Real Estate Terms All Home Buyers Should Know

Real Estate Terms All Home Buyers Should Know

Buying a home can be a stressful process. It doesn’t matter if you have attended homeowner classes or if you have a realtor on speed dial. To help relieve some of this stress, you should know the different real estate terms and real estate definitions that you will come across. 

Debt-To-Income Ratio

Anytime you apply for credit, potential creditors and lenders look at your debt to income ratio. This is the amount of debt you have compared to the income that you bring in. 

Your debt-to-income ratio gives lenders an idea of your ability to pay your debts. The ideal percentage should be less than 36%. This is calculated by dividing your monthly debt by your monthly net pay. 

Down Payment

This real estate term refers to the money that you put down towards the purchase of your new home. The amount of cash that you can put down reduces the amount that you need to borrow and is given to the seller to close on the home. You want to have at least 5-20% of the purchase price of the home for a downpayment. 

Proof of Funds

This is documentation proving that you have the available funds to cover the costs associated with buying a home. This can include down payment, escrow, and/or closing costs. 

Proof of funds is usually needed if you are paying cash for the home, or you have a lender that wants to make sure that you have the funds to cover the purchase costs. The proof of funds should include the following:

  • Date funds were either available or deposited in the account.
  • An official bank statement
  • Balance in your account (checking, savings)
  • Copy of your bank statement (official)
  • Name and address of the bank
  • In some cases, authorized bank employee signature, or bank notary


This refers to what the property is worth when you look at the difference between the market value of the home and what you owe on the home. When you put a cash down payment on the home you are putting money into the equity that you have in the home. 


This is an agreement that you will be receiving a loan from a lender towards the purchase of a home. Having a pre-approval prior to submitting an offer to a seller increases your chances of getting the home. The seller doesn’t have to wait for you to get approved for a loan. 


This is different from a pre-approval. This is based on calculations using your debt to income ratio to determine how much you can afford. A prequalification is not a guarantee that you will receive a loan, but it is helpful for real estate agents to be able to show you real estate listings that you can afford or that are within your price range. 

“As Is”

An “as-is” home is usually one that has been foreclosed on. The term is telling you that the home is being sold in the condition that it is currently in and the seller doesn’t plan on fixing it. You either take it or leave it. This may include things such as termite infestation, leaking roof, mold, and mildew, or other structural issues. 


Assessment is how your property or real estate taxes are determined. Your home and land are given an assigned value and the government uses this to calculate the property tax that you owe. This differs from an appraisal because it relies on past information.

Home Inspection

If you are not purchasing a home “as-is”, you will need to have a physical examination of the home performed. This looks for issues with plumbing, electrical, roof, foundation, and other aspects of the home. This should be done prior to signing papers for the home because you would want to use these as contingencies when submitting an offer letter. 

Homeowner’s Association (HOA)

This is an organization that manages the common areas in a development or condominium building. The association is responsible for ensuring that HOA fees are paid and that residents are complying with the rules of the development. 

Loan Contingency

Loan contingency is a clause in the sales contract of the home that protects the buyer if there are hiccups in the loan approval process.

This is put in place to give the buyer enough time to secure a loan. The contract details the amount of money that is given for the down payment, and how much is to be given for the earnest deposit. 

The earnest deposit is paid to the seller demonstrating the seriousness of the home buyer to purchase the home. If the home buyer fails to secure funding in the specified time frame, then the earnest deposit (1% – 5% of home value) is forfeited. 

Adjustable-Rate Mortgage (ARM)

An Arm is a type of mortgage where the interest can vary until it has reached the preset limit. The lender will inform you how, when, and why the rate will fluctuate. 

Annual Percentage Rate (APR)

The APR is a combined annual percentage rate that includes the fees and costs associated with the loan added to the interest for the loan. This information is disclosed to you when working with a mortgage broker so that you can evaluate the bottom line of the loan. 


An appraisal is based on sales of homes in the last 90 days that are located within a 1-mile radius of your home. An appraiser will come into the home and give an estimated value of the home using recent sales, initial purchase price, and evaluating the property. An appraisal can be used to tell your bank and/or lenders if the house is worth what you “intend” to pay for it. 

Closing Costs

The closing costs are the additional charges that are placed on top of the purchase price of the home. This is paid when the contract is settled unless there’s an agreement between you and the seller. 

These additional costs include anything from origination fees, attorney fees, home inspection fees, appraisal fees, title search, and other costs associated with purchasing the home. These costs are typically 2 – 5% of your loan.


Escrow is an account where funds are placed until the sale of the home is complete. An escrow agent is a neutral third party that will handle the payment until a specific date. 

Fixed-Rate Mortgage

This is the opposite of an adjustable-rate mortgage. A fixed-rate mortgage is a constant and steady interest rate that you pay for the life of the mortgage.

By Admin