If you are buying a home for the first time, the terminology alone can make your head spin. It’s not that first-time buyers lack the intelligence to understand home-buying terminology. It’s just that they’ve never been exposed to it before. And there’s so much of it!
So one of the first steps you should take is to learn the lingo. After all, buying a home and taking on a mortgage loan are two of the biggest financial moves you’ll ever make. You don’t want to make a costly error simply because you misunderstood the meaning of a certain term.
Here is a short list of the most common home-buying and mortgage terms you are likely to encounter:
Adjustable Rate Mortgage (ARM) — This is a type of loan that starts out with a lower interest rate for an introductory period (3 years, for example) and later adjusts to whatever the current interest rate is at the time of adjustment.
Appraisal — A professional appraiser’s estimate of the market value of a property. Appraisers consider local market conditions and the unique characteristics of a particular property. Home appraisals are required by most mortgage lenders.
Closing — The official transfer of property ownership from seller to buyer. It usually happens in the form of a formal meeting between the buyer, seller, settlement agent, and the buyer’s and seller’s agents. In some states, it can be handled separately. It varies. At closing (or “settlement”), the buyer will sign the mortgage document, the seller will receive payment for the property, and the buyer and/or seller will pay the closing costs.
Comparables — Also known as “comps,” these are comparable homes that have sold in the same area as the home you’re considering. By looking at recent comps for other homes that have sold recently, you can better validate the seller’s asking price.
Debt-to-Income (DTI) Ratio — This is one of the criteria lenders will evaluate you on, to determine if you are “credit worthy” of a loan. This ratio is calculated by dividing monthly debt by gross monthly income.
Down Payment — The money paid by the buyer to the lender at the time of the closing. It goes toward the purchase price and is generally expressed as a percentage of the home price. Smaller down payments (less than 20%) usually require mortgage insurance.
Escrow — Also “escrow account.” These are funds set aside and held by a neutral third party, usually for payment of taxes and insurance.
FICO Score — Also referred to simply as a credit score, this is a computer-generated score used to determine how likely a person is to repay a loan. Your credit score is based on your credit reports. Lenders use this score to analyze the level of risk you bring. FICO stands for Fair Issac Corporation, the company that created the credit-scoring model used by most lenders these days.
Fixed-Rate Mortgage — With this type of mortgage loan, the interest rate stays the same for the entire term of the loan, regardless of what the economy does. Thus, the monthly mortgage payments will also stay the same for the life of the loan.
Foreclosure — This is what happens when a homeowner can no longer pay their mortgage. It is the legal process that allows the lender to recover and sell a property after the owner has defaulted on the loan.
Home Inspection — A complete “top to bottom” inspection of a home’s physical condition. Home inspections should be conducted by a professional, licensed home inspector and should cover all major systems and structural elements of the property. Home inspection fees are typically paid by the buyer.
Homestead Credit — A state-sponsored property-tax credit program (only available in some states). It reduces property taxes for eligible households. Ask your agent if your state offers such a program. Also known as Homestead Exemption.
Mortgage — A financial agreement between a lender and a buyer in which the property is used as collateral for the loan. A mortgage gives the lender the right to collect payments on the loan (and to foreclose on the property if those payments are not made).
PITI — This home buying acronym refers to the primary components that make up a monthly mortgage payment. It stands for Principal, Interest, Taxes and Insurance.
Principal — The actual amount of money borrowed, not counting interest. The part of the monthly payment that actually reduces the remaining balance of a mortgage. Think of it as the “core” amount borrowed from a lender, excluding interest.
Purchase Offer — A detailed, written document that makes an offer to purchase a property. The offer may be modified, or “amended,” several times during the course of negotiations. When the offer is signed by all parties involved, it becomes a legally binding contract. It is also known as the purchase agreement, offer or contract.
Settlement Statement — A document required by the Real Estate Settlement Procedures Act (RESPA). An itemized statement of charges that must be paid at closing or settlement. The buyer has the right to examine the settlement statement at least one day before the closing. It is also known as a Closing Statement or a HUD-1 Settlement Statement.
Deed — A written document that shows ownership of a particular property. It includes the signatures of current owners and a legal description of the property.
Clearly, this list is not all-inclusive. You might encounter additional mortgage and home-buying terms that are not on this list. These are just some of the most common terms. Is there something on this list you’ve never heard of before? If so, your next home buying step is clear — research those topics!