September 5, 2019

The First-Time Homebuyer Definitions Guide

Buying your first home is an exciting time packed with fun decisions and new experiences. Our homebuyer glossary is here to help you feel confident and empowered by defining common real estate terms you’re likely to encounter as you navigate the home buying process.

Definitions


Escrow – Escrow is the process of using a third party (agent) as a neutral actor in the sale of a home. The escrow agent makes sure that the seller receives the money agreed upon for selling the house and ensures the buyer receives the house in return. Since there are so many moving parts involved in selling a home, the escrow agent is charged with remaining a nonpartisan middleman throughout the process. For instance, when the buyer writes an earnest money check (see below), that check will be given to the escrow agent and not the seller.

PMI – Private mortgage insurance is an extra amount paid on top of your mortgage and is generally required if you pay less than 20% of a home’s cost for the down payment, so it should be avoided whenever possible. This insurance favors the bank, not the homeowner, and is meant to alleviate the risk of the bank lending you more than 80% of the home’s price.

Earnest money – Earnest money is a sum (usually between 1%–5% of the home’s cost) paid from the buyer to the seller and held by the escrow company that represents the buyer’s serious intention to buy the home. Once earnest money has been paid, the buyer has a set amount of time to obtain financing for the home and handle other necessary tasks (perform an inspection, get an appraisal, etc.). If the deadline for obtaining financing is not met or if the buyer backs out of the sale, the earnest money will likely not be returned to the prospective buyer. If, however, the sale proceeds successfully, the earnest money will be rolled into the closing costs or down payment.

Fixed interest – If your home loan has a fixed interest rate, it means that the interest rate of the loan will never fluctuate. If you sign your loan at 3.8%, it will remain there for the duration of the loan.

Adjustable Rate Mortgage – An ARM loan means that the interest rate of your home loan will fluctuate with the market at predefined intervals (for example, annually). This is great if interest rates decrease, but it could become a problem if interest rates increase because your monthly mortgage payment will also increase.

Closing costs – Closing costs include a variety of fees paid for completing the purchase of a home, such as taxes, title insurance, homeowner insurance, and title search. Closing costs are normally 2%–5% of the total loan amount.

Down payment – A down payment is a portion of the total home price paid up front in one lump sum of cash. The higher the down payment, the smaller the amount of loan needed to pay for the remainder of the home’s cost. The recommended amount of down payment is 20%; this will allow you to qualify for the best loan rates and avoid having to pay PMI.

Home Co-investment – Due to rising housing prices, it may take a long time to save up the suggested 20% down payment to purchase a home. A home co-investment company pitches in to help with the down payment. For instance, if a home buyer has 10% of the home’s cost for a down payment, a co-investment company will contribute the remaining 10%. At the end of the term, typically when the home is sold, the co-investment company will receive an amount equal to its original investment and a portion of the appreciated value of a home. If the home has depreciated in value, the co-investment company may also share in the loss of value. Home co-investments are also available to homeowners looking to tap into their existing equity.

Broker – Brokers represent sellers and buyers of real estate. Brokers who work with buyers look for their clients’ dream home and assist with the buying process. Brokers who work with sellers determine the market value of the home, show the property, and help with other aspects of selling the home. Brokers normally have real estate agents working for them.

Real estate agent – A real estate agent is also commonly referred to as a “realtor,” and these agents work for a broker. They’re qualified to facilitate real estate transactions, and your realtor will be the one showing you homes and being your advocate throughout the homebuying process.

Home inspection – It may look like your dream home, but without a home inspection, it might actually be a nightmare. A home inspection is conducted on behalf of the buyer during the homebuying process. During an inspection, the inspector will investigate the condition of the home, from the plumbing and electrical systems to the foundation. The inspector will then provide a full home inspector’s report that details the findings.

Title – A title is the ownership document for a home. It’s similar to the “pink slip” showing ownership of a car.

Appraisal – An appraisal is a report estimating the value of the property, which may factor in how much similar properties have recently sold for . A home with an updated kitchen, for instance, will be appraised higher than an identical home in the same neighborhood with an older kitchen.

Lien – A lien is a legal right to someone else’s property. When you’re buying a house, you’ll need to make sure no money is owed on the property by the previous owner.

Closing – The closing is a meeting where all final documents involved in the purchase of the home are signed. During this meeting, the buyer will pay closing costs and the down payment.

Contingencies – Contingencies are conditions that must be met to successfully finalize the home purchase. The sale may be contingent upon a roof being replaced or the home being appraised at the sale price, for instance.

Equity – Equity refers to the portion of the home’s value that belongs to the homeowner, rather than the bank. In a purchase, it will generally equal the amount of the down payment.

Annual Percentage Rate – The cost of borrowing money for your home is the Annual Percentage Rate. APR considers interest as well as other finance changes associated with the loan. It is designed to help consumers compare the costs of different loan options.

Offer – This is the amount of money offered for a home by a prospective buyer. If, for instance, a home is listed for $200,000, a prospective buyer may offer $180,000. It is up to the seller to then accept or reject the offer. A stronger offer may include fewer contingencies (see above) or a higher down payment.

Mortgage Payment – A mortgage payment is the monthly amount you’ll pay for your home. It’s similar to paying rent, but the amount paid includes both the interest on the home loan and the principal (actual loan amount). It may also include amounts for monthly taxes and insurance depending on the lender.

Pre-approval letter – Before beginning the home search, a buyer should consider obtaining an estimate of how much a bank will lend them. The bank will determine how much it is willing to lend based on criteria such as income and credit.

There are several other words and phrases you’ll encounter as you buy your first home, but these terms are the most common. If you’re ever confused about anything during your home buying journey, just ask your realtor: he or she is there to help.