When you're new to the real estate market, there's a lot to learn. The terminology and jargon used in the home-buying process can be overwhelming for potential buyers, especially if they are unfamiliar with the industry.
To help you navigate the world of real estate with confidence, we have compiled a list of 20 essential terms that every potential home buyer should know. Ready to dive in? Let’s go!
An adjustable-rate mortgage (ARM) is a mortgage loan with an interest rate that can fluctuate over time. The initial interest rate is typically lower than that of a fixed-rate mortgage but may adjust periodically based on market conditions. Understanding the terms and adjustments of an ARM is vital in order to determine if it is the right option for your financial situation.
An appraisal is an evaluation of a property's value that must be conducted by a licensed professional appraiser. Lenders often require an appraisal to determine whether the property's value is sufficient to support the requested loan amount. As a buyer, it's important to understand the appraisal process to ensure you're paying a fair price for the property.
Closing costs are the fees and expenses associated with finalizing a real estate transaction. They include expenses such as appraisal fees, title insurance, attorney fees, and loan origination fees. It's important to budget for closing costs in addition to the down payment when planning your home purchase.
The closing disclosure is a document provided to the buyer by the lender at least three days before the closing date. It outlines the final terms of the loan, including the loan amount, interest rate, closing costs, and monthly payment. Reviewing the closing disclosure is crucial to ensure that all the details are accurate before signing the final documents!
A comparative market analysis (CMA) is a report prepared by a real estate agent that compares the prices of similar properties recently sold in the same area. It helps buyers and sellers determine a fair market value for a property and assists in making informed pricing decisions.
A contingency is a condition that must be met for a real estate contract to be binding. Two common contingencies are a satisfactory home inspection and obtaining financing. Contingencies provide protection for buyers, allowing them to back out of the contract without penalty if certain conditions are not met.
A contingent offer is an offer to purchase a home that is dependent on certain conditions being met. For example, a buyer may make an offer contingent upon the sale of their current home. If the contingency is not met within a specified timeframe listed on the contract, the offer may be voided.
A conventional loan is a mortgage loan that is not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Conventional loans usually have stricter eligibility requirements but may offer more flexibility in terms of the loan amount and property type.
“Days on market” means exactly that. It refers to the number of days a home has officially been listed for sale. There are many things can impact how many days a home stays on the market, so it’s important for homebuyers to pay special attention. A home that is priced too high will more than likely remain on the market longer, because fewer buyers will be interested. On the other hand, the same is true for homes that are in a poor physical state (needing extensive, costly repair) or in undesirable locations (high crime, for example!). Well-priced homes in great locations and in good condition typically don’t stay on the market very long.
The down payment is the initial payment made by the buyer when purchasing a home. It is typically a percentage of the total purchase price, and the remaining amount is financed through a mortgage. The size of the down payment can vary, but it is often recommended to aim for at least 20% to avoid private mortgage insurance (PMI) costs.
Earnest money, also called a “good faith deposit,” is a sum of money provided by the buyer to the seller as a sign of their commitment to the purchase. It demonstrates the buyer's seriousness and is typically held in an escrow account until the closing of the transaction.
Escrow refers to a neutral third party, usually a title company or an attorney, who holds funds and important documents related to the real estate transaction until all conditions of the sale are met. This helps ensure a smooth and secure final sale for both the buyer and seller.
A fixed-rate mortgage is a mortgage loan with an interest rate that remains constant throughout the entire loan term. This means that the monthly mortgage payment will not change over time, providing stability and predictability for homeowners.
A home inspection is a thorough examination of a property's condition conducted by a licensed home inspector. It assesses the overall condition of the property, including its structure, systems, and components. A home inspection can uncover any potential issues or repairs needed, helping buyers make informed decisions about the property.
A homeowners association (HOA) is an organization that manages and governs a community or condominium complex. HOAs typically have rules, regulations, and fees that homeowners must adhere to. It's important to understand the HOA's policies and fees when considering a property in a community governed by an HOA.
The Multiple Listing Service (MLS) is a comprehensive database used by real estate agents and established by cooperating real estate brokers to list properties that are for sale. It provides detailed information about properties, including their features, pricing, and availability. As a potential home buyer, working with a real estate agent who has access to an MLS can be extremely beneficial in finding your dream home.
Private Mortgage Insurance (PMI) is insurance that protects the lender in case the borrower defaults on the loan. It is usually required for conventional loans with a down payment of less than 20%. PMI adds an additional cost to the monthly mortgage payment and is typically canceled once the homeowner has built sufficient equity in the property.
Before you start house hunting, it's essential to get pre-approved for a mortgage. Pre-approval involves a lender evaluating your financial information and creditworthiness to determine the amount they are willing to lend you for a home purchase. Having a pre-approval letter in hand shows sellers that you are a serious buyer and can give you a competitive edge in a competitive market.
Title insurance is an insurance policy that protects the buyer and lender against any defects or issues with the property's title. It ensures that the buyer has clear ownership of the property and protects against any claims or liens that may arise in the future.
A title search is a process conducted by a title company or an attorney to examine public records and ensure that the property's title is free from any liens, encumbrances, or ownership disputes. It provides assurance to the buyer that they will have clear ownership of the property and that the seller truly has the liberty to sell it.
By familiarizing yourself with these essential real estate terms, you'll be better equipped to navigate the home-buying process with confidence. Remember, it's always beneficial to work with a knowledgeable real estate agent who can guide you through the intricacies of the market and help you make informed decisions. Happy home hunting!
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