Real estate vocabulary can add layers of confusion to an already complicated process. Whether you’re buying or selling a home, this list of resources can help you learn the vocabulary.
- Debt to Income Ratio: In the consumer mortgage industry, the debt-to-income ratio is the percentage of a consumer’s monthly gross income that goes toward paying debts.
- Adjustable Rate Mortage (ARM): A variable-rate mortgage, adjustable-rate mortgage, or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index that reflects the cost to the lender of borrowing on the credit markets.
- Probate sale: A probate sale happens when a homeowner dies without writing a will or leaving a property to someone. In such situations, the probate court would authorize an estate attorney, or other representatives, to hire a real estate agent to sell the home. The total process will usually be a bit more complicated and therefore will take more time than a conventional sale.
- Commissions: A real estate commission is a percentage of a property’s purchase price that is paid to the real estate agents and brokers that facilitated the purchase and sale of a property. Real estate agents typically make their money through their commission and do not make a commission (or get paid) unless the house sells.
- Down Payment: A down payment is a sum of money that a buyer pays in the early stages of purchasing an expensive good or service. The down payment represents a portion of the total purchase price, and the buyer will often take out a loan to finance the remainder.
- Equity: Home equity is the market value of a homeowner’s unencumbered interest in their real property, that is, the difference between the home’s fair market value and the outstanding balance of all liens on the property.
- Earnest Money Deposit: Earnest money, or good faith deposit, is a sum of money you put down to demonstrate your seriousness about buying a home. In most cases, earnest money acts as a deposit on the property you’re looking to buy.
- Fixed Rate Mortgages: A fixed-rate mortgage is a mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float.”
- Escrow Account: An escrow account sometimes called an impound account depending on where you live, is set up by your mortgage lender to pay certain property-related expenses. The money that goes into the account comes from a portion of your monthly mortgage payment.
- Principal, Interest, Taxes, and Insurance (PITI): In relation to a mortgage, PITI is the sum of the monthly principal, interest, taxes, and insurance — these are the component costs that add up to the monthly mortgage payment in most mortgages.
- Principal: A mortgage payment is typically made up of four components: principal, interest, taxes, and insurance. The principal portion is the amount that pays down your outstanding loan amount.
- Mortgage Commitment Letter: A mortgage commitment letter is a formal document from your lender stating that you’re approved for the loan. Lenders issue a mortgage commitment letter after an applicant successfully completes the preapproval process.
- Appraisal: Real estate appraisal, property valuation, or land valuation is the process of developing an opinion of value for real property or the estimated value of a piece of real estate, as judged by a qualified third party.
- Close of Escrow: Close of escrow means that both buyer and seller have met the conditions in the homebuying contract and the third party that holds the documents and funds can move forward with the sale.
- Contingencies: A contingency is a clause that buyers include when making an offer on a home that allows them to back out of buying the house if the terms of the clause aren’t met.
- Pre-approval: Pre-approval is a way for a lender to help you and a seller estimate what you can afford. After you find a house and make an offer, the home will still need to be appraised by a third party and inspected for potential repairs before you can close on the loan and buy the home.
- Pre-qualified: An estimate is given by a lender to determine how much of a mortgage you may qualify for when you are seeking a home.
- Purchase and Sale Agreement: A purchase agreement is a final document used to transfer a property from the seller to the buyer, while a purchase and sale agreement specifies the terms of the transaction. Parties will sign a purchase agreement after both parties have complied with the terms of the purchase and sale agreement.
- Title Search: A property title search examines public records on the property to confirm the property’s rightful legal owner. The title search should also reveal if there are any claims or liens on the property that could affect your purchase.
- Inspection contingency: Also known as a “due diligence contingency,” the inspection contingency is a clause sometimes offered in a purchase agreement that grants buyers a predetermined amount of time during escrow to perform any necessary inspections.
Buying a home can be exciting. It also can be somewhat daunting even if you have done it before. No doubt you will hear and see words and terms you have never heard before. Hiring a reputable realtor can help you understand all the terms and transactions in the real estate and mortgage marketplace.
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