Understanding Home Buyer Terms

As a home buyer it is important to understanding concepts and terms prior to buying property. Throughout the buying process a buyer will be exposed to new terminology and needs the ability to understand these terms.  Following is a list of some important terms:

Abstract of Title – Historical record of legal ownership of the property.

Adjustable Rate Mortgage (ARM) – Variable rate loan where the interest rate changes based on an index.

Agreement of Sale – Written contract for sale signed by both parties which the buyer and seller agree to specified terms to transfer ownership of property.

Amortization – Process of reducing the principal amount of debt over a scheduled period of time based on the interest rate of the loan.

Appraisal – Professional market value of property based on local market data from recent sales of similar properties.

Assessed Value – Value placed on property by county to determine amount of property taxes.

Closing – Final step to becoming a property owner.  Buyer reviews, and signs, all documents pertaining to ownership of property.  Finally, delivers all funds to seller required by transaction.

Closing Cost – Costs to complete the real estate transaction defined within final closing statement.

Contingency – Terms within purchase agreement that describes conditions that must be met before contract becomes binding.

Counter-Offer – An offer made in response to a prior offer.  As soon as, another offer has been made, this resends the prior offer.  This process allows negotiations to continue towards a possible mutual agreement.

Conventional Mortgage – A mortgage loan that is not insured or guaranteed by the federal government.

Debt-to-Income Ratio – Measures the debt burden of an individual.  It is calculated by dividing individual’s debt burden by gross monthly income.

Down Payment – Money paid at closing.  This amount is the difference between sales price and mortgage loan amount.  The amount required will vary depending on the type of loan.  If the amount is less than 20% of the sales price, normally mortgage insurance will be required.

Earnest Money – Amount of money paid to an escrow agent when the seller accepts the buyer’s offer.  When the property closes the deposit is credit to the purchase price.  It is possible the earnest can be forfeited if buyer does not fulfill contract obligations.

Equity – Owners value in the property less loan balance, liens and debts against the property.

Easements – Legal right to access and use your property for specific purpose.

Escrow – Funds held by a third party until certain conditions have been met within a contract.  Also loan service providers hold funds to pay property taxes and homeowners insurance.

Fixed-Rate Mortgage - A mortgage loan that has full-term fixed interest rate.

Home Inspection – Professional inspector, who inspects, provides a written report on the condition of plumbing, heating, electrical, appliances, roof, and foundation, etc.

Homeowner’s insurance – An insurance policy that protects the mortgage lender and homeowner from property damage and liability occurrences on the property.

Lien – Financial debt against the property. Lender has the right to take property back from owner if owner fails to make mortgage payments.

Market Value – Is the dollar amount a buyer is willing to pay for the property.

Mortgage Insurance – Insurance premium paid by buyer on a FHA or Conventional type loans. Conventional type loans require this premium to be paid if buyer has less than 20% equity.

Possession Date - Date the buyer becomes legal owner of the property.  This occurs on, or before the contract closing date.

Pre- Approval Letter – Letter from a mortgage lender stating the buyer has been approved for specific amount to purchase property.

Principal – Outstanding loan amount remaining to be paid mortgage lender not including interest.

Purchase Offer – Written document signed by buyer to purchase property.  Once the document is signed by seller, it becomes a legal contract.

Title – Is a written document showing proof of land ownership.  Clear title states the title has no defects.

Title Insurance – Insurance policy covering defects in title for mortgage lenders and homeowners.

Truth-In-Lending Act – Federal law requires disclosure statement, and summary of mortgage loan.

Title Search – Search of legal documents relating property ownership.  Purpose is to determine if there are any flaws in transfer of ownership, claims, or encumbrances to property title.