Data from The National Association of Realtors shows that 35 percent of all June home sales were from first-time buyers. When you begin your home-buying journey you might start to hear phrases like pre-approval, under contract, contingent, and closing costs. Depending on where you are in the process, you’ll start to notice these terms as you see them included on listings you browse online, used by your real estate agent, or your mortgage lender.

However familiar you may have become with seeing and hearing these terms used, you may not fully understand what they mean in practice. That’s okay though, it’s all a learning process and we’re happy to walk you through some of the basics.

The following is a list of the most common terms you are likely to encounter while buying a home.

Debt-to-Income Ratio: Mortgage lenders calculate this by dividing your monthly debt (money that flows out for things like bills) by your pre-taxed income. Lenders will be looking for borrowers who spend less than 36 percent of their monthly income on debt payments. This is meant to ensure that the borrower doesn’t end up paying more than they can afford on their mortgage.

However, things like groceries, health insurance, utilities, and other similar expenses are not typically accounted for in the debt-to-income ratio. This means you could likely end up getting approved for more money than you could comfortably pay. So, be careful when putting an offer on a home, and don’t just assume that because you were approved for a certain amount, that you could afford the monthly mortgage payment that comes with it.

Pre-Qualified: This is an estimate of the amount you can expect to be approved to borrow, but it does not guarantee that you will be approved for the loan amount. This is done with a short assessment of the information you provide a lender without providing any verifications.

Pre-Approval: A pre-approval letter states the exact amount that you are qualified to borrow. After filling out an application your lender will calculate your ability to repay your loan by examining your debt-to-income ratio, financial situation, and credit rating.

Offer & Counteroffer: Once you find a home you are happy with, it’s time to make an offer. As the buyer, you will work with your real estate agent to create a formal, written offer that is then signed and sent to the seller’s agent. The offer should be based on what you and your agent each feel is a fair market value for the home. The seller could then choose to reject the offer or provide a counteroffer. The counteroffer is a negotiation regarding what the seller feels is a fair market value.

Contingencies: When making an offer on a home, contingencies may be specified in the offer contract that must take place before the deal is complete. There are various contingencies that may be included, such as an appraisal contingency or an inspection contingency, among others. They are things you would like to see completed within the home, or things the seller may want to see happen, before completing the sale. These should always be discussed with your agent.

Inspections: Once you have made an offer on a home and the seller has accepted, you should schedule an inspection to take place. The cost will vary by location. A licensed inspector will examine the home, looking at plumbing, heating, electrical, walls, etc.

This is a part of the “due-diligence” phase you will also hear about. The purpose is so the seller can be fully educated on the quality of the home and make a decision about whether or not they would like to continue with the purchase of the home, change their offer, or request specific repairs to be made by the seller.

Appraisal: A licensed appraiser will visit the home to professionally assess the value of the property. This will help the buyer decide if the home is worth the amount they would potentially be paying.

Under Contract: If a home is under contract, this means the seller has accepted an offer from a potential buyer, but the sale is not yet complete. During this period, inspections and appraisals will take place and allow the buyer to consider the value of the home and whether they would like to complete the sale. During this phase, a buyer is not permitted to accept another offer.

If the sale is not complete, the house will re-enter the market.

Closing Costs: Closing costs are fees charged by lenders, attorneys, tax authorities, title and insurance companies, real estate agents, and other companies that assist in the closing process and completion of the sale. These are usually 2-5 percent of the purchase price of the home and are typically paid before or at the time of closing by either the buyer, the seller, or both.

There are still many other terms you could come across on your home-buying journey, but this list will have equipped you with the basics you need to begin the process. Remember to always discuss anything you don’t fully understand with your real estate agent and mortgage lender. They are the team representing you and your interests and they are at your disposal, so don’t be shy about asking questions.


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Customers use The Warren Group to identify new business opportunities through access to comprehensive real estate and mortgage data, analytics, and industry news coverage. The Warren Group was established in 1872 and is now in its fourth generation of family ownership and management. It is the publisher of Banker & Tradesman, The Commercial Record, and The Registry Review. For more information visit www.thewarrengroup.com.