As a Realtor I find that most people don't know all the steps in the home buying process. That's okay and really normal. Thus the reason to allow a Avocate (Realtor) to work for you. I love what I do. I love serving people and seeing them become Homeowners.
The process of buying a home is long with plenty of moving parts and complicated jargon with every step. This list of terms can help you understand how to buy a house and what you're agreeing to when you sign each document.
- Homebuyers encounter lots of jargon and acronyms, from PMI to escrow.
- There is a seemingly endless list of vocabulary to learn — and people to know.
- Here is a glossary of the most important terms for first-time or anytime homebuyers.
The finances of buying a home
Credit score: A credit score is a number that indicates how likely you are to repay debt, and the higher your score, the better. The credit score you'll need to get a mortgage depends on your lender and which type of mortgage you get. A higher credit score usually lands you a better interest rate.
Debt-to-income ratio: Your DTI ratio is expressed as a percentage, and it is the amount you pay toward debts each month, divided by your gross monthly income. You want your DTI ratio to be as low as possible. Each lender requires a different ratio depending on which type of mortgage you get.
Down payment: This is the amount of money you pay upfront. Any money you don't have for a down payment, you'll borrow by taking out a mortgage.
Loan-to-value ratio: The LTV ratio is the relationship between the amount you owe on your mortgage (the loan) and how much your home is worth (the value). Knowing your LTV ratio helps you understand how much of your home you own in financial terms. If you have 20% for a down payment, your LTV ratio is 80%.
Closing costs: Closing costs are fees you pay when you buy a home. Some go to your lender, while others pay third-party vendors like appraisers and attorneys.
Types of mortgages
Mortgage: This is a type of loan used to buy a home.
Fixed-rate mortgage: Your interest rate is locked in for the entire life of your loan, so you'll pay the same rate until you pay off your mortgage.
Adjustable-rate mortgage: Your interest rate stays the same for a predetermined amount of time, then changes periodically. For example, a 5/1 ARM locks in your rate for the first five years, and then your rate goes up or down once a year.
Conventional mortgage: This is a type of mortgage that is not backed by the government, and its eligibility requirements are a little stricter than those with government-backed mortgages. The two types of conventional mortgages are conforming and jumbo.
Conforming mortgage: A conforming mortgage is for an amount within the limits set by the Federal Housing Finance Agency, which is $548,250 in most parts of the US in 2021. In areas with a higher cost of living, such as Alaska, Hawaii, Guam, and the US Virgin Islands, the limit has been increased to $822,375.
Jumbo/nonconforming mortgage: A jumbo mortgage is for an amount that exceeds the limit set by the FHFA. You'll usually need a larger down payment and higher credit score to qualify for a jumbo mortgage.
Government-backed mortgage: If you default on a mortgage that's backed by the government, the agency pays the lender on your behalf. When a lender gives you a government-guaranteed mortgage, it's like the lender is getting insurance on your loan. The three types of government-backed mortgages are FHA, VA, and USDA mortgages.
FHA mortgage: This loan is backed by the Federal Housing Administration. You may be able to get an FHA mortgage with a lower credit score and/or smaller down payment than with a conforming mortgage.
VA mortgage: A mortgage guaranteed by the Department of Veterans Affairs is for active military members and veterans, and you don't need a down payment.
USDA mortgage: A loan backed by the United States Department of Agriculture is for low-to-moderate income earners who are buying in rural areas. You don't need to put any money down.
Construction loan: This is a loan for building a home. You have the option to roll the construction loan into a regular mortgage after the building is complete.
Balloon mortgage: Instead of paying the same amount every month for the entire life of your mortgage, you make smaller payments for a few years. Then you'll pay off the remaining lump sum when the balloon-mortgage term ends.
Interest-only mortgage: You'll pay interest only for a set term. Then payments will go toward both interest and the principal. For example, a 10/20 term has interest-only payments for 10 years, and then your payments will go up for the remaining 20 years.
Mortgage refinance: When you refinance, you replace your original mortgage with a new one that has different terms. You don't need to worry about refinancing when buying a home, but know that you have the option to refinance later if you want to change the terms you get with your first mortgage.
Getting a mortgage
Mortgage lender: This is the company that loans you money to buy your home.
Mortgage broker: A broker is the middleman between you and lenders. The broker does the research to help you find the right lender and best deal. You are not required to go through a broker, but you may choose to.
Prequalification: When you apply for prequalification, you'll tell a lender information such as your income and credit score, and the lender gives you an idea of which terms you could get on your mortgage. You'll probably apply for prequalification if you're just starting to consider buying a home.
Preapproval: This is similar to prequalification, but there are key differences. You'll apply for preapproval when you are ready to shop for homes. The lender does a hard credit inquiry to give you more precise information about your mortgage, and your interest rate is locked in for about 60 to 90 days.
Loan estimate: After you choose a home, you can ask a mortgage lender for a loan estimate that itemizes your list of closing costs and explains what your monthly payments will be.
Closing disclosure: The lender will send you a closing disclosure within three days of closing. This is the most detailed document about your mortgage terms.
Appraisal: The lender will require an appraiser to visit the property and assess the value of the home.
Inspection: While an appraisal is required, an inspection is optional. An inspector checks the condition of the home and tells you about any major or minor issues.
Contingencies: When you sign the contact after the offering, there will be multiple contingencies in the document that you and the seller agree to. For example, an inspection contingency may state that you won't buy the home if the inspection comes back showing that more than a certain dollar amount is required for repairs.
Interest rate: The interest rate is a fee for borrowing money, expressed as a percentage. For example, you may take out a mortgage for $200,000 with 3.5% interest.
Annual percentage rate: The APR is the interest rate plus the costs of things like discount points and fees. This number is higher than the interest rate and a more accurate representation of what you'll pay on your mortgage annually.
Private mortgage insurance: PMI protects the lender should you default on your mortgage payments. You'll need PMI if you have less than 20% for a down payment on a conventional mortgage. You might pay PMI monthly, in full at closing, or divide it up between closing costs and monthly payments.
Homeowners insurance: This covers damage to you, your property, and your belongings. You'll probably pay for homeowners insurance monthly. But many lenders require you to pay a certain amount — maybe a year's expenses — at closing.
Title search: You'll pay for an expert to track down the seller's title to ensure they own the home.
Title insurance: You might pay for both the lender's title insurance and the owner's title insurance. The lender's insurance protects the company in case there's an issue in the title-search process. The owner's insurance, which is optional, protects you if problems arise.
Survey fee: A lender may require you to pay for someone to survey the land and create a drawing of the parameters and dimensions of the home.
Discount points: You can pay a fee at closing for a lower interest rate on your mortgage. One discount point usually costs 1% of your new mortgage, and it reduces your rate by 0.25%. So if your rate on a $200,000 mortgage is 3.5%, and you pay $4,000 for two discount points, your new interest rate is 3%.
Prepayment penalties: A mortgage-prepayment penalty is a fee you pay the lender if you sell, refinance, or pay off your mortgage within a certain amount of time of closing on your initial mortgage — usually three to five years. This will be a closing fee only if you're refinancing, but you should read your contract for your initial mortgage to find out whether you will pay prepayment penalties if you refinance later.
The real-estate market
Buyer's agent: This is a real-estate agent who guides a homebuyer through the process of a home purchase.
Listing agent: The listing agent is a real-estate agent who represents the current homeowner (seller) in a property sale.
Blind offer: This is the offer a buyer makes on a property they haven't seen before. Blind offers are most often made in competitive bidding situations or unique circumstances in an effort to win a home quickly.
Closing agent: A closing agent is the person who organizes various closing activities, from prepping closing documents to distributing funds. Closings are often conducted by title and escrow companies or attorneys.
Counteroffer: This is an offer made in response to a previous offer. For example, after the buyer presents their first offer, the seller may make a counteroffer with a slightly higher sale price.
Deed: A deed is a legal document that shows property ownership.
Easement: Easement is the right to use or access land owned by someone else.
Escrow: Escrow is an arrangement in which a third party distributes the money or property derived from a transaction between two others. In real estate, this often occurs when funds or documents are deposited and distributed by an attorney upon the closing of a property sale.
Foreclosure: When a homeowner fails to fulfill mortgage payments or falls into default, the property can fall into foreclosure, which ends a homeowner's ownership rights to their property.
Homeowners association: This is a group of homeowners organized in a particular area of residence who ensure community maintenance and services for the common benefit of local residents.
iBuyers: These are companies that use technology to make instant offers on homes. iBuyers often alleviate the burden of property marketing and resale, and make sellers more all-cash offers.
Investment property: An investment property is real estate purchased by a homebuyer with the intention of generating rental income or a profitable resale.
Market value: This refers to the valuation of a home based on what a buyer would pay for the property in the current state of the housing market. Appraisals are sometimes used to assess a property's market value.
Multiple listing service: An MLS is a clearinghouse organization through which real-estate brokerages exchange listing information about properties. They vary by location and are typically operated by local, private real-estate associations.
Offer: An offer is the formal bid a prospective buyer makes on a seller's home with the intent to purchase.
Open house: This is an event brought about by the seller's agent during which the agent opens the for-sale property to the public.
Walk-through: A walk-through is the tour a homebuyer often takes of the home they are about to purchase, usually conducted immediately before the closing.