Real estate terminology you should know when buying a home
Read, 9 minutes
Don’t know your DTI from your LTV from your PMI? Buying a home has a vocabulary all its own. As you make your way through the homebuying process, we’ll help you understand the key terms and acronyms you’re likely to encounter at each step of the way.
-
Can I afford to buy a home?
Begin the homebuying journey by evaluating your income, debt, expenses and savings to determine how much you can afford to spend on a house. Important terms include:
Debt-to-income ratio is one way to measure your ability to repay debt. It is the comparison of your monthly debt payments to your monthly income before taxes, expressed as a percentage. Many mortgage lenders prefer this figure, including a mortgage payment, to be no higher than 43 percent.
This is the amount of cash you can put toward the purchase price of a home. Down payments often range from 2 to 20 percent of the home price. The size of the down payment is a factor in determining your interest rate, monthly payment and whether you need to buy private mortgage insurance.
These are the two parts of your mortgage. Principal is initially the amount you borrow. Then, after you start making monthly payments, it is the amount you still owe on the loan. Interest is what the lender charges you for the loan. Each mortgage payment includes principal and interest.
PITI stands for principal, interest, taxes and insurance. Sometimes called your monthly housing expense, it includes your mortgage payment and a monthly portion of your real estate taxes and homeowners insurance. A rule of thumb is to keep your housing expense at approximately 28% of your monthly income before taxes. Keep in mind that a home comes with a lot of additional expenses for maintenance and repairs.
Article continues below
Related content
-
How much will I be able to borrow?
Before you start seriously shopping for houses, meet with a lender to discuss loan options. You’re likely to encounter these terms:
This is when a lender estimates how much you can borrow, based on financial and other information, such as employment history, that you provide. Prequalification is not a commitment to lend, but it shows sellers that you’re a viable buyer. To get the loan, you will need to submit additional information for review and approval.
This is a step beyond prequalification. It is a lender’s conditional agreement to lend you a specific amount of money, made after confirming your financial information such as income and assets. Conditions may include a home appraisal and no significant changes to your finances. As with prequalification, it is not a commitment to lend.
Loan-to-value ratio compares the total amount of your mortgage to the home’s sale price or appraised value, expressed as a percentage. For example, a down payment of 20 percent will give you an LTV of 80 percent. Lenders use LTV to assess a loan’s risk. If your LTV is higher than 80 percent, you generally pay a higher interest rate on your mortgage and may need to buy private mortgage insurance.
Private mortgage insurance protects the lender against losses if you can’t repay your loan. Your lender may require you to buy it if your down payment is less than 20 percent. PMI is typically canceled after you’ve made enough mortgage payments to push your LTV below 80 percent.
-
What should I know about making an offer on house?
Now that you have a good idea how much you’ll be able to borrow, you’re ready to seriously shop for homes and make an offer on one you love. If your offer is accepted, you and the seller sign a purchase agreement or sales contract. You may hear these terms used by real estate agents:
Earnest money is a good-faith deposit you pay after the seller accepts your offer on a house. The deposit—typically 1 to 3 percent of the sale price—shows your commitment to buy the house. It is held in an escrow account until closing, when it is applied to your down payment. If you back out of the sale, you may lose the money. If the home inspection turns up problems or the appraisal comes in at less than the sale price, you may get the money back.
An offer to buy a home is considered contingent if specific conditions must be met for the sale to occur. A common contingency is that the home’s appraised value must support the sales price. Other contingencies that might be in the sales contract include:
House must pass home and termite inspections
Buyer must be approved for a loan
Buyer must sell their current home
Buyer must review the home’s title to identify any issues
A home inspection is a visual and mechanical examination of a home’s physical structure and systems to identify defects and assess the home’s condition. The buyer usually pays for the inspection. If the inspector finds problems, you can negotiate with the seller to make repairs or lower the selling price. If the problems are big enough, you may have the option of walking away from the deal.
An appraisal is an informed estimate of a home’s value, generally done by an independent, professional licensed appraiser and typically required and ordered by the lender in conjunction with the mortgage application.
Comparables, or comps, are recently sold properties similar to the home you want, with approximately the same size, location and amenities. Appraisers evaluate comps to help determine a property’s fair market value.
A homeowners association is an organization that collects fees, makes rules and manages upkeep of a neighborhood, planned community or condominium building. HOAs are run by a board of directors made up of residents. In most cases, if you buy a home in a community with an HOA, you’re legally obligated to pay the fees and abide by the rules.
-
How do I get a mortgage?
The nitty gritty of getting approved for a mortgage can take 30 to 60 days. Even if you’ve been prequalified or preapproved, you’ll need to fill out forms and submit financial records. Along the way, you’ll learn about:
The loan estimate is a disclosure to help you understand the key loan terms and estimated costs of a mortgage, including your approximate interest rate, monthly payment and closing costs. The lender provides the loan estimate within three days after you submit a mortgage application. All lenders are required to use the same standard form to make it easier for you to compare and shop for a mortgage.
Closing costs, also known as settlement costs, are the costs incurred when getting a mortgage. They include attorney fees, preparation and title search fees, discount points, appraisal fees, title insurance and credit report charges. They are typically 2 to 5 percent of your loan amount and are paid at closing or just before.
Escrow is an agreement for money to be held by a third party until specific conditions are met. For example, when you make an offer on a home, your earnest money deposit may be held in an escrow account until closing. Some lenders require borrowers to establish an escrow account at closing consisting of future tax and insurance payments. The loan servicer then pays your property tax and insurance on your behalf.
Mortgage or discount points are fees paid to the lender, typically at closing, to lower the interest rate. Each point costs 1 percent of the total loan amount. For example, 2 points on a $100,000 mortgage cost $2,000.
The origination fee is charged by the lender to cover expenses of processing a mortgage loan. It is usually a percentage of the amount loaned—often 1 percent. It can be expressed in the form of points or a flat fee.
A lien is a legal claim on your property by a creditor to recover an unpaid debt. By entering into a mortgage, you voluntarily give the lender a lien on your home. If you do not make payments, the lender can take possession. There are involuntary liens, as well. They include federal tax liens for unpaid taxes or judgment liens if creditors sue and win. A title search to make sure there are no outstanding liens on a property is part of the mortgage process.
Title insurance protects against a tax lien or other legal claim that would affect ownership of the property.
Underwriting is the lender’s process of approving or denying a mortgage application. Underwriters review submitted documents to verify your finances and assess the risk of lending to you. They also consider factors related to the home, such as the title search and appraisal.
-
What happens at closing?
The last step of the homebuying process is called closing or settlement. This is when you sign all the necessary documents to finalize the sale and take responsibility for the mortgage loan. It’s good to understand these terms before going to closing:
The closing disclosure is a document that provides key information about your loan, such as the interest rate, monthly payments and closing costs. The lender must give you this document at least three business days before you close on the loan, and the information should match the loan estimate you received when you applied.
Cash to close is the money you need to bring to closing to cover the closing costs and down payment, less any earnest money you paid when you made the offer. You may also need to make initial payments for interest, property taxes, insurance and HOA fees. The amount of cash you’ll need to bring is in the closing disclosure. Payment is usually made with a cashier’s check, certified check or wire transfer.
A deed is a legal document that transfers ownership of the home from the seller to the buyer. It describes the property, is signed by the seller and buyer, and filed with the local government. The deed is your proof of ownership and should be kept in a safe place.
FAQ about buying a home
Amortization is a process that allows you to make equal payments through the life of your loan, assuming your interest rate is fixed. You’ll receive an amortization schedule at closing. It shows how each monthly mortgage payment is split between principal and interest. Initially, most of your payment will cover interest. But as your principal balance declines, so will the monthly interest charges. This frees up more of your payment to go to principal. While the same process applies to variable-rate mortgages, your payments will change if the interest rate changes.
- Maximum income and loan amount limits apply. Fixed-rate mortgages (purchases or no cash out refinances), primary residences only. Certain property types are ineligible. Maximum loan-to-value (“LTV”) is 97%, and maximum combined LTV is 105%. For LTV >95%, any secondary financing must be from an approved Community Second Program. Homebuyer education may be required. Other restrictions apply.
