Terms To Know When Buying A Home
If you’re a first-time homebuyer, you may feel overwhelmed by all the terminology you hear during the process. Here are some of the terms you are likely to hear.
Listings: Real estate agents frequently refer to homes for sale as “listings.” A “listing” on a website shows information about the home, like the price and number of bedrooms.
Comparative Market Analysis (CMA): This is an evaluation of comparable recently sold homes in a neighborhood (known as “comps”) to determine a fair price range for a certain home on the market.
Dual agency: Dual agency occurs when the listing agent selling a home also serves as the buyer’s agent. In most cases, it’s not a good idea for one agent to represent both parties in a real estate transaction. The listing agent’s job is to sell a home at the highest price; the buyer’s agent aims to negotiate the lowest price for his buyers. In this case, the agent and his client’s interests aren’t aligned. Some buyers feel that a dual agent will be more motivated to write an offer on his own listing since he’ll get double the commission from both sides of the deal. This could be a possibility, but chances are the buyers won’t get the home for the best price when working with the listing agent.
Appraisal: When you apply for a mortgage, your lender will require an appraisal of the home you want to buy. A licensed appraiser will estimate the home’s value based on comparable homes that have sold in the area and an investigation of the property.
Contingencies: When you put in an offer on a home, you can specify certain conditions that must be met before the deal will go through – these are called contingencies. You have to make sure you can actually get the loan (a financing contingency), that the inspection doesn’t show anything too crazy (inspection contingency), and that the appraised value is close to what you’re offering to pay (appraisal contingency). Those are just a few common examples; there are several other types of contingencies, which you should discuss with your agent.
Good Faith Estimate (GFE): An estimate of a loan’s total costs that lenders are required to provide to borrowers within three business days of the borrower submitting a loan application. The estimate includes the interest rate, principal, mortgage insurance and mortgage fees for the loan. Remember, this is just an ESTIMATE. The HUD-1 Settlement Form (see below) will detail the actual costs.
Mortgage insurance: This insurance protects the mortgage lender against loss if a borrower defaults on his loan. There is both private and public mortgage insurance. Private mortgage insurance (PMI) is required for borrowers of conventional loans with a down payment of less than 20 percent. Alternatively, many homebuyers will opt for a Federal Housing Administration (FHA) loan, which is insured by the federal government and backed with taxpayer dollars.
Earnest money: The money buyers pay within one to three business days after agreeing with the seller on a price for the home to show that they’re serious about the offer. The money is usually 1 – 3% of the purchase price (though sometimes it’s a fixed amount) and is deposited into an escrow account via a cashier’s check or money order.
Escrow: A neutral third party or attorney that handles the exchange of money and documents once mutual acceptance is reached on an offer. Escrow handles the transfer of the buyer’s loan documents and property taxes and works with a buyer’s lender and real estate agent to make sure that the title of the home is clear of liens before the transfer of ownership. In addition, escrow agents prepare the HUD-1 settlement form that lists the costs of the transactions that both the buyer and sellers must pay at closing.
HUD-1 settlement form: The official settlement document for the purchase and sale of real estate from the Department of Housing and Urban Development (HUD). The form is completed by the escrow agent or attorney handling closing and lists all costs of the transaction for both the buyer and the seller, including the cost of the property, the real estate agents’ fees, the lenders’ fees, the cost of title insurance and the escrow agent or attorney fees. To avoid surprises, agents will provide both buyers and sellers with a preliminary version of the HUD-1 one day in advance of the closing.
Closing costs: Be prepared to pay a lot of fees when you purchase a home. Typically, closing costs will amount to 2-5% of the purchase price of the home, and that doesn’t include the down payment. Common fees include excise tax, loan-processing costs and title insurance. For a more exact list of what you’ll be charged, ask for a “Good Faith Estimate” from your lender.
Title insurance: After all the negotiations are done and the seller has accepted your offer, you should receive a home title report within a week. Most mortgage lenders require you to pay title insurance as part of the closing costs; title insurers search the public records to make sure the home seller actually had rights to the title and that there are no liens on the home (like an unpaid contractor or unpaid taxes).
Deed: A legal document filed with the county that documents the transfer of home ownership. This is a document the buyer signs when her deal closes and she’ll receive a copy once the original is recorded by the county.