Real Estate Terms for Beginners
If you’re in the market to buy or sell a home in Reston, you know that the real estate industry has its own unique language. You might know some of the words your agent is throwing around, but why not know it all? Let’s dive into some common real estate terminology to help you navigate the real estate market like a boss!
Credit score
Your credit score is a number from 300 to 850 that shows how worthy you are as a borrower. This magic number has a big influence on your ability to get a mortgage, the interest rates offered to you, and more. The three primary credit bureaus, Equifax, Experian, and TransUnion, compile your scores from information including your payment history and if you’ve paid on time or been late, the age of the credit cards and accounts you hold, hard inquiries for things like credit cards and loans, and credit card utilization. For credit card utilization, try keeping the credit you’re using under 30% of what is available to you for a score boost.
Debt-To-Income Ratio
Divide all your monthly bills by your gross monthly income and there is your debt-to-income ratio. This number lets lenders assess if you will be able to keep up with mortgage payments along with your other obligations. Even with a killer credit score, if your bills are taking up too much of your income you won’t be seen as a good risk. Aim for a DTI of less than 35% to be an attractive borrower.
Real Estate Appraisal
A real estate appraisal helps estimate the value of a property. For sellers, this helps see how much a home is worth so it can be priced competitively. For buyers, lenders use it to make sure you aren’t borrowing more than a home is worth. An appraiser will look at things like size of the property, exterior and interior condition, age of property, improvements and renovations, along with sales of similar properties and current market trends.
Assessment
An assessment is another estimate of value of your property but is for property tax purposes. Tax assessors don’t enter the property, and their assessment is based on general knowledge of the property (size, number of bedrooms) and sales comparisons. This is less accurate view of a property’s true value, since it doesn’t take into consideration other factors like renovations that an appraisal does.
Pre-Approval
A pre-approval will give you the go-ahead to shop for a home knowing ahead of time how much of a mortgage you’ll be able to get. This helps in the buying process because you’ll know exactly how much wiggle room you have when shopping and ultimately making an offer on the right place. To get pre-approved, you will complete a mortgage application and the lender will complete an assessment on your credit worthiness. From that, you will receive a pre-approval letter, good for 90 days, with an offer to lend you a specific amount of money.
Earnest Money
Also known as a good faith deposit, earnest money is the money a buyer puts down as a deposit to show that they are serious about the transaction. If everything works out and you buy the house, the earnest money can go towards a down payment or closing costs. The amount of earnest money varies but is generally between 1% and 3% of the purchase price.
Escrow
There are two different uses for escrow. The good faith deposit buyers put down goes into an escrow account, where it is held until the home sale is complete. Once the sale is final, the funds will be applied to the down payment.
Your mortgage generally has an escrow account associated with it. After closing, the mortgage company will take a portion of your mortgage payment and hold it in the escrow account to pay for your property taxes and insurance.
Closing
Closing is the completion of the real estate transaction, when home ownership is transferred from seller to buyer.
Closing Costs
Closing costs are all the extra charges for purchasing a home that aren’t included in the purchase price. They are due at closing and include things like taxes, insurance, records filing, real estate commission, and loan origination fees.
Mortgage Points
Points are extra, upfront fees you pay your mortgage lender to get a lower interest your total loan amount.
Due Diligence Period
The time between acceptance of a home offer and closing is the due diligence period. During this time, buyers can make sure there aren’t any issues with the property and gives them a chance to back out if they find out anything is wrong. This is the time for the buyer to get a home appraisal, home and pest inspections, and examine home owner association documents,
Equity
Equity is the difference between how much you owe on your mortgage and how much your home is worth.
Principal and Interest
The principal is the amount you borrowed, while the interest is the charge paid for the use of the loan.