Unless you already work in finances or real estate, then when you start looking to buy your first home, it will be one of the biggest learning experiences of your adult life. My partner and I are looking to buy a home and I have learned more in the last two months than I have learned in the last five years. Every meeting we take has me learning new and very important concepts about which I knew nothing before. I’m sure the very first lender and realtor I spoke to thought I was completely clueless—and I was. The more meetings I take, the more homes I view, and the more research I do on my own, the more I realize that purchasing a home will introduce a whole new vernacular into your life. Here are terms you should learn before you start house hunting.
Common interest development
A common interest development property can be a townhouse, condo, or single-family home with community spaces. So even a stand-alone house can be considered a CID if it’s within a group of properties that enjoy, say, a shared swimming pool, gym, tennis courts, and things like that. Living in a CID will make you subject to paying homeowner’s association fees, since the HOA will handle the maintenance of these shared amenities.
You’ll hear this term at least once and possibly twice depending on what type of home you’re looking at. Your mortgage lender will want to know how many reserves you have, and in their eyes, that’s the amount of cash you will have left over after putting the down payment on your home and paying for closing costs (something you can learn about here). In addition, if you’re looking at a common interest development property, you’ll want to investigate how many reserves the homeowner’s association has. That essentially means how much cash they’ve stockpiled to handle large projects, should they come up.
So you find an open house you’re interested in. You attend it, and there is a realtor there, ready to tell you all about the house. But…he asks you if you have “Buyer’s agent.” You’re not sure what that means. The realtor at the open house is the seller’s agent—he works on the behalf of the person selling the property. You can just work with him, but it would benefit you to get a buyer’s agent, who helps negotiate a sale on your behalf, and actively looks for properties in which you may be interested.
A prequalification letter is a letter from your mortgage lender that calculates roughly how much they will lend you and, in that sense, what properties you can be looking at. If a lender looks at your finances and comes up with a prequalification letter stating you will likely receive $400,000 from them, and you have $100,000 to put down, then you can be on the market checking out properties that cost $500,000 (maybe more, but you’d have to ask the seller to go below asking price). Keep in mind this letter is not a promise from the lender—it is just an estimate of what they’ll likely give you. They will still need to do an official deep dive into your finances, and appraise the property you find, before making you an official offer.
Adjustable rate mortgage
An adjustable rate mortgage is a mortgage with an interest rate that may change throughout the life of the mortgage, depending on changes in the market. There are limits on how often these can change, but they’ll typically change once a year.
Fixed rate mortgage
A fixed rate mortgage has an interest rate that will remain locked in throughout the life of the mortgage. It will not be subject to any changes. If the bank gives you an interest rate of four percent, that will be the interest rate you pay for your entire mortgage.
A contingency is a condition that must be met in order for a sale to go through. So you may make an offer on a home, with the contingency that, when your lender appraises the property, they find it to be equal the value that the seller listed it at. Or you could have a contingency that you will only hand over any sort of payment after an inspection finds no fault with the property.
Earnest money deposit
An earnest money deposit (EMD) is given at the time of the offer. This will usually equal between one and two percent of the total purchase price. It will be handed over at the beginning of escrow, and the rest of the down payment will be handed over at the end of escrow.
Speaking of escrow, when buying a home, you will deal with an escrow company. You will actually give your EMD check to an escrow company—not directly to the home seller. An escrow company is a neutral third party who ensures that everybody holds up their end of the deal, and in a timely manner. So, if one of your contingencies is that the appraisal value is appropriate, the escrow company will not give the seller your EMD until that appraisal is complete. If the seller fails to comply, the escrow company will refund you your money.
This acronym stands for principal, interest, taxes, and insurance—which make up what you’ll pay every month to own this home. The principal is the original sum lent to you by the lender (for example, $300,000), the interest is the interest paid on that sum (if it’s, for example, four percent of $300,000, then divided by 12 months, that’ll be $1,000 a month), taxes on the property (this will vary based on where you live and can change yearly, but could be anywhere from one to eight percent of your property’s value), and homeowners insurance.
The LTV is the loan-to-value ratio, which is the ratio of the amount of money borrowed over the appraised value of the home. Most lenders want the LTV to be eighty percent or less to minimize their own risk, which is why they want borrowers to put down 20 percent or more.
Real estate broker
A real estate broker is a real estate professional who is licensed to negotiate the purchase or sale of a property, and is typically paid a commission or fee. If you don’t want to go to a bank for your mortgage, you might go to a broker who will “shop” out your mortgage to several potential lenders to find you the best deal.
Zoning, to put it simply, means what the city will allow you to do to your property, or even the neighboring community to do to the neighborhood. This is important to you for several reasons. If you’d like to start a business out of your home, your home must be zoned for commercial use. If the neighboring lot is zoned for commercial use, then that could mean a large mall may be put in at some point.
There are several types of mortgages you can take on, but an amortized one combines interest and payment from the start. This means you pay off part of the property’s value, from the beginning, helping you build equity quicker. This is different from an interest-only loan, in which you would only be paying off interest for the first X amount of years, taking longer to build equity.
Points refer to a one-time fee you can pay a lender that equals one percent of the loan amount, and that reduces your interest rates. It’s an incentive for your lender to give you a better rate, because you’re giving them more money upfront.