If you are preparing to buy home, you have already discovered that the real estate and mortgage industry practically have their own language! AHRN.com has outlined the terms you are likely to run into to help you begin the process of buying your home with confidence.
Acceptance: Agreeing to the terms of an offer, thereby creating a contract. As soon as the seller signs on to your purchase offer, you’re in contract for the sale of the house, and neither of you can back out without facing consequences — in your case, losing your earnest money deposit and, in the seller’s case, a potential lawsuit.
Adjustable rate mortgage (ARM): A mortgage loan with an interest rate that fluctuates in accordance with a designated market indicator — such as the weekly average of one-year U.S. Treasury Bills — over the life of the loan. To avoid constant and drastic fluctuations, ARMs typically limit how often and by how much the interest rate can vary.
annual percentage rate (APR): A yearly interest rate that includes upfront fees and costs paid to acquire the loan, calculated by taking the average compound interest rate over the term of the loan. Mortgage lenders are required to disclose the APR so that borrowers can more accurately compare the actual cost of different loans with different fees.
Appraisal: A determination of the value of something, such as jewelry, stock, or, in this case, the house you plan to buy. A professional appraiser — who should be a qualified, disinterested specialist in real estate appraisals, with expertise in the local geographic area — makes an estimate by examining the property, looking at the initial purchase price, and comparing it with recent sales of similar property. Your bank or other lender will require the appraisal in order to ascertain the worth of the house for lending purposes. And, unfortunately, the lender may refuse to fund the loan if the appraisal comes in lower than the loan amount. In such situations, if you can’t come up with additional down payment money or a better appraisal, deals have been known to fall through.
Appreciation: An increase in the value or worth of an asset or piece of property that’s caused by external economic factors occurring over time, rather than by the owner having made improvements or additions. For example, increased market demand or inflation can cause property to appreciate. The term is commonly used in the context of real estate. The seller is probably hoping to cash in on any appreciation in the home’s value since buying it — but the opposite (called depreciation, defined below) is also possible.
assumable mortgage: A home mortgage that allows the buyer to take over the seller’s mortgage; that is, to step into the seller’s shoes, make mortgage payments, and comply with other terms of the existing loan. Most lenders require the borrower to qualify for the mortgage in order to assume the mortgage.
balloon mortgage: A mortgage that is not fully paid off over the loan term (such as five, seven, or ten years), leaving a balance at the end. The borrower must either pay off the remaining mortgage or refinance the loan.
Closing costs: All settlement or transaction charges (above and beyond the actual cost of the property) that home buyers (or sellers, depending on tradition in your area and what you negotiate with the seller) need to pay at the close of escrow when the property is transferred. These typically include lender’s fees and points or prepaid interest, a prorated share of the property taxes, transfer taxes, credit check fees, homeowners’ and title insurance premiums, deed filing fees, real estate agent commissions, inspection and appraisal fees, and attorneys’ fees. Some closing costs are tax-deductible.
Common area: Facilities and space, such as recreation facilities, parking, laundry rooms, or a courtyard in condominiums, apartment buildings, and some cooperative housing projects. Common areas in condominiums are not individually owned by the residents, but shared by percentage interest or owned by the management organization.
common interest development: A type of housing, composed of individually owned units, such as condominiums, townhouses, or single-family homes, that share ownership of common areas, such as swimming pools, landscaping, and parking. Common interest developments (also known as community interest developments or CIDs) are managed by homeowners’ associations. Members typically pay monthly association dues.
Condominium: A type of real property ownership in which each owner holds title to his or her individual unit and shares ownership jointly of common areas such as driveways, parking, elevators, outside hallways, and recreation and landscaped areas. A homeowners’ association typically manages the common areas and oversees the covenants, conditions, and restrictions (CC&Rs) that apply to the property. Condominiums are often referred to as a common interest development.
Contingency: A provision in a contract stating that some or all of the terms of the contract will be altered or voided by the occurrence of a specific event, usually by specific dates leading up to the closing. For example, a contingency in your home purchase contract might state that, if the buyer does not approve the inspection report of the physical condition of the property, the buyer does not have to complete the purchase. Or the seller might include a contingency asking for proof that the buyer is financially able to close the deal or for closing to be held off until the seller successfully finds another house to buy.
Counteroffer: The rejection of an offer to enter into a contract, where the rejecting party includes a different offer that changes the terms of the original offer in some way. For example, if you offer $350,000 for a house, and the seller replies that he wants $375,000, the seller has rejected your offer and has made a counteroffer. The legal significance of a counteroffer is that it completely voids the original offer.
Credit report. A written account of a consumer’s credit history prepared by a credit reporting agency. Credit reports generally include information on loans, credit cards, and other bills and accounts, as well as a record of the consumer’s addresses and employers.
Credit reporting agency: A private company that collects and sells information about a person’s credit history. Banks and mortgage lenders are among those who use the information to screen applicants. There are three major credit reporting agencies — Equifax, Experian, and TransUnion — and they are regulated by the federal Fair Credit Reporting Act. You can receive free copies of your credit report at www.annualcreditreport.com.
Credit score. Numerical calculation that creditors use to evaluate the creditworthiness of someone applying for credit, such as a mortgage. High credit scores (over 700) indicate less risk that you will default on payments, and low scores (under 400) indicate potential problems.
Depreciation: The gradual loss of value of property that occurs through external economic conditions, the property’s age, natural wear and tear, or deterioration.
Disclosure: The making known of a fact that had previously been hidden; a revelation. In many states, a home seller must disclose major physical defects in the house within his or her knowledge, such as a leaky roof or potential flooding problem; and, in all states, sellers must disclose the presence of lead-based paint hazards in buildings constructed before 1978.
Earnest money deposit (EMD): A partial payment (deposit) demonstrating commitment in a contractual relationship, and commonly made in real estate transactions at the time of making the purchase offer. The remainder of the payment is due on the closing date. The seller keeps the earnest money if the buyer fails to make timely payment in full (or if there is a similar breach of the agreement).
Escrow: The holding of funds or documents by a neutral third party prior to closing your home sale.
Escrow agent: A person (often an attorney) or a company that handles escrow arrangements for a fee usually paid as part of the closing costs. Also sometimes called a title agent.
Escrow instructions: Written instructions, signed by a buyer and seller, telling an escrow agent what needs to happen before the deal closes.
Fixed rate mortgage: A mortgage loan that has an interest rate that remains constant throughout the life of the loan, usually 15 or 30 years.
Hazard insurance: A type of insurance found in homeowners’ policies, which protects against physical damage to the property caused by unexpected and sudden events such as fires, storms, and vandalism. Your mortgage lender will no doubt require you to purchase hazard insurance, in order to protect its collateral from decreases in value.
Homeowners’ association: An organization made up of neighbors concerned with managing the common areas of a subdivision or condominium complex. These associations collect monthly dues and take on issues such as garden, pool, and fence maintenance, noise abatement, snow removal, parking area upkeep, repairs, and dues. The homeowners’ association is also responsible for enforcing any covenants, conditions, and restrictions (CC&Rs) that apply to the property.
House closing: The final transfer of the ownership of a house from the seller to the buyer, which occurs after both have met all the terms of their contract and the deed has been recorded.
Multiple listing service: A computer-based service, commonly referred to as MLS, that provides real estate professionals with detailed listings of most homes currently on the market.
Nonrecurring closing costs: Those costs of closing a home purchase that need to be paid only once — such as the appraisal fee, title insurance, and transfer taxes. (Compare with recurring closing costs, defined below.)
PITI: Abbreviation for the major expenses that make up a mortgage payment: principal (the amount borrowed), interest, (property) taxes, and (homeowners’) insurance.
Prepayment penalty: A fee imposed on a borrower who pays off a loan (usually a mortgage) before its due date. Lenders impose this kind of fee to encourage borrowers to hold a debt — and keep paying interest on it — for the whole term of the loan.
Private mortgage insurance: Insurance that reimburses a mortgage lender if the buyer defaults on the loan and the foreclosure sale price is less than the amount owed the lender (the mortgage plus the costs of the sale). A home buyer who makes less than a 20% down payment will most likely have to purchase private mortgage insurance, commonly referred to as PMI.
Real estate: Land and things permanently attached to it, such as buildings, houses, stationary mobile homes, fences, and trees. Real estate is also called real property. Anything that isn’t real estate is personal property.
Real estate agent: A foot soldier of the real estate business who shows houses and does most of the other nitty-gritty tasks associated with selling real estate. An agent must have a state license and be supervised, in most U.S. states by someone called a real estate “broker” (or, if the agent is already referred to as a broker in his or her state, by a “managing broker”). Most agents are completely dependent upon commissions from sellers for their income.
Real estate broker: A real estate professional licensed to negotiate the purchase and sale of real estate for a commission or fee. In most states, a broker is one step up from a real estate agent, having more training and the power to supervise agents. However, in some states, the term “broker” is used for all agents. In Washington State, for example, regular real estate agents are referred to as “designated brokers,” and those who can supervise others are called “managing brokers.”
Realtor®: A real estate agent who is a member of the National Association of Realtors (www.realtor.com) is allowed to call him or herself a Realtor®.
Recurring closing costs: Those costs of closing a home purchase that represent the first of a series of payments that will recur over time — such as homeowners’ insurance and property taxes. (Compare with nonrecurring closing costs, defined above.)
Title: Ownership of real estate or personal property. With real estate, title is evidenced by a deed (or other document) recorded in the county land records office.
Title report: The written analysis of a real estate title search, including a property description, names of titleholders and how title is held (joint tenancy, for example), tax rate, encumbrances (mortgages, liens, deeds of trust, recorded judgments), and real estate taxes due. A title report is needed before a lender will agree to finance purchase of the property. A title report is prepared by a title company, an abstracter, an attorney, or an escrow company, depending on local practice.
Zoning: The local laws dividing cities or counties into different zones according to allowed uses, from single-family residential to commercial to industrial. Mixed-use zones are also used. Zoning ordinances control the size, location, and use of buildings within these different areas and have a profound effect on traffic, health, and livability. You’ll need to look into zoning laws if you’re hoping to change the use of the home you buy, for example by adding a rental unit or running a home-based business.