Home Buying Terms Explained

Every time you buy a home, it is a stressful process. The search itself is tedious and it is difficult to perform the various tasks associated with buying a home.

The number of tasks usually increases once you find one you are interested in purchasing. If you are a first-time home buyer, the process is even more difficult.

You may feel bewildered by the entire process, including determining your budget and finding a realtor. The home loan application process is an added stressor as well.

When faced with each of the above difficulties, do anything you can to make the process easier to manage. One way to minimize your stress and the problems you encounter is to gain an understanding of real estate-related terminology.

Many words are only used in the real estate world and you may not recognize them as they appear in listings or in conversation. Some words have similar or interchangeable meanings.

Learning the nuances of real estate terms is the only way to ensure your home purchasing process goes as planned. Below are some common real estate terms to start you on your home buying journey.

Learn About Home Buying Terms

If you are purchasing a new home, you are the home buyer. Any contracts or paperwork relating directly to your purchase lists you as such.

Certain paperwork from your bank may refer to you as the borrower. You are a borrower if you apply for a loan to acquire the money necessary to buy the property. When paying for the home using cash, the term “borrower” is never used.

The person who currently owns the property is the homeowner. He or she is called the seller as well and is not the same as a realtor. A realtor or a real estate agent is a third party hired to help sell the home.

The terms “realtor” and “real estate agent” seem the same and are sometimes erroneously used in the same way, but they differ slightly. A real estate agent is a person who sells homes for a living.

The National Association of Realtors refers to its members as realtors. Other real estate agents are not realtors but are sometimes called realtors by mistake. Some purposely pretend they are realtors to increase the appearance of credibility.

You must understand the difference between a mortgage broker and a lender when buying a home. A lender is a banking institution. A mortgage broker is an unrelated company specializing in locating home mortgage deals offered by lenders. No requirements exist to use the services of a mortgage broker to purchase a home and you can opt to do so when needed.

When doing so you:

  • Pay a fee to the mortgage broker for the services offered.
  • Use the services to search for home mortgage rates offered by lenders in your area.
  • Compare information provided about each lender to help you select your preferred lender from the list.

Learn About Financial Terms

Several terms relating to home buying are directly related to paying for the home or acquiring the necessary funds to do so. For example, closing costs are part of a home sale. Home buying fees are closing costs. The closing costs of each home sale vary, though your closing costs are likely to be between two and five percent.

You must understand debt ratio to buy a home. Your debt ratio refers to how your income compares to your debt. Your lender calculates your debt ratio when you apply for a home loan. The lender must do so to determine if you qualify for the loan.

If so, the debt ratio is used to determine the exact amount you can borrow. This amount affects your home equity. Home equity is the total value of the home. Any money you borrow from your lender is deducted from the total equity until you repay it.

Another term to know when buying a home is “down payment.” The down payment is how much you must pay for the home immediately when you buy it. Every home sale requires a down payment even if you are using ongoing mortgage payments to pay for the bulk of the purchase. The size of your down payment depends on many factors, including the size and overall value of the home you are buying.

Make sure you know what the down payment is and have access to those funds before signing a contract to purchase the home. Unlike a down payment, earnest money is paid before you purchase a home. It is a small good faith deposit paid to the owner, so the home is held for you. When you purchase the home, your earnest money is applied to the total amount you owe.

You must also understand financing and interest when buying a home. Financing is applying for a mortgage on your home. You must make installment payments until you pay the full mortgage balance. Your outstanding balance continues to accrue interest over time, and you must pay this interest.

Additionally, you may be asked to pay an option fee. An option fee is a fee you pay if the seller allows it. This fee allows you to void the contract if necessary, though a limit is placed on how long you have to break the contract.

You may be asked to pay some additional fees to your lender when purchasing a home. One fee, the premium, is paid to purchase insurance. Another, called the origination fee, is a fee necessary to start the loan process. You can potentially avoid paying an origination fee because not every lender charges such a fee.

When paying your loan, you must understand terms like “principal” and “prepayment.” The principal is the amount you owe your lender and it is sometimes referred to as your loan balance.

When you make a loan payment, a certain amount is applied to the principal and the rest is used to pay interest on the loan. You can often make a prepayment to reduce the interest you must pay over time.

A prepayment is an unscheduled or additional payment you make beyond what is required to help you pay off your home loan early. Be aware: your lender may charge you a fee for making prepayments.  You may pay an additional fee when repaying the entire loan balance before the agreed upon date as well.