There are a lot of terms to know when buying a home. Here are just a few home buying terms to help you be in the know as you begin your home buying journey!
Affordability
A measure of whether someone earns enough to qualify for a loan on a typical home based on the most recent price, income, and mortgage rate data.
A very basic way of explaining affordability is to subtract the cost of housing from your take-home income. You should still have enough money left over for necessities, as well as wants. Housing is considered affordable by the U.S. Department of Housing and Urban Development when it is 30% or less of a buyer’s income.
Appraisal
A report highlighting the estimated value of the property completed by a qualified third party.
A home appraisal is when a licensed appraised thoroughly inspects the property to access its worth, which may be different than the listing price. After compiling their findings, the appraiser will generate the home’s appraised value. Some lenders may require buyers to include an appraisal contingency in their offers. This is to ensure lenders do not lend more than the home is worth.
Closing Costs
The fees required to complete the real estate transaction. Paid at closing, hence the name.
Closing costs are fees that are paid to your lender. These fees typically cover things like searches on a property’s title and appraisals. What you’ll pay for exactly depends on the type of loan you have, as well as where you live. These fees are typically about 3-6% of your loan amount. For example, if your loan is $200,000, you can expect closing costs to be around $6,000-12,000. In Tennessee, the average closing cost after taxes is $3,790.39. “Closing costs” can be confusing, but it’s one of the most important home buying terms.
Credit Score
A number ranging from 300-850 that’s based on an analysis of your credit history.
Before you apply for a loan, it’s a good idea to know your credit score. If you’re planning on taking out a conventional loan, typically a minimum score of 620 is required. If there are multiple buyers, the average of their credit score will be used. For example, a buyer with a 500 credit score and one with 700 would only have an average of 600. Other loans, however, may have a lower credit minimum or none at all.
Another benefit of a higher credit score is that your interest rate may be lower. A lower interest rate can increase your purchasing power.
Down Payment
A percentage of your home purchase price that is paid up front when you close on a home loan.
Down payments are typically 3.5-20% of your home’s purchase price. However, there are some 0% down payment programs. With many loans, you will be required to pay for private mortgage insurance (PMI) if you put down less than 20%.
Check out these tips on how to save for a down payment.
Equity
The value of your home above the total amount of liens against the property.
Your mortgage would be a type of lien against your property. The equity would be the current market value of your home after the cost of those liens. You can use your home equity in the form of a loan or line of credit. The bigger a down payment you put down, the smaller your mortgage, so the more equity is available in your home.
Let’s say you buy a house worth $200,000 and make a down payment of $40,000. That $40,000 would be the amount of equity you have in your home right away. With each mortgage payment, your home equity increases.
Inspection Contingency
A provision in a contract requiring an inspection to be completed.
An inspection contingency is also called a “due diligence contingency.” This allows the buyer to have the home inspected prior to closing. Depending on what the inspection finds, the buyer can negotiate repairs, price, or completely cancel the contract. The inspection itself will include things such as the roof, foundation, appliances, electrical system, HVAC, and plumbing. As a buyer, it’s not a bad idea to be present for the inspection.
Mortgage Rate
The interest rate you pay to borrow money when buying a home.
Instead of paying your loan back in a lump sum, a mortgage loan is paid back monthly, including interest. Your mortgage rate depends on many factors, including credit score, the economy, the housing market, inflation, loan size, etc. Here is a good breakdown of current average rates.
Pre-Approval Letter
A letter from a lender that shows what they’re willing to lend you for your home loan.
Your pre-approval letter may only be good for 30-60 days, so you may want to wait to get one until you are ready to begin the buying process. Each lender is different, so talk to your bank, financial advisor, or lender to find out exactly what you need.