Buying your first home comes with a LOT of new words, paperwork, and terminology.
And honestly, some of it can sound like a different language!
I've put together this simple guide to help break down common real estate terms into everyday language, so you can feel more confident and informed as you navigate your home-buying journey.
Mortgage – A loan you get from a lender to help you purchase a home. Your monthly mortgage payment typically includes Principal + Interest + Taxes + Insurance (often called PITI). Depending on your loan, it may also include mortgage insurance. Taxes and insurance aren't always included in your monthly payment, so it's important to understand what your lender is collecting.
Down Payment – The money you pay upfront toward the purchase of your home. The amount required depends on your loan type, lender, and financial situation. You don't always need 20% down to buy a home!
Pre-Approval – Before you start seriously shopping for a home, you'll want to connect with a lender. They'll review your financial information, including your income, debts, and credit, to determine approximately how much they're willing to lend you. This gives you an idea of your price range and helps sellers know you're a serious buyer. Keep in mind that pre-approval is not a guarantee of final loan approval.
Earnest Money – A deposit you put down after your offer is accepted to show the seller you're serious about purchasing the home. This money is typically held in an escrow or trust account and is generally credited toward the money you owe at closing. Whether it's refundable if the deal falls through depends on the terms of your purchase agreement and why the transaction doesn't close.
Closing Costs – The additional expenses associated with officially purchasing your home. These can include lender fees, appraisal fees, title services, title insurance, recording fees, prepaid property taxes, and homeowners insurance. Closing costs are separate from your down payment.
PMI (Private Mortgage Insurance) – Insurance that protects the lender if a borrower stops making mortgage payments. It's typically required on conventional loans when you put less than 20% down. PMI is usually added to your monthly mortgage payment, although payment options vary. The good news? On eligible conventional loans, you can generally request to have PMI removed once you've reached 20% equity in your home, as long as you meet your loan's requirements.
Home Inspection – After your offer is accepted, you'll typically hire a professional home inspector to evaluate the home's condition and look for potential problems (roof issues, electrical concerns, plumbing issues, foundation concerns, etc.). Once you receive the inspection report, you can discuss potential repairs or credits with the seller. Depending on your purchase agreement and inspection contingency, you may also have the option to cancel the contract.
Appraisal – An independent professional evaluates the home to estimate its market value. Your lender typically requires an appraisal to help determine whether the property is worth the amount they're lending you.
Example: If you offer $300,000 for a home but it appraises for only $275,000, your lender may not be willing to lend you the full amount originally anticipated. You and the seller may need to renegotiate, you may need to cover the difference, or you may have other options depending on your contract and loan.
Contingency – A condition written into your purchase agreement that must be met or addressed for the transaction to move forward. Common examples include financing, appraisal, and inspection contingencies. These help protect buyers if certain conditions aren't met.
Escrow – A neutral third party or account used to hold money and/or important documents until certain conditions of the transaction are met. For example, your earnest money is typically held in an escrow or trust account until closing. Your mortgage may also have an escrow account used to collect and pay your property taxes and homeowners insurance.
Title – The legal ownership of a property. Before you purchase a home, a title search is completed to help identify potential ownership issues, outstanding liens, or other claims against the property. This helps ensure the seller has the legal right to transfer ownership to you.
Closing Disclosure – A document that outlines your final mortgage details, including your loan amount, interest rate, estimated monthly payment, and closing costs. For most mortgage loans, your lender must provide this document at least three business days before closing so you have time to review everything.
Final Walkthrough – Your last opportunity to walk through the home before closing. You'll want to make sure the home is in the agreed-upon condition, any negotiated repairs have been completed, and anything the seller agreed to leave behind is still there.
Closing Day – The big day! This is when you'll sign the final paperwork, provide any remaining funds needed to close, and finalize the purchase. Once the transaction is completed and ownership transfers, you'll officially be a homeowner. Time to get those keys!
Please note: This guide is intended for general educational purposes. Every home purchase and mortgage is different. Your lender and real estate professionals can help you understand the specific requirements and terms of your transaction.
Remember...
You're not supposed to know everything about buying a house. That's why you have a realtor!
My job is to help explain things, answer your questions, and make sure you feel comfortable every step of the way. ❤️
Never be afraid to ask what something means.