Buying a home, especially without the assistance of a real estate professional, can be a complicated process. This process can be further complicated by the very technical real estate language used in the sale of all real property. If you want to understand the process of buying a home without carrying around a dictionary, you have come to the right place. In this article we discuss some common terms used in real estate transactions.
It may be helpful to begin by defining the people and places involved in real estate transactions.
Homeowners Association
This refers to an organization of neighbors who meet to manage the common areas of a housing subdivision or condominium complex, such as the pool. These organizations typically collect monthly dues to cover landscaping and upkeep. This organization is also responsible for ensuring that all neighbors comply with the applicable covenants, conditions and restrictions in place in the subdivision or complex.
Multiple Listing Service (MLS)
A collection of hundreds of regional databases of home listings. Each regional database has its own home listings (homes currently on sale) that real estate agents can get access to by paying dues. This is very important for sellers looking to get their home in front of as many potential buyers as possible.
Real Estate
Land and the things permanently attached to it (ie. Houses, buildings, trees, fences, etc.)
Real Estate Agent
A common player in most real estate transactions is the real estate agent. The real estate agent shows the homes on the market and does much of the other leg work involved in selling a home in exchange for a commission. The agent must have a license, and must be supervised by a licensed broker.
Real Estate Broker
The real estate broker is the licensed professional authorized to negotiate the purchase and sale of real estate. This player also works in exchange f or a commission or set fee.
Realtor
A member of the National Association of Realtors (NAR). Real estate agents are often realtors, but not every agent is a realtor.
Now that we know the players, we can move onto the financial rhetoric. These are often the most confusing, yet most important, terms to understand.
Annual Percentage Rate (APR)
A yearly interest rate calculated by taking the average of the compound interest rate over the term of the loan. This rate includes the upfront fees and costs paid to acquire the loan and thus gives a more accurate picture of the loan price.
Appraisal
An appraisal is a determination of the value of something. In the real estate context, it is the estimate of the value of a home based. This estimate is made by comparing the initial purchase price of the home with the sale price of similar homes in the area. The appraisal is an essential and required part of the home purchase program, especially if the purchase is being financed by a bank or other major lender. If the appraisal amount is less than the loan amount, most banks and lenders will typically refuse to approve the loan because the house is worth less money than you want to borrow. In this case you will want to increase your down payment, renegotiate the purchase price or get a second appraisal.
Adjustable-Rate Mortgage (ARM)
A mortgage with interest rates that change periodically. This allows a buyer to potentially begin with lower monthly payments than in a fix-rate mortgage, but the payments may go up later.
Assumable Mortgage
This refers to a mortgage that the buyer can take over from the seller. This occurs when a homeowner who already has a mortgage sells the home before they completely pay it off. The new buyer will step into the seller’s place and make mortgage payments and comply with the other terms of the loan. The new buyer is often required to prove that they would qualify for the mortgage anyway before they are allowed to assume it.
Balloon Mortgage
This refers to a mortgage that does not need to be paid off before the end of the loan term (ie. 15 years). The mortgagee pays a fixed monthly amount and at the end of the loan term, they either pay the remaining balance or refinance the loan.
Covenants, Conditions & Restrictions (CCRs)
The rules and regulations placed on real property by a homeowner’s association, developer or builder that set forth what the homeowners are able to do on or with their property.
Closing
Closing refers to the final step in the homebuying process, when ownership is finally transferred from the seller to the buyer. In order to reach this stage, all signatures must be recorded on the appropriate documents and all monies paid. There are often various closing costs involved charged by title companies, lenders, agents, attorneys and other related companies that buyers should be prepared to pay to complete closing.
Commission
A fee paid to a real estate agent and/or broker for their services. The fee is typically a percentage of the property’s selling price, but it could also be paid as a flat fee.
Escrow
The time period prior to the closing of the real estate purchase during which a neutral third party, the escrow holder, holds certain related funds, documents, personal property or other things of value to be held while the parties complete performance of the purchase contract.
Equity
The amount of investment a homeowner has in their home. This is calculated by subtracting any mortgages or liens on a home from the home’s market value. For example, if you purchase a home worth $300,000 for $280,000, you get instant equity of $20,000. Similarly, if that same home is later worth $350,000 due to improvements and it’s sold for $360,000, there is an additional $10,000 in equity that you, as the seller, get to keep.
Fixed Rate Mortgage
A mortgage loan that has a constant interest rate. The interest rate will not change over the course of the mortgage loan, which is typically 15 or 30 years.
Pre-Approval
The desired outcome for home buyers who apply to lending institutions. Lenders preapprove potential buyers for home loans after examining their debt-to-income ratio, ability to pay and credit history. The preapproval letter lets a buyer know exactly how much the lender has been authorized to loan them. This is much more thorough than a pre-qualification letter.
Pre-Qualification
An estimate for how much a potential buyer can expect to be approved for. This assessment is based solely off of information provided by the potential buyer and is not verified by the lender.
Purchase and Sale Agreement (PSA)
A written contract between the buyer and seller of real estate that outlines the terms of the sale.
Title
A title is the legal document that proves ownership of real estate or personal property. Title is evidenced by a deed in real estate, which is recorded with the local recorder’s office.
Zoning
Zoning refers to the local laws designed to divide cities and towns based on the building use. For example, certain zones allow residential housing, others allow commercial use for businesses, others allow industrial activity, and others may allow two categories (ie. Residential and commercial use). These laws control the allowable size, location and use of the buildings within a zone. These are worth paying attention to if you purchase land and intend to use it in a different manner than it was used at the time of purchase.
If you have any questions or need assistance understanding your home purchase or real estate matter, contact an experienced attorney at O’Flaherty Law today! Call our office at (630) 324-6666, or schedule a consultation. You can also fill out our confidential contact form and we will get back to you shortly.
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