10 Terms All Home Buyers Need to Know
The purchase of a home is probably the most expensive and important investment one will ever make. “For Sale” signs can be seen all over town this time of the year and many people in the Lansing area are looking for a place to call home. Real estate terminology tends to be confusing, especially for first-time homebuyers so it is crucial to understand the real estate lingo before buying a home.
Members of the Greater Lansing Association of REALTORS® explained these important home-buying terms in further detail to help build an understanding.
1. Preapproval
Prior to going on a showing with a REALTOR®, home buyers must be preapproved for a mortgage. Buyers can get preapproval from a bank, mortgage company or credit union.
“A preapproval is an initial approval based on information exchanged during a phone conversation. The lender will review your income, assets, and analyze credit then issue a preliminary approval,” said Jameel Abdo, owner and loan originator at Glacier Financial.
2. Annual Percentage Rate (APR)
Every loan, including mortgages and forms of credit, come with an annual percentage rate, or APR, which is the actual cost of the loan and is separate from the interest rate. The APR is intended to make it easier to compare lenders and fees associated with different loan options. Buyers are encouraged to shop different lenders and pay close attention to the APR.
“The APR is essentially the cost of the loan,” said Patty Leonard, senior loan officer with Independent Bank.
There are several different types of mortgage loans available. Mortgage lenders can help buyers select the best loan based on the type of home they are looking for as well their financial situation. The amount of a required down payment is dependent upon the loan. A common misconception amongst first-time homebuyers is that they need 20 percent of the homes purchase price for a down payment, this is not true in most cases. There are many loan products and downpayment assistance programs available to first-time homebuyers.
3. Federal Housing Administration loan (FHA)
FHA loans are government endorsed loan products.
4. Conforming loans
“A conforming loan is one that conforms to Fannie Mae or Freddie Mac’s underwriting guidelines. These loans typically come with the best interest rates,” said Bryan Clark of Dart Bank.
One important detail to pay attention to with a mortgage is whether it is a fixed-rate or adjustable-rate mortgage. Depending on the mortgage type, the APR will either stay the same for the duration of the loan, or change after a designated amount of time.
5. Fixed-rate mortgage
“The interest rate, or APR, on the mortgage will not change throughout the duration of the mortgage with a fixed rate,” said Tammy Halsey, a loan officer with Eaton Community Bank.
6. Adjustable-rate mortgage (ARM)
The interest rate on a fixed-rate mortgage will stay the same, but with an adjustable-rate mortgage, the interest rate will change.
7. Earnest money deposit (EMD). After making an offer on a home, buyers must make an earnest money deposit, also referred to as good faith deposit, to be held in an escrow account until closing. This deposit shows the seller that the buyer is committed to going through on the purchase of the home.
“The money is held in an escrow account and the money helps fund the down payment or the closing costs,” said REALTOR® Brooks Warner of Keller Williams.
8. Title
Before receiving the keys to the property, the title company provides insurance that the title of the property is free of any liens. Title insurance companies also handle the closings. Both parties, the buyer and the seller, meet at the closing table at the title company when all agreements of the purchase are met and the title is ready to be transferred.
"Title insurance companies make sure that the rights and interests to the property are clear, that transfer of title takes place efficiently and correctly and that your interests as a home buyer are protected to the maximum degree,” said Kim Kruger of Transnation Title Agency.
9. Closing Costs
Buyers should be aware of closing costs. Although it can be negotiated for the seller to pay closing costs, it is still wise to be informed of what these fees consist of.
There are fees related to lender processing such as credit report, appraisal, and flood certification. There are also fees that are related to title insurance which include: the settlement closing fee, owner’s policy, mortgage policy, and inspection fees.
10. Escrow
This is a licensed third-party account used to hold and disperse money as part of the real estate transaction. For instance, a buyer’s earnest money deposit will be held in an escrow account and dispersed to the seller at the time of the transaction closing. In addition, lenders may set-up escrow accounts separate from the mortgage to pay for property taxes and insurance on behalf of the homeowner.
The real estate transaction can be confusing, and it is best to consult professionals to guide buyers in the right direction to make the most informed decisions in the process of buying a home. Find a REALTOR®, lender, or other real estate professional at www.lansing-realestate.com.
This article originally appeared on Lansing State Journal: 10 Terms All Home Buyers Need to Know
