When researching to purchase a new home, you’re likely to come across many real estate terms you are unfamiliar with. This can make understanding the home buying process more difficult, or get you into trouble down the road.
For instance, when you aren’t sure exactly what a contract is saying, you may find out you’ve agreed to a stipulation you would otherwise not have accepted. Below are some of the important real estate terms (explained simply) you should know before buying a new home or investing in real estate.
Real Estate Term Glossary
Adjustable Rate Mortgages – An adjustable rate mortgage is a loan with an initial low interest rate (often referred to as a ‘teaser rate’). After a set term (such as 3 or 5 years) the rate will be subject to adjustment by the lender. This means the interest rate may increase, as could the monthly mortgage payments.
Buyer’s Agent – This is a real estate agent that has signed an agreement that they will work for the homebuyer’s interest, as opposed to working with the specific goal of selling a specific property. Many agents are both buyer’s and seller’s agents.
Contingency – This is a clause in an offer for a property that must be met in order for the homebuyer or the seller to continue the home buying process. An example would be requiring the seller to give you enough time for a home inspection before you will purchase the house.
Debt to Income Ratio – This is how much an individual pays on their debts (including the new mortgage, if they are approved) compared to how much income they make in a month; expressed as a percent. If you have a DTI ratio of 35%, then you are spending 35% of your income every month on debts, and have 65% of your income left over for other expenses.
Default – When a borrower does not have the ability to pay back their loan and stops making payments towards their loan balance. Generally a borrower who has defaulted must forfeit their rights to the property.
Down Payment – This is an amount of cash or funding that is paid down against the total loan amount for a mortgage. Some non-conventional loans come with ‘no down payment’ options, but may require mortgage insurance.
Earnest Money – This is an amount of money the homebuyer sets aside in an escrow account in order to prove to the seller that they are legitimately interested in buying the home. If the deal is approved, this money may be put toward the down payment amount. If a deal is not reached, this money may be returned to the buyer (if they have made this a condition in their initial offer).
Escrow – An objective third party company that specializes in holding funds for a specific purpose. An escrow company will only release these funds to a party that has been approved by the fund holder, and only at a time designated by them.
Fix and Flip – This is when an individual buys a home that is in need of repairs with the intent of fixing it up or remodeling it, and then selling it (‘flipping’ it) to another party for a profit.
Fixed Rate Mortgages – These are loan options with an interest rate that is the same throughout the life of the loan (unless the homeowner refinances). This means the monthly mortgage payments are also the same throughout the life of the loan.
Foreclosure – This is a property that has been seized by a lender or bank when a homeowner can no longer afford their monthly mortgage payments and cannot payoff the remainder of their loan. Properties that have been foreclosed on are often put back on the market at a reduced market value, in order to help the lender sell the home and recoup their losses as quickly as possible.
Holding Costs – The costs associated with holding ownership to a property; mortgage payments, taxes, insurance, etc.
Loan to value ratio – This is the amount of your loan compared to the value of the property, expressed as a percent. If a homeowner borrows $80,000 in order to buy a property that has been appraised at $100,000, their LTV is 80%. LTV ratios may exceed 100% if the borrower finances more than the cost of the loan.
Mortgage Insurance – This is insurance a “high-risk” homeowner buys in order to offset a risk for the lender. When a high-risk borrower has been paying mortgage insurance and defaults on their loan, the company providing MI is partially responsible for helping the lender recover from their losses.
Offer – This is an official notice to the seller that states what amount a homebuyer is willing to pay for a particular property along with any terms or contingencies they require before agreeing to purchase the home.
Pre-approved – This is when a lender has reviewed a potential borrower’s information and has agreed to approve any future loan up to a specific amount.
Pre-qualified – This is when a potential borrower appears to meet the borrowing criteria or qualifications for a particular type of home loan.
Rate – This is the interest (amount of money) you will be charged for holding an open line of credit. It is based on total loan amount, market values, and risk for the lender.
REO (Real Estate Owned) Property – This is a property that is owned by a lender- typically a bank or government agency. Usually the lender has acquired the property after the original homeowner has defaulted on their mortgage.
Seller’s Agent – This is a real estate agent that works for the seller and helps them to sell a specific property. Agents may be both buyer’s and seller’s agents.
Short Sale – This is when a home is sold for less than the amount owed on it. Please see our page on Short Sales for more information.
Teaser Rate – An introductory interest rate that is very low in order to appeal to potential homebuyers.
Title – The bundle of property rights and proof of ownership for a specific property. It declares the owner and well as the rights that owner has; such as whether or not they may use the property for specific purposes. See our page on Understanding Titles for more information.
As time goes by, we will be adding new and other important words to our real estate terms glossary. If there’s a term you’ve heard and do not understand, or if you would like us to expand on any of the definitions offered here, please feel free to contact us and ask!