairs agreed upon in advance have been made and that there are no other issues.