Homebuying 101: Real Estate Terms to Know

Do you ever feel like your real estate agent or mortgage broker is speaking a different language? Jargon like ‘ARM’ and ‘BOM’ can make a complicated process feel more confusing. Don’t worry, we’re here to help.

Here are the common real estate terms you’ll encounter so you can better understand the process and feel more confident when searching for your new home.

General terms

Buyer’s agent/listing agent: the ‘buyer’s agent’ represents the buyer while the ‘listing agent’ represents the home seller.

Closing: the finalization of a home sale where the parties meet to sign the final paperwork and the buyer pays closing costs and the down payment before receiving the keys.

Earnest money: also known as a ‘good faith deposit,’ is the initial funds (usually between 1% to 5% of the sales price) a buyer provides once the seller accepts their offer.  This amount is typically held in an escrow account.

Escrow: an account managed by a third party that holds money and property until specific conditions are met. Escrow agents make sure the seller receives the money and the buyer receives the house as agreed.

PMI: PMI, or private mortgage insurance, is an insurance policy that protects the lender. It’s usually required if your down payment is less than 20%.

Homeowner’s Association (HOA): the homeowner’s association is a private association that manages a community or condominium.

Spec home: a home that is built without a purchase contract that a builder hopes to sell at a profit. The level of completion can vary, with some spec homes fully complete and others that allow for buyers to choose some finishes and fixtures.

Financial terms

Adjustable-rate mortgage (ARM): an adjustable-rate mortgage is a mortgage with an interest rate that changes with the market at set periods of time (i.e., annually). Often the rate will be lower at the start of the loan for a set number of years and then fluctuate for the remaining life of the loan.

Fixed-rate mortgage: a conventional mortgage with an interest rate that stays the same for the duration of the loan.

Debt-to-income ratio: a comparison of how much you owe each month to home much you earn. Lenders use this ratio to determine your ability to manage your debt payments.

Equity: the portion of the home’s value that belongs to the homeowner, usually the market value of the home minus outstanding liabilities.

Origination fee: the fee a borrower pays to cover the cost of processing a loan application.

Principal: the amount owed on your mortgage, less the down payment.

Prequalification: a lender’s estimate of the expected amount a homebuyer may be eligible to borrow. This process is less formal than a preapproval as it relies on what the borrower tells the lender.

Preapproval: a lender’s written guarantee of the specific amount the borrower is approved for. This is a formal process where the lender reviews your credit and verified your financial information. It marks you as a serious buyer. Lenders may often provide a preapproval letter outlining the loan terms, type, and the amount the buyer is qualified for.

Offers and contingencies

Appraisal: an estimated value of a property, usually assessed by a third party. This helps the lender determine if the property is worth the amount a buyer is looking to borrow.

Contingencies: specific conditions that must be met before closing a transaction.

Closing costs: the fees paid for completing the purchase of a home. Closing costs typically include taxes, title search and insurance, and homeowner insurance and are normally 2% to 5% of the total mortgage amount.

Title insurance: an insurance policy that protects the lender or owner against title defects. It’s typically required by lenders and homebuyers can buy their own insurance policy to protect themselves from future issues with their title.

While this is far from an exhaustive list of real estate terms. There are several other terms and phrases you’ll probably encounter during the homebuying process but this is a good foundation. An experienced realtor can help answer any questions or explain other terms that pop up.

When you’re ready to find your new home in the Bay Area, visit us at SummerHillHomes.com. We have several new home communities throughout the Bay Area. You can view available homes, virtual tours, and schedule a private tour.

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