Whether you’re a first-time homebuyer or you’re preparing to re-enter the home buying market, you’re bound to encounter many new, unfamiliar real estate terms. That’s why today, we’re sharing one of our most coveted resources: the homebuyer dictionary.
This comprehensive guide will help you keep track of all the real estate jargon that’s commonly used throughout a home purchase. Remember to refer back to this homebuyer dictionary throughout your home buying journey. And, check out our home seller dictionary if, down the line, you find yourself in the market to sell.
Adjustable-rate mortgage (ARM)
Many homebuyers opt to take out a loan when purchasing a home. Typically, an adjustable-rate mortgage (ARM) has a lower interest rate at the beginning of the loan period. Depending on your specific loan, the initial rate could be locked in for a specific period of time. Then, once the introductory period is complete, an ARM loan will readjust annually based on the market index.
Closing costs
Both homebuyers and sellers are responsible for paying closing costs at the time of sale. For a buyer, closing costs usually range from 2 to 7% of the total home price, and include fees associated with the home loan, inspection, appraisal, taxes, homeowner’s insurance and title insurance.
In certain cases, a buyer may negotiate for the seller to pay for all or some of their closing costs.
“Comps”
Comparable sales, or “comps,” is a term used to describe homes of similar condition to the home you wish to buy. When you are determining how much to offer on a home, your REALTOR® may provide you with comps to help you determine a fair offer. Homes that are included in your comps will be nearby and of similar size and condition.
Conforming loan
A conforming loan is a type of conventional loan meant to meet, or conform to, standards that are established by Fannie Mae and Freddie Mac, which are two government-sponsored institutions that purchase and sell mortgages on the secondary market.
Conforming loans limit the amount a buyer can borrow. In Minnesota and Wisconsin, a single-family home loan must be under $647,200 to be considered a conforming loan. Multi-unit properties may have higher borrowing limits.
Conventional loan
There are two types of conventional loans, conforming loans and non-conforming loans. These loans are not guaranteed or insured by the federal government, so lenders minimize their risk by having more stringent standards for conventional loan borrowers. Homebuyers are encouraged to make a down payment of 20% if they are able, however the minimum down payment for a conventional loan can be lower.
Contingent
You may find some properties listed as contingent during your home search. A contingent property is already under contract with another buyer. However, the final sale of the house is dependent, or contingent, on certain conditions that must be met in order for the sale to be finalized. If the conditions (including inspection, the buyer’s ability to obtain financing, appraisal) are not met, it’s possible that the home may return to the market.
Credit score
Lenders partially evaluate the likelihood that you will repay your mortgage loan based on your credit score. A credit score is determined by your payment history, amount of debt, length of credit history and a variety of other factors. In general, a higher credit score will increase your chances of scoring a loan with the best terms.
Down payment
The down payment is a lump sum of money that buyers are required to pay upfront when purchasing a home. Down payments are paid out-of-pocket to seal the deal, and they typically range up to 20%, or more, of the total selling price.
Down payment assistance programs
Certain lenders and state programs offer down payment assistance programs to help individuals as they purchase a home. Each down payment assistance program has its own set of qualifications and guidelines. Typically, these programs include loan assistance, closing cost coverage and other financial support.
Earnest money
Earnest money is a sum of money paid by the homebuyer around the time the offer on the home is accepted. The funds are typically held by the listing brokerage in a secure trust account. Basically, this money demonstrates that you’re a committed buyer, and will typically range between 1 and 5% of the total purchase price of the house.
Escrow
Escrow is when a neutral third-party holds onto something of value for a predetermined amount of time (like deeds, documents or money). In Minnesota and Wisconsin, escrow is only used after you have purchased your home.
If you borrowed money to finance your home, you’ll be expected to send monthly payments to your lender to cover your mortgage loan premium and interest. In addition, your lender will collect money that will be used to pay out your property taxes, homeowner’s insurance and mortgage insurance. Your lender will keep this extra money “in escrow” until the payments become due, then they will make these payments on your behalf.
Funds may also be held in escrow when work needs to be done on your property (like a roof replacement). In this case, a third-party will hold onto the money you’re paying for a job until the work is complete and the funds are distributed to the contractor.
FHA loan
The Federal Housing Administration grants FHA loans, nicknamed “helper” loans, for buyers who can afford a monthly mortgage payment but may struggle with other aspects of getting approved for a loan or who have limited down payment funds. For this reason, FHA loans are a great option for first-time buyers. Keep in mind, FHA loan lenders are taking on more risk, so FHA loan borrowers will have extra expenses, including mortgage insurance.
First-time homebuyer savings account
A first-time homebuyer savings account offers tax incentives to individuals who are saving for a home purchase. In addition to the homebuyers, other people (like parents and grandparents) can contribute money to a home savings account.
Fixed-rate mortgage
A fixed-rate mortgage offers a predictable monthly principal and interest payment. With this type of loan, rates will remain steady until the loan period is complete.
Homeowners insurance
Homeowners insurance helps protect your property from natural disasters, theft and other unexpected circumstances. In most cases, your homeowners insurance premium will become a part of your monthly mortgage payment, along with your principal, interest and taxes.
Interest rate
Your interest rate reflects the monthly interest charged on your home mortgage loan. Interest is calculated as a percentage of your total loan balance. Depending on what kind of loan you have — fixed-rate mortgage or adjustable-rate mortgage (ARM) — your interest rate may stay the same or change over time.
Listing
When searching for a home to buy, your real estate agent may tell you that they are taking you to see a few listings. Listing is just another name for a home that’s been “listed” for sale and is available for purchase on the market.
Multiple listing service
Real estate agents post active, for-sale properties on the multiple listing service (MLS). This online resource allows agents to publish their active property listings so they can be found by other real estate agents and potential buyers. MLS listings offer information such as home prices, property details and photos.
When you search for homes on Edina Realty, you’ll search the complete MLS inventory of active, available for-sale homes in Minnesota and western Wisconsin.
Mortgage
When borrowing money to purchase a home, a buyer must sign a mortgage. The mortgage is recorded against the title to the property, and it gives the lender a security interest in the property. If, for whatever reason, the borrower fails to uphold their mortgage payments, the lending bank may foreclose on the mortgage and claim ownership of the property.
Mortgage discount points
Mortgage discount points are direct fees paid to the lender from the homebuyer. These points are then exchanged for a reduced interest rate. Buyers can potentially save significant money over the loan term (with an approximate interest rate of .25% per point) by purchasing mortgage discount points, which typically cost 1% of the total mortgage amount.
Mortgage loan
A home mortgage loan is the amount of money you have borrowed from the bank to purchase your home. Typically, mortgage loans are paid back in 15- or 30-year terms.
The mortgage loan is primarily made up of principal and interest. In short, principal is the total balance of the loan and interest is the percentage of the loan that a homeowner pays their lender in exchange for borrowing money. Homeowners contribute monthly payments to pay off their mortgage loan.
Mortgage gift funds
A mortgage gift fund, also known as a down payment gift, is monetary help that close family and friends may offer homebuyers to afford the down payment of their home. Depending on the amount given, money contributed to a mortgage gift fund must be closely recorded and tracked throughout the home loan process.
Mortgage insurance
When buying a home, your lender may request that you pay mortgage insurance as part of your loan terms. This insurance protects the lender if, for some reason, you become unable to pay your monthly mortgage payment.
Pending
A pending property indicates that most of the contingencies have been removed from the homebuyer’s initial offer and the sale is moving toward closing. Usually, a pending sale only requires a financial contingency, title sign-off and final walk-through to be considered complete.
Pre-approval
When buying a home, you will need to submit an official mortgage application and documented financial history to your home loan lender. After the home loan lender validates your information, you will be pre-approved for a mortgage. With your pre-approval notice, you’ll also receive an estimate of the loan amount that you’ll be approved for, along with potential interest rates.
Pre-qualification
For a rough estimate of home loan options, buyers may choose to get pre-qualified for a loan. Loan pre-qualification is a less official step in comparison to pre-approval, and should only be used for personal reference. However, you can get an idea of your buying power with a pre-qualification via automated online or phone questionnaires.
Principal
Your home mortgage loan is primarily made up of principal and interest. Principal is the outstanding balance of your mortgage. In other words, principal is the total amount of your home sale price, minus any payments you have made on its balance. This is separate from the interest you pay on your mortgage, which is a percentage paid in addition to the principal of your loan.
REALTOR®
When purchasing a home, you will likely work with a Realtor to find your ideal property. Because they have pledged to follow the code of ethics established by the National Association of Realtors, Realtors have even more qualifications than non-Realtor real estate agents. All Edina Realty agents are Realtors who have pledged strict commitments to put the needs of the client first.
VA loan
VA loans are available to many military, veteran, reservist and National Guard members. Additionally, spouses of military members who died on active duty, or due to a disability or injury from military service, are also eligible to apply for VA loans. VA loans may provide short-term advantages and benefits for the entire life of the home loan.
Zoning
Local governments implement zoning rules that distinguish what properties can be used for in certain areas. A buyer may want to look into the zoning laws when searching for a home, as these regulations may set limitations on the property, such as the types of structures allowed at a residence or whether an in-home business is allowed.
Ready to buy?
Understanding these commonly buyer-related terms can help you with your own home purchase. Be sure to keep this homebuyer dictionary, along with our comprehensive home seller dictionary, close by when moving forward with a home transaction.
Then, reach out to Edina Realty or one of our agents today for additional support – from the initial home search to the final property closing.
