Adjustable Rate Mortgage (ARMs)
This type of mortgage usually has a lower initial rate (for a set number of years), then the rate may go up or down, depending on the specified index rate used for determination. Usually preferred for short-term ownership, the repayment period for ARMs are typically 5, 7, or 10 years, but they can be issued for longer time periods.
The repayment schedule of a loan, including payments of principal (the original amount borrowed) and interest. An amortization schedule displays, in a table format, the amount of principal and interest included with each payment, along with the remaining loan balance.
The estimated value of a property based on a qualified appraiser’s written analysis. Banks typically require appraisals before issuing loans to ensure the estimated value of the property adequately exceeds the amount borrowed.
The value of a property assigned by a governing authority to levy a tax or fee on the property owner.
Incidental fees associated with completing real estate transactions, potentially including attorney’s fees, credit report fees, document preparation fees, deed recording fees, appraisal fees, etc.
Particular conditions that must be met prior to closing a real estate transaction such as a home inspection (to ensure the home has no serious defects), a financing contingency (which releases a buyer from the sales contract if their loan falls through), or a contingency that a buyer must first sell their current home. In general, the fewer contingencies required of a seller, the stronger a buyer’s negotiating position, in terms of getting the best price.
All sellers are required to fill out a property disclosure for buyers that states everything they know about the home since they’ve owned it, whether it’s good (there’s a brand-new roof) or bad (the basement leaks during heavy rains).
Also called a “good faith” deposit, these are funds held by a neutral party to demonstrate the buyer has serious interest in purchasing a property. There is no defined amount, but earnest money generally runs about 1% to 2% of the purchase price. When the purchase is complete, that money is applied toward closing costs. If the contract doesn’t go through, there are guidelines that vary by state that determine which party will be awarded the escrow deposit.
The date that the last party signed or initialed any terms and/or changes in the sales contract. This is often the date that starts the clock on the contract’s various deadlines (e.g., that a home inspection must happen within 10 days).
Loans insured by the Federal Housing Administration (FHA). With attractive financing rates and less stringent lending requirements than conventional mortgages, FHA loans are often appealing options for buyers with lower credit scores and/or smaller down payments. They do, however, require two types of mortgage insurance: an upfront premium and an annual premium, which is wrapped into monthly mortgage payments.
A conventional loan with a pre-determined (or “locked in”) interest rate for the duration of the loan repayment period. They are traditionally 30 years in length but can be issued for 15 years, 10 years, or another duration.
A buyer can do any inspections within a time frame that’s mutually agreed upon with the seller—typically within seven to 14 days of an accepted offer. After an inspection, the buy can: accept the property in the current condition and move forward to closing, release the contract and retain the earnest money, or ask the seller to repair issues discovered at inspection. If the seller counters with a lower sales price or rejects the repair request, the buyer has the right to terminate the contract and keep the earnest money.
A thorough professional examination (at the buyer’s expense) that evaluates the structural and mechanical condition of a property (plumbing, foundation, roof, electrical, HVAC systems, etc.). This highly recommended step is a common contingency clause in real estate sales contracts. If the inspector identifies issues that may be expensive to remedy, these can be revisited with the seller before proceeding with the sale. A buyer can do any inspections within a time frame that’s mutually agreed upon with the seller—typically within seven to 14 days of an accepted offer. After an inspection, the buyer can: accept the property in the current condition and move forward to closing, release the contract and retain the earnest money, or ask the seller to repair issues discovered at inspection. If the seller counters with a lower sales price or rejects the repair request, the buyer has the right to terminate the contract and keep the earnest money.
The printed (or digital) description of a property for sale. Listings may include details about the property, the home (number of bedrooms, baths, featured rooms), other structures, the price, and photos.
A formal request to buy a home. See sales contract.
Prepaid interest on a loan, equal to one percent of the loan amount. The advantage of paying points up front is that a lower interest rate can be secured for the lifetime of the loan. This may be a good deal if a buyer plans to stay in the home for many years (so the long-term interest savings outweigh the initial cost in points).
A lender’s written guarantee to grant a loan up to a specified amount (subject to receiving full documentation). Pre-approval for a loan can strengthen a buyer’s negotiating position with a seller.
Less “official” than a mortgage pre-approval, banks offer (at no cost or obligation) pre-qualifications to estimate the amount a buyer may be able to borrow. It is often used early in a buyer’s search to help determine a reasonable price range.
Private Mortgage Insurance (PMI)
A monthly insurance payment that may be required if a buyer’s down payment is less than 20 percent of the home’s purchase price. It protects lenders against loss if a borrower defaults.
The contract’s contingencies (see below) provide the buyer a period to conduct due diligence, which essentially means doing homework. If the buyer discovers negative information regarding the property during this time, he can cancel the escrow and receive a refund of his earnest money.
A legal agreement between a buyer and seller to purchase real estate, for a specified price and terms, for a limited time period (also called a purchase agreement or a binder). When initially presented to a seller, this document is often called a purchase offer. Once the seller accepts (or the buyer accepts the seller’s counter offer), it becomes a legally binding sales contract.
This type of insurance is acquired to protect against any unknown liens or debts that may be placed against the property. Before issuing title insurance, public records are searched to ensure that the current owner has legal rights to the title as well as the legal ability to sell the home and that no liens are held against the property.
In the home-buying process, escrow is a secure holding area where important items (like the earnest money check and contracts) are kept safe until the deal is closed and the house officially changes hands.
How escrow works…
The escrow officer is a third party—perhaps someone from the closing company or a title company agent. The third party is there to make sure everything during the closing proceeds smoothly, including the transfers of money and documents. Escrow protects all the relevant parties by ensuring that no funds and property change hands until all conditions in the agreement have been met.
Along the way, proper documentation is filed with the escrow officer as each step toward closing is completed. Contingencies that might be part of the process could include home inspection, repairs, and other tasks that need to be accomplished by the buyer or seller. And every time one of those steps is completed, the buyer or seller signs off with a contingency release form; then the transaction moves on to the next step (and one step closer to closing).
How Much Are Closing Costs? What Home Buyers and Sellers Can Expect
Once all conditions are met and the deal is finalized, the money due to the sellers is transferred to them. Meanwhile an escrow officer clears (or records) the title, which means the buyer officially owns the home.
How much does escrow cost?
That varies—as well as whether the buyer or seller (or both) pays—with the fee for this service typically totaling about 1% to 2% of the cost of the home.
How escrow protects buyers and sellers
Escrow may seem like a pain, but here’s how it can work in your favor. Let’s say, for example, the buyer had a home inspection contingency and discovered that the roof needed repairs. The seller agrees to fix the roof. However, during the buyer’s final walk-through, she finds that the roof hasn’t been repaired as expected. In this case, the sellers won’t see a dime of the buyer’s money until they fix that roof. Talk about a nice safeguard for the buyer!
Sellers benefit from escrow, too: Let’s say the buyers get cold feet at the last minute and bail on the deal. This may be disappointing to the seller, but at the very least, buyers have typically ponied up a sizable chunk of change for their earnest money deposit. This money, often totaling 1% to 2% of the purchase price of a home, has been held in escrow. When buyers back out with no legitimate reason, they forfeit that money to the seller—a decent consolation for the sale’s failure.