When you decide to buy a home, there are many times that you may not understand the process – let alone the terminology being used!! Mortgage lenders and realtors use terms that many buyers don’t understand. Hopefully we also explain what we are saying but just in case, here is some of the lingo that may get used!
Closing costs and prepaids – basically this is the money needed to close on your home – the fees charged by the lender, title company and any state fees, plus the money needed to pay for the first year of insurance and setting up your escrow.
Escrow – this is one of two things (just to confuse you more!!). Usually an escrow is referring to the money set aside to pay for your taxes and insurance in your monthly payment. If you are escrowing for taxes and insurance, your lender will collect 1/12 of the payment every month and pay the bill when it comes due. The other meaning of escrow is if you need to set aside money for repairs. Maybe you are purchasing a new home, the builder may put money into an escrow account to pay for things like landscaping in the future. That can also be called an escrow account.
Mortgage approval – There are mortgage approvals and mortgage prequalifications. A mortgage approval means your lender has pulled your credit report, looked at your income documentation and assets, they have also run your file through an automated underwriting system. A prequalification means that they have talked to you about your file but do not have any supporting documentation.
Earnest money – This is a check or a wire transfer that is given to the listing realtor’s company. It basically says you are going to go through with the transaction, it will be a credit at closing towards your down payment and closing costs. It is usually at least $1000 but can be much higher depending on your offer. Remember the check does get cashed – I have had some clients get surprised by this!
Appraisal – This is a valuation done by a licensed appraiser. This determines the value of the home based on other homes that have sold in the same area and are the same type of home (size, age, type, etc). An inspection is different – this is done by an inspector and looks for issues with the home. The appraisal looks at value and also major health and safety issues.
Closing – this is where you will meet to finalize your purchase. It’s typically done at a title company in Minnesota. It’s handled by an independent third party and they go through all your documentation to make sure you have clear title to the property you are buying.
There are many more terms that may be confusing but the most important thing is to have a realtor and lender that you understand and more important that they understand you and what you are looking for. This is one of the biggest purchases you will make, you want to make sure you have people helping you! You need to be able to ask questions and know that it’s ok to ask questions. I always tell clients to make sure they ask if they are not sure of something. Realtors and lenders talk this lingo all day long and understand it, it’s easy to forget that the buyer may not understand what we are talking about!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
