Financial Terms to Know for Home Buyers

Important Terms to Know When Buying a Home

Quick Definitions of Common Real Estate Terminology

If you are beginning to think about, or have already started your journey to homeownership, you have more than likely come across a wide assortment of financial terms exclusive to the home-buying process with which you may or may not be familiar. In today’s blog, I wanted to go ahead and define some of these terms, so that wherever you are in the home-buying process, you can be familiar with and prepared to deal with any and all real estate jargon you come across.

The best way to be prepared when looking to buy a home, however, is to work with an experienced and knowledgeable Realtor. When you work with a professional Realtor, like myself, you gain the advantage of having someone by your side walking you through the entire home-buying process, and making sure that your needs are being met.

Today, I’ll just be covering terms that you might need to know as a homebuyer, and the next part of this series will cover what terms you need to know when selling your house.

Adjustable Rate Mortgages (ARMs): An ARM loan is a type of mortgage where there is an initial fixed-rate period that is typically lower than a conventional fixed-rate mortgage. The rate then changes depending on the current market after the fixed-rate period expires. There are a variety of time frames available for the fixed portion of these mortgages (3 years, 5 years, 10 years as examples)

Fixed-Rate Mortgage: A fixed-rate mortgage is a mortgage where you lock in with a lender at a rate, and your mortgage stays at the same rate throughout the entirety of the loan. These are offered typically at 10, 15, 20, or 30-year loans, with the 15 and 30-year fixed-rate loans being the most popular mortgages in the country.

FHA Loan: An FHA loan is a type of loan where the federal government insures lenders and banks that they take care of any losses those lenders might incur if the buyer is not able to make their payments. These loans typically offer buyers lower down payments and lower interest rates, but loans always vary, so make sure to talk with a trusted lender.

VA Loan: A VA loan is a type of home loan that is available from the Department of Veteran Affairs for any active or retired members of the military. These loans allow homeowners to receive a loan on a home with very small to no down payments and competitive interest rates.

Pre-Approval: Pre-Approval is the process of getting approved by a lender for a certain sales price, and exact loan amount. This letter gives you as a buyer a very detailed idea of what you will need to pay in order to purchase a home, and what kind of properties you should be considering. The lender determines this by doing a thorough investigation of your financials, including your credit, your debt-to-income ratio, and other financial information.

Principal: When you take out a mortgage loan, the principal amount of the loan is what you owe to the lender, not including the interest. If you took out a loan at $250,000, that would be the principal that you owe on the loan. Every month, you pay the monthly interest on the loan and a smaller portion of the principal. The lender will typically structure your loan so that you pay the majority of the interest on the loan early in the life of the loan.

Appraisal: An appraisal is conducted by a professional appraiser, who is typically sent out by the lender in order to verify that the property is worth as much as the homeowner is willing to pay for it. There will also typically be an appraisal contingency in the contract that allows the buyer to walk away from the purchase if the appraiser finds the property is not worth the contracted price.

Home Sale Contingency: A home sale contingency is a way for the buyer to tell the seller that they will only be able to go ahead with closing on a property as long as they also are able to sell their current home. This is included in the contract as a home sale contingency. This will typically occur when the buyer needs money for closing costs, down payment, or cannot make payments on two homes at the same time.

Title Search: A title search is part of the closing process in which a title examiner will search through public records to find out who is the legally recorded owner of the property, and if there are any liens or encumbrances on the property. This process can protect you from legal issues down the road, including encountering any unexpected debts from previous owners.

Realtor: This one might be slightly confusing, but it’s important to know. Not every real estate agent is a Realtor, as Realtors are actually real estate agents that are members of the National Association of Realtors, also known as NAR. NAR holds its members to high standards and requires that all of its members follow an ethical code when representing clients in buying or selling properties.

Debt-To-Income Ratio: Debt-to-Income ratio is calculated by adding your total amount of debt to your monthly house payment, and then dividing that number by your gross monthly income, and finally multiplying it all by 100. Your debt-to-income ratio is an important indicator for your lender of what you can actually afford monthly and for your loan.

Title Insurance: Insurance against loss resulting from defects of title to a specifically described parcel of real property. Title insurance is required by lenders to protect against title defects, and it is also valuable for buyers to purchase personal title insurance to protect themselves.

While these are some of the more important terms to know when buying a home, this is only a sampling of some real estate-specific language you can run into during your home search. If you have any questions about the home-buying process, or would like to schedule a complimentary consultation, you can contact me by filling out the form below, or by giving me a call at (404) 576-8515!

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