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10 Key Terms to Know Before Buying a Home
It’s important to have a basic understanding of important real estate terms and concepts before you start your homebuying process. Here are a few key terms that can help make the experience a little less intimidating.
1. Buyer’s Agent (often known as the Selling Agent) – A real estate agent focused on making sure the buyer’s needs are met. This could include finding properties the buyer can afford and would want to live in, as well as helping the buyer determine a fair price for a property and negotiating on their behalf. Their responsibility is to the buyer.
2. Listing Agent (or Seller’s Agent) – A real estate agent focused on selling the property according to the terms the seller sets. This includes getting the best price for the property, negotiating terms, and managing the legal transaction. Their responsibility is to the seller.
3. Earnest money deposit or good faith money – A deposit made to a seller indicating the buyer’s good faith in an arrangement. Earnest money allows the buyer additional time when seeking financing. Earnest money is typically held jointly by the seller and buyer in a trust or escrow account.
4. Private mortgage insurance (PMI) – When a homebuyer offers less than a 20 percent down payment, generally they will have to purchase private mortgage insurance, commonly known as PMI. This insurance reimburses a mortgage lender if the buyer defaults on the loan and the foreclosure sale price is less than the amount owed the lender (the mortgage plus the costs of the sale). For conventional loans, this is purchased through private mortgage insurers. VA, USDA and FHA also charge a fee to insure their loans.
5. Escrow – Money held by a mortgage company to pay property tax and insurance during the term of the mortgage or money held by a third-party on behalf of transacting parties.
6. Seller’s concession – Money given back to the buyer at closing to cover stated costs. This can include items such as lender processing fees, attorney’s fees, transfer taxes, title insurance costs, inspection fees and more.
7. Home inspection – A visual examination of a dwelling, performed for a fee, which is designed to identify and describe the condition of the home at the time of inspection as well as identify observed material defects. It is generally ordered by the buyer after their offer is accepted by the seller and before closing.
8. Home appraisal – A property appraisal is an estimate of a property’s market value conducted by a third-party certified or licensed appraiser. Value is based on such factors as location, amenities, structural condition and recent sales of similar local properties.
9. Pre-approval – A preliminary review of a borrower’s qualifications to determine how much they might be able to borrow. It is not a commitment to lend the buyer money, however.
10. Debt-to-income ratio – The sum of monthly debt payments divided by your monthly gross income before taxes and other deductions are subtracted. The acceptable ratio will vary by mortgage and lender. However, the number usually ranges between 40-50%.
If you’ve found these tips helpful, be sure to check out our homebuyer education programs at http://mmp.maryland.gov/Pages/Homebuyer-Education.aspx.