If you’re thinking of buying a home soon, you may be wondering about some of the language you’ll hear. Since a home sale involves many people – real estate agents, attorneys, lenders, appraisers, and inspectors, just to name a few – some of the lingo tossed around might be confusing, especially for a first-time buyer. Financing a home, in particular, carries with it some terms that are important to understand. Here is a brief primer on some of the terminology you can expect to hear as you head down the path to home ownership.
Credit Rating. Your credit standing can determine whether you are eligible for a loan as well as the amount of loan a lender is willing to extend to you. It can also affect the interest rate on your loan. Order your credit report annually for free from the three credit reporting agencies (TransUnion, Equifax, and Experian) to find out your credit rating and check for any errors or points of dispute.
Mortgage. A mortgage is quite simply a home loan. This loan is extended by a bank, credit union, or other lender and can carry a fixed or adjustable rate. Some loans, like FHA (Federal Housing Administration) and VA (Veterans Affairs) are backed by the government. Theoretically, the note is the loan and the mortgage is what secures the loan with the property.
Pre-Approval. It’s a good idea to be pre-approved for a mortgage when you start your search for a new home. Pre-approval differs from pre-qualification, which is merely an informed estimate of your borrowing power based on minimal financial documentation. Pre-approval actually involves running your finances and credit through the mortgage application process to determine the type and amount of mortgage you can expect.
Appraisal. Performed by a professional, an appraisal is an assessment of the value of the property you wish to purchase.
Title. The title is a legal document verifying ownership of a property and is important for proving that there are no liens against it at the time of sale.
Contingencies. A contingency is a condition written into the contract for a home purchase and is meant to protect the buyer during the sale. Common contingencies include securing financing for the home, a satisfactory home inspection, and the sale of a buyer’s current home prior to the purchase of the new property.
Down Payment. A down payment is the amount of cash paid up front to finance a new home. The rest of the home purchase is paid by a mortgage loan. While loan options vary, conventional wisdom suggests that the buyer provide a down payment of 20% of the price of the home.
Amortization. This is the schedule to pay off a mortgage loan over a certain amount of time (often 15 or 30 years) via monthly insallments.
Closing Costs. These fees, due at closing, are one-time costs associated with a home purchase. They can include payment for inspections and appraisals, attorney’s and recording fees, and title service costs. They might also include taxes and pre-paid homeowner’s insurance. Closing costs may be paid by the buyer or the seller or be divided between both parties.
Earnest Money. This is the money included along with an offer letter to show a seller that a buyer is serious, or “earnest,” about the purchase or good faith deposit.
Escrow Account. When extending financing, a lender sets up an escrow account for a buyer to pay “extra” above the amount of the loan principal and interest. This financial cushion is used to pay homeowner’s insurance and property taxes.
Points. Also referred to as “discount points,” these costs are paid at closing on certain types of loans. Points represent a percentage of the loan paid up front in exchange for a lower mortgage interest rate.
Don’t be afraid to ask questions if you don’t understand a particular aspect of the home buying process. Your real estate agent is your best resource if you need clarification of any terminology. He or she will be happy to walk you through the details.