Every profession has its own lingo and often when we are entering a world we are unfamiliar with we feel intimidated by that lingo. When entering the realm of home buying for the first time, it’s not uncommon to be overwhelmed simply trying to understand what the jargon means, and the common real estate terms can actually intimidate us a bit.
Understanding the language can also help you understand whether you are entering a good deal or not, as well as protect you from making errors in judgment that you otherwise wouldn’t if you were clear on what was being talked about. Instead of learning along the way, a few common real estate terms can help you grasp the concepts before they are put in front of you.
Some of the more commonly used terms like agent or buyer’s agent refers to the licensed real estate agent responsible for helping the seller sell and the buyer buy. This is the person who will take you step by step through the process of finding a home. The home has most likely been appraised, which means that a professional has come in and determined what the home is actually worth. An assessment has most likely been done which is the process of determine the appropriate property taxes.
There are ample terms which deal with the actual cost of purchasing a home such as a down payment which is typically between 5% and 20% of the value of the home. In other cases, closing costs refers to the amount of additional cash required to cover all the extra expenses such as loan origination fees, lawyer’s fees, discount point fees and often recording fees which often range from 3% to 5% of the value of the home.
A debt to income ratio is a calculated factor in determining the buyer’s ability to afford the home. This deals not only with the credit of the buyer, but also with the income, the expense ratio, and often can not exceed 50 to 60% depending on the situation.
When buying a home often one of the most common real estate terms that can be overlooked refers to contingencies, basically determining clauses that prevent the contract from going through such as mortgage acceptance, home inspection, and any previously agreed upon work to the home that must be completed prior to settlement.
All buyers should take the time to get a comparable market analysis which is simply a general idea of what similar homes in the same area appraise and sell for. This prevents the buyer form paying too much and the seller from asking too little.
Closing refers to the time when the entire deal is finalized. At closing, the buyer will receive the deed (the government’s form of paperwork which determines who owns the property) as well as pay all costs including the down payment, the earnest money (which is a portion of the down payment offered when a buyer is serious about purchasing the home) and all closing costs. For the buyer, this is a very expensive day.
Not all lenders require a loan origination fee, although most do. This is a percentage that is paid to the loan officer for determining and starting the loan. If applicable, it is paid at the time of closing. It is important to lock-in the interest rate at the time of agreement in case interest rates increase during the time between agreeing to purchase the home and the time that the paperwork is signed and the deed is transferred.
The closing will also require the buyer to pay points. Points are equal to 1% of the home’s value and are determined often by reducing the interest rate. In other words, instead of paying the interest over time, the lender will add points so the buyer will pay a chunk of the interest up front in exchange for a lower interest rate. Closing also usually requires the buyer to pay for pre-paids, which is a sum of money that usually extends to cover home owner’s insurance for a specified period of time (the average being one year) as well as a determined amount of property taxes, and any other regular fees that require payment, such as association fees when purchasing a condo.
Of course, having a basic handle on the common real estate terms will not only make you a more educated buyer, but can help you predetermine for yourself how much home you are able to purchase, maintain, and realistically afford.