Buying a home is a major transaction. You’ve got to secure financing, negotiate with real estate agents, understand the real estate settlement procedures, and hunt for your dream home, all that can seem even more complex when you don’t understand the terms used throughout the process.
Whether or not you are a first time home buyer or have sold real estate before, the terminology your agent will use to explain parts and pieces of the transaction will likely seem foreign.
Sometimes, although not intentionally, your agent might use an industry phrase without explaining what it means.
If you’re looking to become a homeowner this year and to be sure you aren't left scratching your head, it’s important to know these housing terms and how they relate to the current market so you feel confident throughout the homebuying process.
If you’ve purchased a house in the past, consider this a refresher course. Here are the key terms to know when buying a home:
The increase in value of real estate due to market conditions or improvement.
A lot of factors can affect this increase including making improvements, increased market demand in the area, and inflation. These factors can drive up home prices.
The term is commonly used in the context of real estate. The seller is probably hoping to cash in on any appreciation in the home's value.
A payment method wherein a third party holds and regulates the payment of money involved in a transaction between two parties; often the buyer, seller, and lender.
This allows for the funds to remain secure in an escrow account until all of the terms and conditions associated with the sale are met.
This can include any contingencies or repairs that need to be made by the buyer or seller.
The escrow company will verify that all terms and conditions are met prior to releasing funds to the seller.
A real estate professional who is hired and represents the buyer in a real estate transaction.
The buyer’s agent will be responsible for searching out homes on behalf of the buyer, negotiating with the seller and ultimately closing the deal.
This agent should be able to provide excellent advice and guidance throughout the entire process and through multiple listing service. Furthermore, this agent acts as the mediator who will write and extend an offer and can also connect you to a mortgage broker or mortgage lenders.
A real estate professional who is hired by and represents the seller in a real estate transaction.
They are responsible for preparing the home for sale, verifying that closing disclosure are properly completed, marketing the property to potential buyers and ultimately helping negotiate with potential buyers, before the seller accepts any offer.
They will also help to facilitate any inspections , appraisals and other tasks related to the sale.
It is important that you understand the role of both buyer’s agent and seller’s agent prior to beginning your search for a new home.
The money the buyer will pay upfront during the buying process.
This is typically a percentage of the total sales price and can range anywhere from 20%.
The seller's agent can ask for a lower down payment to show that you are serious about purchasing the home.
Deposits are also collected for rental properties prior to purchase and sale agreement signing as proof of intent . The amount of the deposit will depend on the landlord and rental agreement
The money given by the buyer to the seller and held in what is called an “escrow account” as a show of good faith during the home buying process.
This deposit shows that the buyer is serious about closing on the purchase of the property. The amount can vary, but it will typically cover 1-3% of the purchase price.
If the sale goes through, the deposit will be applied to closing costs or the down payment.
However, if the buyer backs out of the agreement, usually for reasons beyond their control such as financing not being approved, then the seller will retain this earnest money deposit.
This is the percentage of a borrower’s monthly income that goes towards debt obligations. Such expenses as car payments, school loans, rent, conventional loan etc.
Lenders will review this ratio to determine if you are able to afford the mortgage payments or not.
Your lender might also require you to have a certain debt-to-income ratio before they approve you for a loan.
A leaseholder owns the property and its land for the length of the lease agreement with the freeholder.
Leasehold refers to the interest of a tenant in real property held by a lease. The tenant, or lessee, has temporary possession and use rights over the property for a specific length of time.
Leaseholds are most often associated with rental agreements but can be used when buying a home if you don’t have the money to purchase it outright.
The agreement between the buyer and seller will specify the amount of time for the leasehold term.
Leases are normally granted for 99 years, but you may extend it at the point of purchase if there is a shorter amount of time remaining on the lease
The ownership of a property in perpetuity and not subject to any other interests or claims.
This simply means that you own the property outright with no limitations. Freeholds usually come with certain rights and responsibilities like paying taxes, making improvements, etc.
Freeholds are ideal for those who want full control over their property without any limitations.
A legal document proving current and proper ownership of the property.
Also referred to as a Title Deed, this document highlights the history of property ownership and transfers.
The process of evaluating the credit risk of potential borrowers.
This is done by lenders to determine the likelihood that a borrower will repay their loan and also take into account any other factors associated with the loan, such as income, assets, debts and employment history.
Underwriting typically includes an in-depth review of all documents submitted by the borrower , a credit report and an appraisal of the property.
The process of estimating the market value of a property.
This is done by a valuer who charges a fee to evaluate the condition and features of the home, taking into account any issues or factors that can affect its assessed value.
The valuer will also look at similar properties in the area to ensure they are giving an accurate assessment of the home’s and then give a fair market value
A loan that is secured from a mortgage lender by a property and used to purchase a home.
Mortgage loans can typically range from 5-25 years and offer different terms like fixed rate mortgage, adjustable rate mortgage, interest rate, annual percentage rate, loan estimate, assumable mortgage, mortgage company, annual percentage rate apr, title insurance, all these based on the borrower’s credit history or credit score, debt-to-income ratio, gross monthly income, appraised value, down payment, ability to make monthly mortgage payment etc.
Mortgage loans are provided by banks or mortgage lender and can help you finance the purchase of a home.
This is a type of insurance policy that covers the lender if you default on your monthly mortgage payments.
It is usually required for buyers who have less than 20 percent of the purchase price as down payment.
Mortgage insurance is usually paid in monthly instalments and protects your lender against any losses if you are unable to repay your mortgage payment.
It is an important factor to consider when buying a home since it can add up quickly depending on loan amount, interest rates, your monthly payments, loan servicing, loan origination fee and other variables.
The rate of interest charged on the loan, typically influenced by current market conditions and credit score.
A condition that must be met by one or both parties in order for a transaction to go through.
For example, a home sale may require an inspection of the property and the buyer has the right to rescind the offer if it does not meet their standards. Contingencies are important to protect both buyers and sellers as they can limit any potential losses due to unforeseen problems.
Forbearance allows borrowers to temporarily stop making payments on their mortgage for a specified period of time.
This allows borrowers to get back on track with their finances without risking foreclosure or other legal action from their lender.
It is important to remember that when the forbearance period ends, you are still responsible for repaying any missed or deferred payments .
A Homeowners Association (HOA) is an organization that sets and enforces rules and regulations for a certain community.
HOAs are common in condos, townhomes, and other neighborhoods where there are communal areas or shared amenities.
HOA dues may be required each month and are used to cover the costs of maintaining common areas and providing services to the community.
It is important to review and understand any HOA rules before purchasing a home in an area with one.
A lease-purchase agreement is a type of real estate contract that allows the buyer to rent the property for an agreed upon period of time before purchasing it.
This can be a beneficial option for buyers who are not quite ready to purchase or need more time to improve their credit score.
It is important to pay close attention to all details of the lease-purchase agreement, such as terms of repayment, expiration date and any other restrictions.
A townhouse is a type of housing where multiple dwellings are connected in a row or block. Townhouses often share common walls and usually have two or more stories.
They may also include shared amenities such as pools, playgrounds and community centers.
Townhouses can be an attractive option for home buyers looking for more space and privacy than an apartment or condo can provide.
A draft contract is a preliminary version of an agreement between two or more parties that outlines the responsibilities and obligations of each.
The terms can be modified by both parties before it is finalized and signed. Draft contracts are usually written up by a lawyer or real estate agent to ensure they meet all legal requirements and protect the interests of all involved.
Service charges are fees that are paid to cover the cost of specific services provided by a lender or homeowner’s association.
Service charges may include things like service fee for processing loan applications, late payment fees and HOA dues.
It is important to understand these costs before entering into any agreement so you can budget accordingly.
Stamp duty is a tax charged by state or local governments for the transfer of ownership rights for real estate. The amount varies based on the value of the property and other factors.
It is important to factor in stamp duty into overall costs of purchasing a home so you have enough funds available when the time comes to transfer ownership.
Equity is the difference between the value of a property and the amount still owed on a loan.
As homeowners make payments towards their mortgage, their equity increases.
Equity can be used to leverage against a second loan and can also increase the resale value of the home. It is important to understand how much equity you have in your home and what it can be used for.
The land registry is a government agency that keeps records of ownership and other legal matters regarding real estate, also know as county land records office.
In some countries, it is mandatory for individuals to register their property with the Land Registry in order to prove legal title over a property.
It is important to understand the rules and regulations associated with registering your property with the Land Registry before purchasing a home.
Closing costs are fees associated with the purchase of a home.
All settlement or transaction charges that home buyers need to pay at the close of escrow when the property is transferred.
It is important to know how much these closing costs will be ahead of time so you can budget accordingly and consider any loan payments.
Common auctions are a type of auction where multiple properties are sold in one day.
This is an attractive option for buyers looking to purchase homes quickly and at competitive prices.
It is important to do your research ahead of time and be prepared to place a bid on the property you want as soon as possible.
Shared facilities and space, such as recreation facilities, parking, laundry rooms, or a courtyard, by the residents.
A deed of trust is a document that is used when a borrower takes out a loan from a lender.
A legal document in which the borrower transfers the title to a 3rd party (trustee) to hold as security for the lender.
When the loan is paid in full the trustee transfers title back to the borrower.
If the borrower defaults on the loan the trustee will sell the property and pay the lender the mortgage debt.
A home inspection is a process where an experienced inspector evaluates the condition of a property, from the foundation to the roof, and documents any potential issues that may need to be addressed.
Capital growth is the increase in value of an asset over time.
It can be used to measure the appreciation or depreciation in a property's market value.
It is important to understand how much capital growth you may expect on a particular property before investing in it.
Buying a home can be a complex process, with many different terms and conditions to consider.
Understanding real estate transactions or key terms such as service charges, stamp duty, equity, land registry, closing costs, common area, sales contract, property tax, deed of trust and home inspection can help you make an informed decision.
Additionally, understanding capital growth is important in order to predict the potential return on your investment.
By thoroughly researching and understanding these terms, you can make an informed decision when it comes to buying a home or owning a personal property.
With a thorough understanding of the legal and financial aspects of home buying, you can move forward with confidence in making the right decision for you and your family.
