First-Time Home Buyer Term Cheat Sheet
Buying a home for the first-time can be an exciting, yet very overwhelming process. Those who work in the industry day in, and day out forget sometimes that the terms they use daily are not those used by their average buyer or seller. So, if this is you’re first-time buying a home, or you’ve done it before and never understood what they were saying, this is the place for you! We have compiled some of the most frequently used terms throughout the purchasing process in one spot for your go-to cheat sheet.
Amortization Repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specified payment period (e.g., 15 or 30 years).
Annual Percentage Rate (APR) Calculated by using a standard formula, the APR shows the total cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
Appraisal A document that gives an estimate of a property’s fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan is justified by the property value. It protects the lender from loaning more money than a property is worth.
Cash to Close The total amount needed to bring to the closing table on closing day. It typically includes down payment, fees, pre-paid taxes, homeowner’s insurance, and any homeowner’s association (HOA) fees that may be applicable. Cash to close is usually paid in the form of a wire transfer.
Closing Also known as settlement, is the time at which the property is legally sold and transferred from the seller to the buyer; it is at this time that the borrower assumes the loan obligation, pays closing costs, and receives title from the seller.
Debt-to-Income Ratio A comparison of gross income to housing and non-housing expenses; with the FHA, the normal accepted monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.
Deed The written and signed document transferring ownership of property from seller to buyer.
Earnest Money Money put down by a potential buyer as good faith to show that they are serious about purchasing the property; it can be used as part of the down payment or closing costs if the offer is accepted. If the offer is rejected or the borrower does not receive lender approval for the loan, then the earnest money is returned.
Equity An owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
Escrow Account A separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowner’s insurance, mortgage insurance, etc.
Fair Market Value The hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
Home Inspection An examination of the structure and mechanical systems to determine a home’s safety and condition; makes the potential home buyer aware of any repairs that may be needed prior to purchasing the home.
Homeowners Association (HOA) An association comprised of elected officials from the neighborhood who enforce the recorded covenants and restrictions and propose new restrictions or changes. There is usually a monthly or annual fee charged to the homeowners in the neighborhood to pay for the upkeep of common neighborhood grounds, lighting, or trash removal.
Lien A legal claim against property that must be satisfied when the property is sold.
Mortgage A lien on the property that secures the promise to repay a loan.
PMI Known as Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price. Lenders will usually require this to protect their investment.
Pre-Approval Lender commits to lend to a potential borrower for an approved loan amount; the commitment remains so long as the borrower still meets the qualification requirements at the time of purchase.
Pre-Qualify A lender informally determines the maximum amount an individual may be eligible to borrow.
Principal The amount borrowed from a lender for the purchase of property; doesn’t include interest or additional fees.
Survey A property diagram that indicates legal boundaries, easements, encroachments, rights of way, and improvements.
Title Insurance Insurance that protects the lender against any claims that arise concerning legal ownership of the property.
Title Search A check of public records to confirm the owner of a specific property, and any mortgages or assignments that have been granted on the property.
Now you can go into your search and purchase with confidence! Happy hunting!
What terms would you add to this list? Reach out to our team in the comments below or on social media!