If you’re searching for your first new home, you will likely hear many words that you’ve never heard before. The homebuying process is already complex, so understanding certain words and terms in the real estate industry will help you get ahead of the game for when you’re ready to start buying. Here are 15 homebuying terms you should become familiar with before you start your home search:
- Appraisal: An educated and well-documented valuation of a home, prepared by a licensed and certified appraiser. Value is based on data about comparable homes in the area, as well as the appraiser’s walk-through.
- Approved for short sale: A term that indicates that a bank has approved a homeowner for a reduced listing price on a home, and said home is ready for resale.
- Closing: A meeting during which ownership of a home is transferred from seller to buyer, usually attended by the buyer, the seller, both real estate agents and the lender.
- Closing costs: Fees associated with the purchase of a home due at the end of the sales transaction. Fees may include the appraisal, the home inspection, a title search, a pest inspection and more. Buyers should budget for an amount that is 1 – 3 percent of the purchase price.
- Contingencies: Conditions written into a home purchase contract that protect the buyer should issues arise with financing, the home inspection, etc.
- Earnest money: A security deposit made by the buyer to assure the seller’s intent to purchase.
- In escrow: A period of time, usually 30 days or longer, after a buyer has made an offer on a home and a seller has accepted. During this time, the home is inspected and appraised, and the title searched for liens, etc.
- Loan estimate: A three-page document sent to an applicant, often three days after they apply for a home loan. The document includes loan terms, monthly payment and closing costs.
- Mortgage interest rate: The price of borrowing money. The base rate is set by the Federal Reserve and then customized per borrower, based on credit score, down payment, property type and points the buyer pays to lower the rate.
- Private mortgage insurance (PMI): A fee charged to borrowers who make a down payment that is less than 20 percent of the home’s value. The fee, usually 0.3 – 1.5 percent of the yearly loan amount, can be canceled in certain circumstances when the borrower reaches 20 percent equity.
- Pre-approval: A thorough assessment of a borrower’s income, assets and other data to determine a loan amount they would qualify for.
- Pre-qualification: A basic assessment of income, assets and credit score to determine which loan programs a borrower may qualify for.
- Short sale: The sale of a home by an owner who owes more on the home than it’s worth. The owner’s bank must approve a lower listing price before the home can be sold.
- Under contract: Similar to “in escrow,” this term indicates a period of time, usually 30 days or longer, after a buyer has made an offer on a home and a seller has accepted. During this time, the home is inspected and appraised, and the title is searched for liens, etc.
- Underwriting: A process a lender follows to assess a home loan applicant’s income, assets and credit, as well as the risk involved in offering the applicant a mortgage.