Terms You Should Know When Buying a House

terms-you-should-know-when-buying-a-house

There is no question that buying a new home is stressful. It’s even more stressful if you don’t understand the lingo. The world of real estate and home loans has a language all its own and you don’t want to need an interpreter when you are looking at properties or qualifying for a mortgage.

To help you understand the language of home buying, we have prepared a simple glossary of terms you should know:

Adjustable rate mortgage (ARM) – This is a form of home loan wherein the interest rate applied to the outstanding balance adjusts with the prime rate. Usually the interest rate is adjusted annually but it can adjust monthly.

Amortization – When paying off a loan over time, you make payments on the principal and the interest with each payment. With most home loans, the amount of interest paid decreases with each payment and the amount of principal paid increases. Amortization is the difference between the amount of interest and the principal.

Annual percentage rate (APR) – APR is the annual rate charged for borrowing money, or the annual rate that money earns in a savings account or other interest-bearing account.

Appraisal – In real estate, an appraisal is a valuation of a property by an independent expert or appraiser.

Borrower – The borrower is the party who receives money, such as a home loan, from another party with the understanding that the money will be repaid.

Closing – In a real estate transaction, the closing is the final exchange of paperwork to close the sale. The closing includes delivery of the deed of title, financing documents, title insurance, and other documents to the buyer, and the agreed-upon costs are paid.

Closing costs – In addition to the actual payment for property, closing costs are additional fees paid at the time of closing to cover title search, title insurance, taxes, and other expenses.

Commission – In a home purchase, the Realtor® or other real estate agent earns a commission for their services calculated as a percentage of the final home price, typically 6%, which is then split between the buyer’s agent and the seller’s agent.

Comps – Short for “comparables,” comps are used to help determine the value of a property by researching the fair market value of similar homes in the area.

Condominium – A condominium is an individually owned unit in a multi-unit building or complex. The condominium owner holds the title for the individual unit, while responsibility for the common property such as the grounds, elevator, hallways, roof, and so on is shared by all residents and managed by a homeowners’ association (HOA).

Conforming loan – A conforming loan is a mortgage that conforms to the limits set by the U.S. government through the Federal Housing Finance Agency (FHFA) and defined in the loan guidelines set by the government-sponsored financing entities Fannie Mae and Freddie Mac.

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Conventional loan – A conventional loan is typically a fixed rate loan that is not guaranteed by any government agency.

Contingency – In real estate, a contingency is a condition or action that must be met or addressed before a sales contract can be executed.

Credit report and credit score – A credit report is a detailed record of an individual’s credit history supplied by one of the credit bureaus, Equifax, Experian, or TransUnion. Using information in the credit report and other data, the credit bureaus assign a credit score between 300 and 850 as an indicator of creditworthiness.

Debt-to-income ratio (DTI) – DTI is the difference between the amount of monthly debt such as credit cards, car payments, student loans, and so on against gross monthly income. DTI is also used to determine creditworthiness.

Equity – In real estate, equity is the difference between the fair market value of a property and the amount that is still owed on that property (i.e., the value of the house minus the outstanding mortgage balance).

Escrow – Financial help for the transacting parties by a third party is referred to as escrow. Mortgage lenders often establish escrow accounts to pay property taxes and insurance during the term of the home loan.

Down payment – A down payment is the amount of cash paid at closing as part of a home purchase, usually expressed as a percentage of the price. A typical down payment is 20% of the home price.

Fannie Mae – The common name for the Federal National Mortgage Association (FNMA). Fannie Mae buys mortgages and packages them as mortgage-backed securities, and gives money back to banks, credit unions, and financial institutions to finance more home loans.

FHA – The Federal Housing Administration is the federal agency that insures mortgage lenders who provide loans to home buyers.

Fixed-rate mortgage – A fixed-rate mortgage is a home loan with an interest rate that does not change over the life of the loan.

Freddie Mac – The U.S. government chartered the Federal Home Loan Mortgage Corporation (otherwise known as Freddie Mac) as a private company in 1970 to buy mortgages and offer them as mortgage-backed securities. Banks and credit unions use funds from Freddie Mac to make new home loans available.

Home inspection – As part of the sale of a property, a home inspection is conducted by a home inspector to describe the condition of the house, identifying issues or potential problems that could cost the homebuyer money to repair.

Home warranty – A home warranty is provided by a home warranty company to pay for discounted repairs and replacements on major home components, such as a furnace, water heater, plumbing, electrical system, and so on.

Homeowners insurance – Insurance that covers losses and damage to a house, as well as liability coverage against accidents, is called homeowners insurance. Homeowners insurance is required by almost all mortgage lenders.

Interest rate – The amount charged by a lender for a loan, usually expressed as a percentage of the amount being borrowed.

Lease purchase – A lease purchase agreement or contract is used with rent-to-own properties, wherein the renter is the first party offered the option to purchase the property when that property goes on the market.

Lender – The lender is a financial institution, such as a bank or credit union, that makes funds available to a borrower with the understanding that the money will be repaid.

MLS – The Multiple Listing Service is the service used by real estate brokers to show what properties are available for sale, including a description of the property, asking price, and other information.

Mortgage – A mortgage is a type of loan offered by a bank, credit union, or other financial institution to purchase property, wherein the borrower is obliged to make regular payments and the property is held as collateral to secure the loan for the life of the mortgage.

Mortgage insurance – Mortgage insurance is paid by the borrower as part of their mortgage payment to protect the lender should the borrower default on the loan.

Non-conforming loan – Also referred to as a jumbo loan, a non-conforming home loan is too large to be eligible for government insurance programs such as Fannie Mae and Freddie Mac.

Offer – In real estate, an offer is a legal document outlining the terms of a potential real estate purchase.

Origination fee – A fee that is charged by a lender to process a new loan application is called an origination fee. The origination fee for a mortgage is typically between 0.5% and 1% of the loan amount.

Pending – A real estate deal is pending when an offer has been accepted by the seller, but the deal hasn’t yet closed.

PITI – The acronym stands for principle, interest, tax, insurance and represents the amount you are paying each month as part of your mortgage payment.

Points – Loan basis points are used to describe differences in the interest rate. One basis point is 0.01%.

Preapproval – Mortgage preapproval is when a mortgage lender checks your credit and evaluates your eligibility for a home loan, indicating that they are willing to loan you up to a specific amount of money toward a home purchase.

Prequalify – Not as rigorous or binding as preapproval, prequalification is based on information provided by the borrower and is an indication that a lender will in all likelihood loan you up to a specified amount toward a home purchase.

Principal – The loan principal is the original amount of the money borrowed, as well as the amount of the original loan that is still owed.

Private mortgage insurance – Also referred to as PMI, private mortgage insurance is paid by the borrower when they take out a home loan and pay 20% or less as a down payment. PMI guarantees the mortgage for the lender if the borrower defaults.

Rate lock – When you freeze the interest rate on a mortgage for a specified period of time it is called a rate lock.

Real estate agent – A real estate agent is a licensed professional who works on behalf of a real estate broker and can represent a buyer or seller during a real estate transaction.

Real estate broker – A real estate broker usually has more training and education than a real estate agent and is licensed to work independently, sometimes hiring real estate agents to assist them.

Realtor – A Realtor is a member of the National Association of Realtors (NAR) and is expected to be a real estate expert and to adhere to the NAR code of ethics.

Title insurance – This is a form of indemnity insurance to protect the title holder of a property from any financial loss in the event that there is a flaw in the property title. In the case of most mortgages, the buyer purchases title insurance to protect the lender.

Under contract – When a property is under contract it means there is a binding agreement between the buyer and the seller with regard to the sale of property.

Underwriting – When an individual or financial institution underwrites a loan, they are assuming the risk on that loan for a fee. The term originates from individuals signing their name under the amount they are willing to risk.

When it comes to buying a home, it’s easy to get lost in the jargon, so work with a real estate professional and a mortgage broker that you can trust. Don’t be intimidated by the process and be sure to ask questions if something isn’t clear. To help you get started, be sure to check out our Mortgage Paperwork Checklist.

Remember that credit unions can be a great resource for a home loan. Credit unions are member owned, can usually offer better interest rates on a mortgage, and are often more willing to work with you if you have unique circumstances. If you are thinking about buying a home, please contact the loan professionals at iQ Credit Union. We’re always plaid to help.

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