Real Estate Terms to Know as a First-Time Homebuyer

The real estate industry is complex, even for seasoned professionals. Whether it’s your first time or fourth time purchasing property, you may encounter unfamiliar terms along the way. The Residential Sales Team at Senné has put together a list of some of the most common terms that are used in real estate transactions. 

Recognizing these phrases can help you make an informed decision about your purchase. 

Appraisal 

An appraisal is an estimate by a licensed appraiser that determines the value of a property as collateral for the loan. Banks and lenders require that homes be appraised so they don’t lend more money than can be recouped in the event that the loan is defaulted on. This is called a “loan to value ratio.” An appraiser should be an expert in local market value so that they can determine whether or not the sale price and perceived value are justifiable for the bank to commit to the loan.

Closing Costs 

These are fees associated with buying a house charged by your lender or other third-party services related to the purchase. Be mindful of these costs when budgeting for a home as they get added on right before your official close on, or purchase, the property. Closing costs include an attorney fee, a recording fee, a land survey lot plan fee, a municipal lien certificate fee, a bank charge for a credit report, title insurance, an appraisal fee, hazard insurance premium, and more. 

Contingencies 

This refers to conditions that need to be met in order for a home purchase to be finalized. Some typical contingencies include mortgage contingency (that the bank will commit to the loan), inspection contingency (that a licensed professional will inspect the home for defects and damage), radon contingency (testing the soil for dangerous levels of radon gas), pest contingency (inspecting the home for signs of pest infestation), and lead paint inspection contingency (if the property is built prior to 1978).     

Escrow

In essence, escrow is the use of a neutral bank account to hold either the earnest money deposit that accompanies your offer, or the full purchase price if you’re making an all cash offer. If you place an offer on a home, your deposit will be placed in escrow until the owner accepts or denies your offer. The escrow account keeps your deposit safe until the home sale is solidified. 

Federal Housing Administration Loan 

FHA loans are excellent loan options for first-time homebuyers with lower credit scores. These loans are issued by the Federal Housing Administration and have lower upfront costs with required down payments as low as three percent.

Lender 

A lender is a financial institution or agency that issues you a loan to purchase a home. This is typically a bank but in some cases can be a federal government agency. 

Pre-Approval 

The pre-approval process is a formal process where a bank or lender verifies your financial documentation to determine the amount that they’d likely be willing to loan you for a home. This along with your personal budget should give you an idea of how much you can spend on a home. The bank or lender will provide you with a pre-approval letter that will be expected to accompany any offers that you submit on a property.

Pre-Qualification

Pre-qualification is a less formal version of the pre-approval process. It requires less documentation than pre-approval but still helps you get an estimate on what you can afford to spend on a home. You can start searching for a home with your pre-qualification value, but you will need to eventually get formally pre-approved for a specific loan amount. 

Private mortgage insurance 

If you place a downpayment on a home that is less than 20 percent of the total value, you will need to pay private mortgage insurance, or PMI. This is a monthly insurance payment that’s required to protect the lender on riskier investments. Typically, PMI is only paid until the borrower pays down enough of the mortgage’s principal. 

Offer

An offer is the amount of money you bid on a home you want to purchase. A seller can choose to accept, deny, or counter your offer.

Now that you’ve learned these common real estate terms, reach out to get matched with a Senné Associate who can guide you through the home buying process at 617.314.9400 or at senneresidential.com.