Every profession has its own lingo, and often, when we enter a world we are unfamiliar with, we feel intimidated by that language. When stepping into the world of home buying for the first time, it’s not uncommon to feel overwhelmed simply trying to understand what the jargon means. Common real estate terms can actually be quite intimidating.
Understanding this language not only helps you avoid feeling lost but also enables you to recognize whether you’re entering a good deal. It can also protect you from making judgment errors that you otherwise might if you were unclear about what was being discussed. Instead of learning on the fly, a few basic real estate terms can help you grasp key concepts before they are presented to you.
Key Real Estate Terms to Know
Some of the most commonly used terms, like “agent” or “buyer’s agent,” refer to the licensed real estate professional responsible for helping the seller sell and the buyer buy. This is the person who will guide you step-by-step through the process of finding a home.
The home has most likely been appraised, which means that a professional has evaluated and determined its actual worth. An assessment has also likely been conducted, which is the process of determining the appropriate property taxes for the home.
There are several terms related to the cost of purchasing a home. For instance, a down payment is typically between 5% and 20% of the home’s value. Closing costs refer to the additional expenses required to complete the purchase, such as loan origination fees, lawyer’s fees, discount point fees, and often recording fees. These usually range from 3% to 5% of the home’s value.
A debt-to-income ratio is a key factor in determining the buyer’s ability to afford the home. This takes into account not only the buyer’s credit but also their income and expenses. This ratio often cannot exceed 50-60%, depending on the situation.
Another crucial term is contingencies, which are clauses that can prevent the contract from going through. These may include requirements like mortgage acceptance, a home inspection, or any work to the home that must be completed prior to settlement.
All buyers should take the time to get a comparable market analysis, which provides an idea of what similar homes in the area are appraising and selling for. This helps prevent overpaying and ensures the seller isn’t asking too little.
Closing is when the entire deal is finalized. At this point, the buyer will receive the deed (the official government paperwork that establishes property ownership) and pay all associated costs, including the down payment, earnest money (a portion of the down payment offered as proof of the buyer’s seriousness), and closing costs. For the buyer, this is often a very expensive day.
Not all lenders require a loan origination fee, though most do. This is a percentage paid to the loan officer for initiating the loan. If applicable, this fee is paid at closing. It’s also important to lock in the interest rate when agreeing to purchase the home, as rates may increase between the time of agreement and the actual closing.
The closing will also require the buyer to pay points, which are equal to 1% of the home’s value. Points can help lower the interest rate on the mortgage. Instead of paying interest over time, the buyer may choose to pay a lump sum up front in exchange for a lower rate. Additionally, closing costs usually include pre-paids, which cover costs like homeowner’s insurance (typically for one year), property taxes, and any other recurring fees, such as association fees when buying a condo.
Of course, having a basic understanding of common real estate terms will not only make you a more educated buyer but also help you determine how much home you can realistically purchase, maintain, and afford.
