Real Estate Terms to Know at Each Step in the Buying Process

First Time Home Buyer Basics

When trying anything for the first time you’ve got to learn the ropes. This is especially true when buying a home for the first time. One of the reasons a real estate agent is so helpful is because they understand the local market and the ins and outs of the real estate process. When attempting to “go it alone” you’ll find that working with the seller’s real estate agent means understanding real estate protocol and a whole set of terminology. For first time home buyers, we’ve put together some of the terms and concepts you’ll need to know as you go about your home purchase.

Do Your Homework

One of the first steps in buying a home is to do your research. Think through the features of your ideal home and its surrounding community. Be as specific as possible. Then spend time reviewing online listings. There are several listing sites that will give you pertinent information about each home. Pay attention to the amount of time a house is on the market and any price changes. Make sure to ask your real estate agent about available homes as well. During this initial phase you’ll likely encounter these terms:

• Multiple Listing Service: this refers to a private listing service that is accessible to real estate brokers. Many of the homes listed here can be found on home search websites, however, the Multiple Listing Service (MLS) provides the most current information. Some online resources have homes listed that have been closed.
• Appreciation: the increase in the value of a home over time due to economic factors. This will be important when considering the neighborhood and community of a house. The location of the home can indicate whether or not it will appreciate in years to come.
• Depreciation: the loss of value of a property due to economic conditions, as well as, the age and condition of the property itself.

When looking for properties consult your real estate agent for listings on the MLS and take into consideration the potential for appreciation or depreciation over time.

Assess Your Finances

When looking for a home it is important to know what you will be able to afford. In general, multiply your annual income by three to five times and try to stay within that range. Remember that a down payment of 20% is advised by most lenders. Inquire about down payment assistance options if this amount is too much to put down. It is also important to get pre-approved for a mortgage. This will work in your favor by gaining credibility for both your real estate agent and your lender. Here are a few terms to know during this step:

• Credit report: an account of one’s credit history prepared by a credit reporting agency. Your lender will seek this report when determining what type of loan you will be able to get.
• Credit reporting agency: a private agency that collects information about one’s credit history. Examples of these agencies are Equifax, Experian, and TransUnion.
• Credit score: a numerical value given to a consumer that reflects their degree of trustworthiness when applying for credit. A credit score over 700 is generally considered “good credit.” Anything under 400 is considered “bad credit.”

Get a Realtor

Hiring a real estate agent to walk you through the buying process will save you a tremendous amount of time and likely some dollars as well. Mistakes can be easily avoided when allowing a trained professional to work on your behalf.

• Real estate agent: a real estate professional that helps the consumer by showing houses and helping them navigate the real estate process. Real estate agents need to be licensed by their state and be supervised by a managing broker.
• Realtor: a real estate agent or broker that is a member of the National Association of REALTORS®. This means that they are committed to a strict code of ethics prescribed by this association. For more information on the differences click here.

Craft Your Offer

When looking for a home keep your list of key features in mind and use a checklist for home analysis. Once you find a home you like it’s time to put in an offer. Rely on your real estate agent to determine a fair price. They will research comparable homes in the area, the condition of the house, and other factors to arrive at a price. Make sure you are up on these terms:

• Acceptance: the agreement by the home seller to the terms of an offer. When the seller signs your purchase offer you enter into a contract for the purchase of the house.
• Counter offer: the rejection of an offer where the seller alters the terms of the offer. When this happens the original offer becomes void and the party that put in the original offer will need to consider the counteroffer.
• Earnest money deposit: a deposit made by the buyer after an offer is accepted. This shows the seller that the buyer is committed to the purchase of the home. If the buyer backs out after this point they risk losing this deposit.
• Escrow: the holding of funds by a third party until the close of the home sale. This third party is often an attorney or a company that provides this service.

Hire an Inspector

It is important for buyers to hire an inspector to verify the condition of the home. Most purchase offers are contingent on a home inspection. Again, your real estate agent will help you find a good inspector and walk you through the details of an inspection. If the inspection reveals issues, the offer can be renegotiated or the buyer can walk away without penalty. Working through this phase of the buying process with a qualified real estate broker will enable you to work out a safe home purchase with the least stress possible. Here are the terms to know:

• Contingency: a provision in a contract that the terms of the contract will be altered or voided under certain circumstances. For example, if the buyer does not approve of the home inspection they do not have to proceed with the home purchase.
• Disclosure: revealing facts that were previously hidden. Home sellers are required to give disclosure regarding the condition of the home. Water leaks, asbestos, and lead paint are examples of things that need to be revealed.

Choose Your Loan

There are several factors to consider when choosing the right loan. Are you hoping for a specific monthly mortgage payment? Perhaps you know you will be moving in a few years. Or is it important to you that your mortgage payment never increases? How long do you expect to pay on the loan? Each of these factors will go into your decision. Also, take the time to find a quality lender that will help you understand the differences between loans. Knowing some of these terms will be helpful:

• Adjustable rate mortgage: a loan with an interest rate that fluctuates according to a market indicator. For example, the weekly average of one-year U.S. Treasury Bills may be used as a standard to adjust the interest rate. Most adjustable rate mortgages limit the degree to which interest rates can vary.
• Fixed rate mortgage: a loan with an interest rate that remains constant through the life of the loan.
• Annual percentage rate: an annual interest rate that includes upfront fees and costs paid to acquire the loan.
• Assumable mortgage: a mortgage that enables the buyer to take over the seller’s mortgage.
• Balloon mortgage: a mortgage that is not fully paid by the end of the term. This means that the balance of the loan will be due at the end of the term.
• Prepayment penalty: a fee given to the recipient of a loan when they pay it off before the term of the loan. Since lenders make money on the interest of the loan they can charge this fee to encourage borrowers to keep the loan through its term.
• Private mortgage insurance: insurance for the lender of the loan in the case that the borrower defaults. Most buyers that put down less than twenty percent as a down payment will be required to purchase PMI.
• PITI: an abbreviation for the various aspects of a mortgage payment (principal, interest, property taxes, homeowners insurance).

Get an Appraisal

Your lender will make sure that an appraisal of the property is conducted. The number determined by the appraiser will show that the home is being sold at a fair price. If the appraisal is found to be lower than the loan amount the lender may decide to refuse the loan.

• Appraisal: determination of the value of something. Some of the factors that go into an appraisal are the initial price of the home, the condition of the property, comparable sales, and the status of the surrounding community.

Closing Day

Before closing your lender will get all the paperwork ready. A title company will be utilized, as well as, the necessary attorneys. On the closing day you will be required to sign the paperwork and pay closing fees. Make sure you understand these closing day concepts:

• House closing: final transfer of ownership of a property from the seller to the buyer.
• Closing costs: the settlement and transaction charges that a buyer pays at the close of escrow when a property is transferred. Click here for a quick list of typical closing costs.
• Non-recurring closing costs: closing costs that only need to be paid one time. Examples of non-recurring closing costs are transfer taxes, title insurance, and the appraisal fee.

The buying process is an exciting adventure and can be navigated safely with some basic knowledge and the right professionals on your side. Happy home hunting!