Home Buying Step #2 – Learning the Lingo

Brandon Cornett asked: When buying a home for the first time, the terminology alone can make your head spin. It’s not that first-time buyers lack the intelligence to understand home-buying terminology. It’s just that they’ve never been exposed to it before. So one of the first home-buying steps you should take is to learn the lingo. After all, buying a home and taking on a mortgage loan are two of the biggest financial moves you’ll ever make. The last thing you want is to make some kind of costly mistake simply because you misunderstood the meaning of a certain word or phrase. Here is a short list of some of the most common home buying and mortgage terms you are likely to encounter: Adjustable Rate Mortgage (ARM) — A type of loan that starts out with a lower interest rate for an introductory period (3 years, for example) and later adjusts to whatever the current interest rate is at the time of adjustment. Appraisal — A professional appraiser’s estimate of the market value of a property. Appraisals take into account the local market conditions and the characteristics of a property. They are required by most lenders. Closing — The official transfer of property ownership from seller to buyer. It usually happens in the form of a formal meeting between the buyer, seller, settlement agent, and the buyer’s and seller’s agents. At closing, the buyer will sign the mortgage, the seller will receive payment for the property, and the buyer and/or seller will pay the closing costs. Also referred to as “Settlement.” Comparables — Also known as “comps,” these are comparable homes for sale in the same area as the home you’re considering. By looking at recent comps for other homes that have sold in the area, you can better validate the seller’s asking price. Debt-to-Income Ratio — This is one of the criteria lenders will evaluate you on, to determine if you are “credit worthy” of a loan. This ratio is calculated by dividing monthly debt by gross monthly income. Down Payment — The money paid by the buyer to the lender at the time of the closing. Because it’s paid in advance, this portion of the purchase price is not part of the mortgage loan. Smaller down payments (those less than the standard 20 percent) usually require mortgage insurance. Escrow — Also “escrow account.” Funds set aside and held by a neutral third party, usually for payment of taxes and insurance. FICO Score — Also referred to simply as a credit score, this is a computer-generated score used to determine how likely a person is to repay a loan. Your credit score is based on your credit report. Lenders use this score to analyze your credit report and to determine your credit worthiness. FICO stands for Fair Issac Corporation, the company that created the credit-scoring model used by lenders. Fixed-Rate Mortgage — With this type of mortgage loan, the interest rate stays the same for the entire term of the loan, regardless of what the economy or the prime interest rate does. Thus, the mortgage payments will also stay the same for the life of the loan. Foreclosure — Something you’ve probably heard a lot of lately. This is what happens when a homeowner can no longer pay their mortgage. It is the legal process that allows the lender to recover and sell a property after the owner has defaulted on the loan. Home Inspection — A complete “top to bottom” inspection of a home’s physical condition. Home inspections should be conducted by a professional, licensed home inspector and should cover all major systems and structural elements of the property. Home inspection fees are typically paid by the buyer. Homestead Credit — A state-sponsored property-tax credit program (only available in some states); reduces property taxes for eligible households. Ask your agent if your state offers such a program. Also known as Homestead Exemption. Mortgage — A financial agreement between a lender and a buyer in which the property is used as collateral for the loan. A mortgage gives the lender the right to collect payments on the loan (and to foreclose on the property if those payments are not made). PITI — This home buying acronym refers to primary components that make up a mortgage payment — principal, interest, (property) taxes, and insurance. Principal — The actual amount of money borrowed, not counting interest. The part of the monthly payment that actually reduces the remaining balance of a mortgage. Think of it as the “core” amount borrowed from a lender, excluding interest. Purchase Offer — A detailed, written document that makes an offer to purchase a property. The offer may be modified, or “amended,” several times during the course of negotiations. When the offer is signed by all parties involved, it becomes a legally binding contract. Also known as the purchase agreement, offer or contract. Settlement Statement — A document required by the Real Estate Settlement Procedures Act (RESPA). An itemized statement of charges that must be paid at closing or settlement. The buyer has the right to examine the settlement statement one day before the closing. Also known as a Closing Statement or a HUD-1 Settlement Statement. Title — A written document that shows ownership of property. Includes the signatures of current owners and a legal description of the property. Also known as a deed. Clearly, this list is not all-inclusive. There are many more home buying and mortgage terms you are likely to encounter. These are just 18 of the more common terms you are likely to encounter when buying a home. Is there something on this list you’ve never heard of before? If so, your next home buying step is clear — research those topics! 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