Between saving, searching, and signing on the dotted line, buying your first home can be an overwhelming process. Making the whole experience even more daunting is the real estate jargon, which can sound like Greek to a real estate newbie.
Not sure where to start? Don’t stress. We spoke to two real estate professionals to find out the 10 terms millennials should know before they even think about buying their first home:
1. Getting a mortgage pre-approval letter is one of the first steps millennial buyers should take on the path to homeownership, says Nicole Durosko, agent at Warburg Realty in New York City. Pre-approval is when a lender verifies your financial information and determines how much money it’s willing to lend you.
“Getting a loan pre-approval letter helps any buyer save time so they’re not looking at homes out of their price range,” she says.
2. When a lender is considering you for a loan, they will look at your debt-to-income ratio—meaning how much you currently owe (like your student loan or credit card balances) against how much you make. If a bank doesn’t think you’re managing your debt well, it won’t approve you for a loan.
“Managing your debt-to-income ratio gives a good idea to lenders how you’ll pay your mortgage bills,” Durosko says.
3. When you’re house hunting, do a comparative market analysis (CMA).
“One of the most important steps before purchasing a home is checking out similar properties in the same neighborhood of a buyer’s desired home,” Durosko says. “Understanding what’s currently on the market in terms of pricing trends will help a buyer formulate an offer.” Usually your agent will provide you with a CMA for reference.
4. We’ve all heard of “making an offer” on a house, but what exactly does that entail? A purchase offer (sometimes called a “letter of intent to purchase” or a “purchase agreement“) is a legal document submitted to the seller or the seller’s agent detailing what you’re willing to pay for a home, how you will pay for it, and other specifics.
“A common mistake by first-time buyers is that they don’t realize that sellers can not only accept an offer or submit a counteroffer, but they can also reject an offer outright,” Durosko says. “After an offer is agreed upon by both the buyer and seller, the next step is to sign a contract.”
5. When financing a purchase, a bank will require an appraisal of the property to ensure that the loan amount is appropriate, says James Morgan, real estate agent at Compass in New York City. An appraisal, also called a property valuation or land valuation, is an objective estimate of a home’s value.
“If the appraised value of the property falls below the contract price, the borrower may have to come up with the difference in cash,” he notes (if the seller chooses not to lower the price.)
6. If your parents ever co-signed a lease on an apartment for you, the concept of co-purchasing may sound familiar.
“Young people may need to purchase their residence with their parents on the title for financial reasons,” Morgan says. However, make sure to check if the homeowners association or board permits this, he notes.
7. If a home is in contract, it means the seller has accepted your offer, but the transaction has not been completed yet. All contingencies must be met before a sale is finalized, Durosko says. (More about contingencies in a minute.)
“Real estate property is considered to be in contract once the terms of sales have been agreed upon in writing,” she says.
8. Contingencies are conditions listed in the contract that must be met before the sale of the home is complete.
“Contingency types are all over the map,” Durosko says. As a buyer, having contingencies gives you an out to cancel the deal if something goes awry. For example, you might have a contingency in that you will only buy the home if your mortgage gets approved, or if it passes a septic system inspection.
9. Keep in mind that the cash you’re saving for a down payment isn’t the only expense you’ll incur when buying a home. You’ll also have to pay closing costs, which are expenses beyond the purchase price, like taxes, lender costs, attorneys fees, and title insurance.
However, Durosko has some good news: “It is important for all home buyers to know that closing costs are a negotiable item on a contract.”
10. A title is documentation stating that the homeowner has the right to possess and use the property. When you’re buying a home and assuming the title of the property, it’s important to get title insurance, which protects you from any previous legal issues around the property’s ownership, Durosko says.
For example, Morgan says: “Did the person who sold the home have the right to do so? This protects you against these risks.”
Are you a current homeowner? What words were most confusing to you during the buying process?