Although it’s almost impossible to make a complete list of all of the vocabulary that might trip you up during the home buying process, it’s important that you have at least a brief overview so you can understand your real estate agent’s “explanations.” If you’re still finding yourself confused after studying up on these 10 terms to know, don’t be afraid to ask your agent questions — in fact, the more the better. When you’re making (probably) the largest purchase of your lifetime, it’s crucial that you know what you’re signing, and what you’re signing up for.
An offer to purchase, or a binder, is a tentative, limited-time agreement between a buyer and a seller. Secured with earnest money, the binder guarantees purchase terms for a set amount of time.
Also known as “good faith” money, earnest money comes before the down payment, usually with an offer or just after it’s been accepted, and signifies to the seller that you’re a serious buyer. The money, typically 1% to 3% of the home’s value, is often held in escrow until the purchase is finalized, and then it applies to the down payment.
A house deed is different than a title, though they both connote ownership. The title is the actual document that proves ownership of the property, and the deed is the document that transfers the title from the previous owner to you.
Simply put, escrow is money that a third party holds while a buyer and a seller negotiate a transaction. So, as the buyer, you would put money in escrow, or an escrow account, and it wouldn’t be released to the seller until the deal is final. Many mortgage lenders also require escrow accounts to hold monthly contributions to insurance or property taxes that would be released when the bills come due.
In a home buying scenario, the previous owners are the grantors, transferring ownership to you, the grantee, through a deed.
As you likely know, a mortgage is an amortization of debt, or a loan repaid at a fixed pace over time. When you’re buying a home with borrowed money, you are the mortgagor, and your lender is the mortgagee.
Also known as documentary stamps, state stamps are taxes on deeds. Stamp amounts and requirements differ by state.
In real estate law, restrictive covenants are deed provisions that limit the use of the land, much like zoning laws do. These legally enforceable restrictions are often used to limit a neighborhood’s development, for example by determining the size, height, or density of buildings on the land. Some covenants strictly bind the new owner to follow the regulations, but others “run with the land” and will hold all subsequent owners to the same regulations, which often affects the property’s marketability as an encumbrance on the title.
Unlike most insurance policies, title insurance is a one-time payment in your closing costs that covers the history of a title rather than the future. Although a title search (a step in the closing process) should turn up any liens, encumbrances, encroachments, or any other event that could impact the validity of the title that will soon be yours. When you’re purchasing title insurance, you’re essentially paying for the peace of mind someone will defend you in court if the title is ever questioned and to compensate lost equity if the case doesn’t go your way. If you’re purchasing with a mortgage, your lender will need title insurance as well.
Short for private mortgage insurance, PMI essentially guarantees the lender’s money in the event that you’re unable to make your payments. Annually, it costs about 1% of the home’s value and is typically only required if you make a down payment of less than 20%, but it varies by lender.
Sam Radbil is a contributing member of the marketing and communications team at ABODO, an online apartment marketplace. ABODO was founded in 2013 in Madison, Wisconsin. And in just three years, the company has grown to more than 30 employees, raised over $8M in outside funding and helps more than half a million renters find a new home each month.