Updated: Feb 19, 2021
Buying a home means stepping into a situation where real estate agents toss around unfamiliar vocabulary like Ultimate Frisbee players throw a disc—fast and furiously. If you familiarize yourself with a few terms, you’ll find that the vocabulary of home-buying really isn’t as daunting as you thought.
Buyers need to understand the details of financing a home purchase.
Much of the vocabulary of buying a home revolves around how you, as the buyer, intend to pay for the home. If you’re like most people, you won’t be able to pay for the entire purchase with cash. According to the National Association of Realtors, 88% of people purchasing a home in 2019 financed the purchase with some sort of mortgage.
A mortgage—which is a special long-term loan specifically for homes—comes in several varieties. Most purchasers use a conventional mortgage to finance their home. A conventional mortgage is a home loan that isn’t guaranteed by a government agency. If you, as the borrower, default on—don’t pay—the mortgage, then the lender bears the loss.
The second most popular type of loan is the FHA loan. An FHA mortgage is backed by the Federal Housing Administration and is designed to help people of modest means be able to purchase a home. Other types of home loans include a VA loan—which is backed by the Veterans’ Administration and is available to people who are serving, or have served, in the military—and a USDA loan which is guaranteed by the U.S. Department of Agriculture and serves buyers who are purchasing homes in rural areas.
Each type of mortgage has its own requirements regarding the amount of the down payment, the mortgage interest rate, and the minimum credit score a buyer must have to qualify. One of the best things you can do before you start looking at homes is learn about these types of mortgages, determine which one(s) you would generally qualify for, and decide which seems to be the best fit for you.
Regardless of which type of mortgage you choose, you’ll have to qualify for the loan by meeting certain requirements about your income, the debt you owe, and your credit score. Your credit score is a number from 300 to 850. The higher your credit score is, the more likely you are to repay your debts on time (based on your history and a number of other factors,) and the more likely you are to qualify for a mortgage. Unless you have a credit score that meets your lender’s requirements, you won’t be able to qualify for a loan,
Lenders use 2 documents to indicate whether they would likely be willing to lend you money. Initially, they issue a pre-qualification letter, which says that, based on the income and debt information you provide, they would be willing to lend you a certain amount of money. You can get a pre-qualification letter by visiting a bank and completing a form that details your income and expense items. You can also go online to any number of lending institutions—such as Rocket Mortgage and Lending Tree—take 10 minutes to complete an
online form, and then receive a pre-qualification letter very quickly.
It’s critical that you complete this process before you start looking at homes to purchase. A pre-qualification letter states the amount that a particular lender is willing to lend you. Because of this, it gives you a good idea of the price of the home you can afford. If you’ve been pre-qualified for a mortgage of $150,000 and you have $30,000 as a down payment, then looking at homes in the $150,000-$175,000 price range makes sense, but asking to see homes priced above $210,000 doesn’t. Also, many sellers want to see a pre-qualification letter included with the offer to buy a home. It’s a necessary first step.
A pre-approval letter is also issued by a lender, but only after the lender has verified your income, expenses, and employment information. Some lenders also do a credit check before issuing a pre-approval letter. Of the 2, the pre-approval letter is a stronger indication of a company’s willingness to lend you money.
The following terms are also part of the vocabulary of home-buying:
Closing costs – Closing costs are fees and expenses the buyer pays in addition to the actual contract price of the home. Closing costs vary significantly from lender to lender, but often include title insurance, appraisals, attorney fees, and taxes. Closing costs are a significant expense to account for, because they can range from 3-5% of the amount of your mortgage. Buyers often include in the contract a request for the seller to pay a certain amount of the closing costs.
Contingency—A contingency is a statement in a contract which specifies certain conditions that must be met before the contract becomes binding. Common contingency clauses in real estate contracts include the contingency that you, as the buyer, must sell your home before you are obligated to purchase your next home. Many contracts include a contingency clause that says you are not bound to the contract if you are unable to obtain financing. If other things are equal, sellers generally prefer offers with fewer contingencies. Contingencies increase the likelihood that the deal will not close.
“As Is” Offer—If you make an ‘as is’ offer on a home, you are agreeing to purchase the home without requiring the seller to make repairs. You are still given a specified period to have the home inspected. You can withdraw from the contract. Doing so could obligate you to pay a termination fee if one was included in the contract.
This certainly isn’t all the helpful information a home buyer should know before starting the purchase process, but if you understand this much of the vocabulary of buying a home, you’ll be well on your way to finding the next home of your dreams.
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