When buying a home, it’s important to understand key concepts and terms. While your real estate agent will explain any unfamiliar terms, here’s a helpful glossary to get you started:
Abstract of Title
A complete historical summary of the public records related to the legal ownership of a property, from the first transfer to the present.
Adjustable Rate Mortgage (ARM)
Also known as a variable-rate loan, this mortgage features an interest rate that changes over time based on an index, such as the Treasury index.
Agreement of Sale
Also referred to as a contract of purchase, purchase agreement, or sales agreement, this is a written and signed contract where the buyer and seller agree to specific terms for the property transaction.
Amortization
The process of reducing the principal debt through a schedule of fixed payments made at regular intervals, with a specific interest rate as outlined in the loan document.
Appraisal
A professional appraiser’s estimate of a property’s market value, based on local market data and recent sale prices of similar properties.
Assessed Value
The value placed on a property by municipal assessors for determining property taxes.
Closing
The final step in the property transfer process. On the Closing Date, the buyer inspects and signs all transaction documents, and payments are finalized. Also called Settlement.
Closing Costs
Expenses incurred to complete the real estate transaction in addition to the home price, such as taxes, title insurance, appraisal fees, and legal fees.
Contingency
A clause in the purchase contract outlining specific conditions that must be met by both the buyer and seller before the contract becomes binding.
Counter-Offer
A response to a previous offer, rejecting part or all of it while proposing new terms for negotiation.
Conventional Mortgage
A mortgage not insured or guaranteed by the federal government.
Debt-to-Income Ratio
A measurement of your total debt burden. It’s calculated by dividing your total monthly debt payments, including your mortgage, by your gross monthly income.
Down Payment
The portion of the home price paid by the buyer upfront. Smaller down payments (less than 20%) often require mortgage insurance.
Earnest Money
A deposit paid by the buyer to demonstrate a serious purchase offer. This money is held in escrow and applied to the purchase price upon closing.
Equity
The difference between the property’s market value and any outstanding debts or liens against it.
Easements
The legal right for individuals or groups to access or use a property for specific purposes. Easements are often included in the property deed and may impact property value.
Escrow
Funds held by a neutral third party (the escrow agent) until specific contract conditions are met. Escrow accounts are also used by lenders to pay property taxes and homeowner’s insurance.
Fixed-Rate Mortgage
A mortgage loan where the interest rate remains constant throughout the term of the loan.
Home Inspection
A professional inspection, typically paid for by the buyer, to assess a home’s condition, including its plumbing, heating, wiring, roof, foundation, and more.
Homeowner’s Insurance
A policy protecting both the buyer and lender from risks such as fire, floods, personal property damage, and liability (e.g., visitor injuries).
Lien
A claim or charge on a property used as collateral for debt repayment. If mortgage payments are not made, the lender can claim ownership of the property.
Market Value
The price a willing buyer would pay a willing seller for a property under current market conditions.
Mortgage Insurance
Insurance purchased by the buyer to protect the lender in case of loan default. This is common for loans with down payments less than 20% and can be provided through the FHA or private mortgage insurers (PMI).
Possession Date
The date when the buyer officially takes ownership and can move into the property, usually a few days after the closing date.
Pre-Approval Letter
A document from a mortgage lender stating that the buyer qualifies for a loan of a specific amount, showing the seller that the buyer is serious.
Principal
The amount of money borrowed to purchase a home, excluding interest and additional fees.
Purchase Offer
A written proposal to buy a property. It may be amended during negotiations and, when signed by all parties, becomes a legally binding sales agreement.*
Title
The legal right to own a property. A Title or Deed is often used as proof of ownership. A clear title means no legal defects are associated with the ownership.
Title Insurance
Insurance that guarantees the accuracy of the title search and protects against legal issues with the property’s title.
Truth-In-Lending Act (TILA)
A federal law requiring full disclosure of the total cost of credit for consumer loans.
Title Search
A historical review of all legal documents related to the property’s ownership to ensure there are no issues, claims, or encumbrances against the title.
This glossary is a great starting point for understanding the home-buying process. Your real estate agent is there to help you navigate these terms and ensure a smooth transaction!
Note: The purchase offer and contract procedures vary by region.
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Disclaimer:
The information provided in this blog is for general informational purposes only and should not be considered legal, financial, tax, or investment advice. While we strive to ensure accuracy, real estate laws, market conditions, and regulations change frequently. Readers are encouraged to conduct their own research and consult with qualified professionals such as real estate attorneys, financial advisors, mortgage brokers, or tax experts before making any decisions related to buying, selling, or investing in real estate. We do not assume any liability for actions taken based on the information provided in this blog.
