Harris: Understanding Homeownership Terminology – Part 1

By Charlestien Harris

Buying a home can be a very exciting experience, but like most industries, the housing industry has its own language or jargon used to describe certain transactions when purchasing a home. Usually, the consumer is so excited about the process that they just sign on the dotted line without really understanding what they are signing or the terminology used to describe the different processes involved in completing the paperwork. 

Here are some common terms used during the home-buying process that you, as a potential homeowner, should be familiar with.

Acceptance – Agreeing to the terms of an offer, which in turn initiates a contract. As soon as the seller signs and agrees to your purchase offer, you’re in a contract for the sale of the house, and neither of you can back out without facing consequences. Some of those consequences could involve you likely losing your earnest money deposit, and in the seller’s case, a potential lawsuit could be filed against you for breach of contract.

Adjustable-Rate Mortgage (ARM) – A mortgage loan with the interest rate on the note periodically adjusted based on an index that reflects the cost to the lender of borrowing on the credit markets. To avoid constant and drastic fluctuations, ARMs typically limit how often and by how much the interest rate can vary.

Annual Percentage Rate (APR) – A yearly interest rate that includes upfront fees and costs paid to acquire the loan, calculated by taking the average compound interest rate over the term of the loan. Mortgage lenders are required to disclose the APR so that borrowers can more accurately compare the actual cost of different loans with different fees.

Appraisal – A determination of the value of something; in this case, the house you plan to buy. A professional appraiser should be an independent, qualified specialist in real estate appraisals with expertise in the local geographic area. They make an estimate by examining the property, looking at the initial purchase price, and comparing it with recent sales of similar properties. Your bank or lender will require an appraisal to assess the worth of the house for lending purposes. Unfortunately, the lender may refuse to fund the loan if the appraisal comes in lower than the loan amount. In such situations, if you can’t come up with additional down payment money, a better appraisal, or the seller won’t lower the price, the loan might fall through.

Balloon Mortgage – A mortgage that does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size. The borrower must either pay off the remaining mortgage or refinance the loan at that time.

Closing Costs – All settlement or transaction charges (above and beyond the actual cost of the property) that home buyers (or sellers, depending on tradition in your area and what you negotiate with the seller) need to pay at the close of escrow when the property is transferred. These typically include lender’s fees and points or prepaid interest, a prorated share of the property taxes, transfer taxes, credit check fees, homeowners’ and title insurance premiums, deed filing fees, real estate agent commissions, inspection and appraisal fees, and attorneys’ fees. Some closing costs are tax-deductible.

Contingency – A provision in a contract stating that some or all terms of the contract will be altered or voided by the occurrence of a specific event, usually by specific dates leading up to the closing. For example, a contingency in your home purchase contract might state that, if the buyer does not approve the inspection report of the physical condition of the property, the buyer does not have to complete the purchase. In my personal case, the lender wanted me to pay off two accounts to improve my debt-to-income (DTI) ratio. I paid those accounts off, and my loan was approved.

Counteroffer – The rejection of an offer to enter into a contract, where the rejecting party includes a different offer that changes the terms of the original offer in some way. For example, if you offer $750,000 for a house and the seller replies that they want $775,000, the seller has rejected your offer and made a counteroffer. The legal significance of a counteroffer is that it completely voids the original offer. You’re not in contract until someone actually signs the paperwork to an offer or counteroffer.

Disclosure – The making known of a fact that had previously been hidden; a revelation. Home sellers must disclose material physical and other defects in the house within their knowledge, such as a leaky roof or potential flooding problem; and in all states, by federal law, sellers must disclose the presence of lead-based paint hazards in buildings constructed before 1978.

Earnest Money Deposit (EMD) – A partial payment (deposit) demonstrating commitment in a contractual relationship, commonly made in real estate transactions at the time of making the purchase offer. The remainder of the payment is due on the closing date. The seller keeps the earnest money if the buyer fails to make a timely payment in full or if there is a similar breach of the agreement.

Escrow – The holding of funds in a designated account or documents by a neutral third party prior to closing a home sale.

Fixed-Rate Mortgage – A mortgage loan that has an interest rate that remains the same throughout the life of the loan, usually 15 or 30 years.

This is just a portion of the terminology you need and should want to understand when you are going through the home-buying experience. In next week’s article, I will continue to explain processes and definitions to help you, as a potential homebuyer, understand or gain clarity on some of the terminology used in the home-buying process. 

For additional information on this and other financial topics, visit our blog at banksouthern.com/blog, email me at Charlestien.Harris@banksouthern.com, or call me at 662-624-5776.

Until next week – stay financially fit!

Charlestien Harris is our financial contributor, a financial expert with Southern Bancorp Community Partners whose articles are seen in a number of publications around the region.