Purchasing a home can be a complicated and confusing process, especially for first-time buyers. Throughout the process, first-time home buyers will encounter a variety of unfamiliar real estate terms. There are several key terms associated with purchasing real estate that are helpful to learn.
For example, many buyers confuse the terms broker and salesperson. A broker is a properly licensed individual, or corporation, who serves as a special agent in the purchase and sale of real estate. A salesperson is an individual employed by the broker, or associated by written agreement with the broker as an independent contractor. The salesperson facilitates the purchase or sale of real estate. In Texas, both real estate brokers and salespersons are licensed by the Texas Real Estate Commission.
Once you decide to purchase, a salesperson will prepare a sales contract to present to the seller along with your earnest money deposit. The sales contract is the document through which the seller agrees to give possession and title of property to the buyer upon full payment of the purchase price and performance of agreed-upon conditions. The earnest money is a buyer’s partial payment, as a show of good faith, to make the contract binding. Often, the earnest money is held in an escrow account. Escrow is the process by which money is held by a disinterested party until the terms of the escrow instructions are fulfilled.
After the buyer and seller have signed the contract, the buyer (unless paying cash) must obtain a mortgage note by presenting the contract to a mortgage lender. The note is the buyer’s promise to pay the purchase price of the real estate in addition to a stated interest rate over a specified period of time. A mortgage lender places a lien on the property, or mortgage, and this secures the mortgage note.
The buyer pays interest money to the lender in exchange for the use of money borrowed. Interest is paid on the principle, the capital sum the buyer owes. Interest payments may be disguised in the form of points. Points are an up-front cost which may be paid by either the buyer or seller or both in conventional loans.
In general, there are two types of conventional loans that a buyer can obtain. A fixed rate loan has the same rate of interest for the life of the loan, usually 14 to 30 years. An adjustable rate loan or adjustable rate mortgage (ARM) provides a discounted initial rate, which changes after a set period of time. The rate can’t exceed the interest rate cap or ceiling allowed on such loans for any one adjustment period. Some ARMs have a lifetime cap on interest. The buyer makes the loan and interest payments to the lender through amortization, the systematic payment and retirement of debt over a set period of time.
Once the contract has been signed and a mortgage note obtained, the buyer and seller must legally close the real estate transaction. The closing is a meeting where the buyer, seller and their attorneys review, sign and exchange the final documents. In Texas, closings are typically done at a title company, with separate meetings for the buyer and seller. At the closing, the buyer receives the appraisal report, an estimate of the property’s value with the appraiser’s signature, certification and supporting documents. The buyer also receives the title and the deed. The title shows evidence of the buyer’s ownership of the property while the deed legally transfers the title from the seller to the buyer. The buyer may also receive a title insurance policy, insurance against the loss of the title if it’s found to be imperfect.
Buyers should plan on a least four to eight weeks for a typical real estate transaction. The process is complex and at times, intimidating. A general understanding of real estate terminology and chronology of the transaction, however, will help any real estate novice to confidently buy his or her first home. For more detailed information, or if you have questions about the home buying process, give me a call, e-mail me or visit my Web site.
Scott Myers, Broker/Owner of Century 21 Scott Myers
(210) 479-1222 or Toll-Free (888) 868-1222