The ABC’s of Homebuying: A Primer for Common Real Estate Terms

ABCs of Homebuying

Home-buying and selling can feel like a different world, complete with its own language. You may have heard some of the following terms tossed around during your homebuying journey, but do you understand what they mean?

Don’t worry, we’re here to help demystify the most common homebuying terms you should know. This will help you to become more fluent in the language and feel more confident.

A

Adjustable Rate Mortgage (ARM): a home loan with an interest rate that can change over time, causing the monthly payment amount increase or decrease.

Annual Percentage Rate (APR): the true cost of your mortgage. APR includes the mortgage interest rate, plus any other, points, fees and costs associated with the loan.

Appraisal: the estimated value of a home. This value is determined by a licensed appraiser and is based on the condition of the home, its initial purchase price and comparable recent sales.

C

Closing Costs: the fees a seller and buyer pay to complete a transaction that are not covered by a loan. Closing costs usually include the following: lender’s fees, transfer taxes, prorated property taxes, origination feed, etc. and are about 2-5% of the purchase price.

Closing: the legal sell and transfer of the property to the buyer. It’s also known as the settlement.

Contingency: a possible event or condition that may affect the terms of an agreement.

D

Disclosure: a document that details all the pertinent information about a property.

Down Payment: the portion of the home’s purchase price (usually between 3.5 to 20%) that is paid to close a sale.

E

Earnest Money Deposit: a partial payment or deposit that shows a buyer is committed to the transaction.

Escrow: a neutral third-party account that holds the money for a real estate transaction.

F

Fixed-Rate Mortgage: a home loan with an interest rate that stays the same over the life of the loan.

G

Gross Income: Your total income before deductions and taxes are removed

H

Hazard Insurance: insurance coverage that protects against physical damage to the property that’s caused by unexpected events like fires, storms, and vandalism.

Homeowner’s Warranty: a program supplied through builders that provides homebuyers a warranty on the workmanship and materials of the home and protects against major structural defects.

I

Inspection: an examination of a property and system made by a qualitied, third-party professional typically done before the sale of a home.

L

Loan Origination Fee: fee charged by lenders to handle the administrative work, including preparing documents, perform credit checks, inspections, and sometimes appraise properties.

Loan-to-Value Ratio (LTV): the ratio of the amount borrowed divided by the appraised value or sales price of the home.

M

Market Value: the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.

N

Net Income: Your income after deductions and taxes have been removed. Commonly known as “after-tax pay”

P

Pre-Approval: the formal process of applying for a loan resulting in the maximum amount a lender will loan the borrower.

Pre-Qualify: the informal calculation to determine the estimated amount a homebuyer may qualify for.

Principal: the amount actually borrowed from the lender.

Private Mortgage Insurance: insurance that protects the lender in case the borrower defaults on the loan.

Q

Qualifying Ratios: the calculations used to determine whether a borrower can qualify for a mortgage loan.

T

Title: the right of ownership of real property

W

Walk-Through: the final inspection conducted before a home sale is finalized

This is just a partial list of real estate terms you’ll come across during the home buying process. We encourage everyone to study up on the process (or have a trusted professional helping you out) to make the journey manageable.

When you’re ready to wade into homeownership, visit us online at DiscoveryHomes.com to learn more about our new home communities throughout the Bay Area.