Welcome to the Residential Real Estate Terminology and FAQs page. Whether you're a first-time homebuyer or a seasoned investor, understanding the jargon can help you navigate the real estate market with confidence. Here, we've compiled a comprehensive list of common terms and frequently asked questions to assist you in your real estate journey.
Key Terminology
Amenity
A feature of the home or property that serves as a benefit to the buyer but is not necessary for its use; may be natural (such as location, woods, water) or man-made (such as a swimming pool or garden).
Amortization
Repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years).
Annual Percentage Rate (APR)
Calculated using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
Appraisal
A document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
Adjustable Rate Mortgage (ARM)
A mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly payment amount, however, is usually subject to a cap.
Closing
Also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.
Commission
An amount, usually a percentage of the property sales price, that is collected by a real estate professional as a fee for negotiating the transaction.
Conventional Loan
A private sector loan, one that is not guaranteed or insured by the U.S. government.
Credit Report
A record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.
Down Payment
The portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.
Earnest Money
Money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.
Equity
An owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
Foreclosure
A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
Mortgage
A lien on the property that secures the promise to repay a loan.
Principal
The amount borrowed from a lender; does not include interest or additional fees.
Realtor
A real estate agent or broker who is a member of the National Association of Realtors (NAR) and adheres to its strict code of ethics.
Frequently Asked Questions
Q: What is the first step in the home buying process?
A: The first step is to get pre-approved for a mortgage. This will give you an idea of how much you can afford and show sellers that you are a serious buyer.
Q: How do I know how much house I can afford?
A: Lenders typically use your debt-to-income ratio to determine how much you can afford. A general rule of thumb is that your monthly mortgage payment should not exceed 28-31% of your gross monthly income.
Q: What are closing costs?
A: Closing costs are fees associated with the purchase of a home, including appraisal fees, title insurance, and attorney fees. They typically range from 2-5% of the purchase price.
Q: What is a home inspection?
A: A home inspection is an examination of a property's condition. It is usually performed before the sale of the home is finalized to ensure there are no major issues that need to be addressed.
Q: What is an escrow account?
A: An escrow account is used by lenders to pay property taxes and insurance on behalf of the homeowner. A portion of your monthly mortgage payment is deposited into the escrow account to cover these expenses.
Q: What is PMI?
A: Private Mortgage Insurance (PMI) is required if your down payment is less than 20% of the home's purchase price. It protects the lender in case you default on the loan.
Q: How long does the home buying process take?
A: The process can vary, but it typically takes about 30-45 days from the time you make an offer to the time you close on the home.
Q: What is the difference between pre-qualification and pre-approval?
A: Pre-qualification is an estimate of how much you can borrow based on your self-reported financial information. Pre-approval is a more thorough process that involves a credit check and verification of your financial information.