Buying a home is undoubtedly an exciting venture but it can be quite confusing as well. Where the documentation keeps you overwhelmed, the abundance of terminologies and jargon used in the home-buying process can add to the complexity. From escrow to appraisal, there are many home-buying terms that homebuyers need to understand in order to make informed decisions.
Let's take a closer look at some of the most common home-buying terminology and their definitions to help you navigate through the home-buying process with confidence.
Pre-approval refers to a lender's reviewing of your credit history, income, and other financial information and getting an estimate of your home affordability. Before you start house hunting, it's important to get pre-approved for a mortgage. If you have a pre-approval letter, you would appear as a serious buyer who is working toward getting financing.
This term is not the same as pre-approval. Pre-qualification is an essential initial step when planning to secure a mortgage. By submitting some basic financial data, the lender assesses if the borrower meets the preliminary criteria to qualify for a loan. Pre-qualification provides an estimate of the potential loan (not exact) amount and aids in choosing between various mortgage products that suit the borrower's financial goals.
A loan taken or borrowed to buy a home is called a mortgage or a home loan. There are many conventional and government loans available that borrowers can look into according to their eligibility. Your credit history, financial standing, and credit score impact your loan features, such as interest rate, duration, and down payment. This loan makes homeownership easier, and in return, you would have to repay the loan as monthly mortgage payments. If you are unable to fulfill your commitments and don't pay your monthly payments on time, you are unintentionally forcing your lender to start the foreclosure process on your house.
The principal is the amount of money that a borrower borrows for a mortgage. It does not include interest or any other fees associated with the loan.
Mortgage insurance is a terminology commonly used in the home-buying process and refers to the insurance that protects the lender against the borrower's default. Usually, when a borrower makes a lower than 20% down payment on the home's price, they are entitled to pay mortgage insurance. If you are going for a conventional loan, you will have to pay for Private Mortgage Insurance (PMI), and if you have an FHA loan, your insurance will be called 'Mortgage Insurance Premium (MIP)'.
An appraisal is a home buying term for the assessment of the value of a property. Usually, a licensed appraiser is hired to examine the home's size, condition, location, and other factors to determine the potential home's market value. Lenders frequently mandate appraisals to ensure that the amount of money lent to the buyer is justified by the property's worth.
Closing costs are the fees and expenses related to the closing of the deal. These can include costs like attorney fees, title insurance, and property taxes. Most closing costs are paid upon the completion of the transaction, although certain expenses such as appraisal fees may be paid prior to the deal's closing. The exact amount of closing costs can vary as per different factors, but these usually fall in the range of 2-5% of the home's purchase price.
A down payment refers to the money given by a buyer as an upfront payment toward the home price. The purpose of a down payment is to ensure the borrower's home affordability. Different loan types and financial standings require different down payments. When you are getting a mortgage, your lender would need a guarantee of your financial standing and ability to pay. A down payment of at least 20% of your home's price, or maybe even more in case you have a low credit score, might be needed to get your mortgage approved. However, you may have the option of choosing loan programs like the Federal Housing Administration (FHA), which offers smaller down payment requirements. Among other factors, the financial circumstances of a borrower, such as credit history, may also impact the required down payment.
Escrow is a neutral third party that keeps and takes care of the funds and documents on behalf of the buyer and seller during the home-buying process. Usually, when you and the seller will finalize the terms of the sale, you have to put your down payment into escrow. Your funds will be held in the escrow account until your transaction is final, the specified stated conditions are fulfilled, and the property is successfully transferred to you.
A homeowners association, or HOA, is like a superhero that works behind the scenes to ensure your community looks its best and runs smoothly. This dedicated organization handles all the maintenance, upkeep, and management of your neighborhood of homes or condominiums. From landscaping to enforcing community rules, the HOA has got it all covered. Usually, homeowners have to pay monthly charges to HOAs to cover the costs of maintaining common areas, such as parks or swimming pools. They may also set rules and regulations that residents must follow, such as restrictions on exterior paint colors or noise levels.
A title search is the assessment of public records to make sure that the seller actually owns the property and can sell it as required. Through a title search, any liens or other encumbrances that could affect the buyer's ownership of the property can be identified.
Title insurance safeguards the buyer and lender against potential flaws or issues with the property title. This type of insurance assures the buyer that they have uncontested and marketable ownership of the property and prevents any liens or other problems from altering their legal rights.
Underwriting is a critical process that lending organizations use to assess a borrower's eligibility for a mortgage. Before the lender hands over a wad of cash to you, they go through a thorough investigation of your financial history. That means analyzing everything from your credit score to your income and other financial details. It's like a financial CSI investigation, where they are putting your finances under the microscope to determine if you have what it takes to repay the loan.
The homebuying terminology 'Walkthrough' refers to the final inspection that a buyer will conduct on a property just prior to closing. In this step, the buyer can see if the agreed-upon repairs have been done, and if the property's condition has changed since after they made an offer. If the buyer doesn't get satisfied, they can request the seller to address their concerns before the sale gets finalized.
The home buying contract has a 'contingency' clause specifying certain conditions that need to be met before the finalization of the sale. For example, a buyer may include a contingency clause that the home should pass the inspection stage or the sale would only get finalized if he gets the needed financing.
The home buying term 'Earnest money' is a deposit you can make to appear as a serious buyer and to make yourself prominent among the pool of buyers. It shows your intent to follow through with the purchase. If the sale is finalized, the earnest money will be applied toward the down payment or closing costs.
A home inspection is an assessment of the property's condition. A professional inspector examines the home's structural components, electrical systems, plumbing, and other areas to identify any issues or defects. If the inspection indicates any issues, it can help the buyer negotiate repairs or a lower purchase price.
When you are refinancing your current mortgage, it means you are changing it with another mortgage having more suitable terms. One usually refinances to take advantage of lower interest rates, to shorten the loan term, or to access the equity in the home.
Zoning laws define how the land can be utilized. These regulations may cover various aspects including but not limited to, the permissible types of structures, height restrictions, and allowed property usage.
The home-buying terminologies can make the already complex homebuying process even more complicated. Whether you are new to home buying or are experienced in the process, understanding these home-buying-related terms can make the entire transaction smoother and more manageable. Otherwise, you might have to face many difficulties, and your confusion can even lead to your losses. By having the know-how of the common jargon, you can make your process easier as well as make informed decisions.
Familiarize yourself better by asking a real estate agent for help. Hop on to HAR.com and hire an expert agent who can explain to you all these complicated terminologies.
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