Here are some common terms that buyers should know when purchasing a home:
Appraisal
An appraisal is an evaluation of the property's value by a licensed appraiser. Oftentimes, a lender requires an appraisal to be completed prior to purchasing to prove that the home is valued at the amount being borrowed by the purchaser.
Closing costs
Closing costs are fees associated with the purchase of the property that are paid at the closing. This is including, but not limited to proration of taxes, title fees, Realtor service fees, sales tax, administrative, and lender fees. These fees are in addition to the purchase price of the subject property.
Contingency
A contingency is a condition that must be met before the sale can be finalized, such as the buyer securing financing or the home passing an inspection. For example, the purchase of a home may be contingent upon approval of additional inspections or may be contingent upon the purchaser selling off one of their preexisting properties.
Equity
Equity is the difference between the market value of the property and the outstanding balance on any mortgage or other loans secured by the property. For example, if you owe $250,000 on your mortgage, but the your home is valued at $325,000, then you have $75,000 in equity.
Home inspection
A home inspection is an evaluation of the condition of the property by a licensed inspector, typically ordered by the buyer. An inspection report will illustrate any concerns regarding the property that the buyer will want to be aware of for repairs or additional upcoming maintenance.
Mortgage
A mortgage is a loan used to purchase the property, secured by the property itself.
Pre-approval
Pre-approval is a process in which a lender evaluates the buyer's creditworthiness, asses their debt to income ratio, and determine the maximum amount they can borrow for a mortgage. Most offers on properties prefer proof of a pre-approval with a letter stating they are qualified to purchase the subject property. This is a crucial step in the home buying process, if you plan to finance your home purchase.
Principal
Principal is the amount of the loan still owed, not including interest or other fees. It is the remaining balance of your home to be paid off.
Title
Title is the legal ownership of the property, as recorded in public records. During a property purchase, the chain of title is followed to make sure the purchaser can and will be the legal owner of the property. This is usually secured with a title policy, paid by the seller, guaranteeing clear title.
Underwriting
Underwriting is the process of evaluating a borrower's creditworthiness and risk by a lender, to determine if they qualify for a mortgage loan. Once pre-approved, and a purchaser is under contract with a property, lending has several steps in the underwriting process to finalize the loan.
Earnest Money Deposit
When a purchaser writes up an offer, it is standard practice to place a deposit down for the purchase of the home. This is “good faith” of a purchasers intent to purchase the property. Please make sure you read the contract’s legal language for if and when the deposit can be returned or if it becomes forfeited to the seller during a set timeframe.
Learning legal language for purchasing a property can be overwhelming and confusing. Please never hesitate to ask your agent or lender to define any terms that you aren’t familiar with throughout the home buying process.
