Buying your first home is one of those times you will remember for the rest of your life. From the moment you decide it is time to start working with a real estate agent, you are filled with excitement. The search for your dream home is the fun and easy part but then comes the financing. To be honest there can be confusion and stress when it comes to understanding real estate and mortgage loan terminology and the expansive amount of money that comes into play. The financial process in obtaining a home is detailed and somewhat cumbersome, and many times you may find yourself wondering what the real estate agent and the mortgage lender are talking about and what you are actually paying for.
Explaining a few basics to help you understand what to expect in the initial purchase of your new home can take out some of this guesswork. It will enable you to understand what certain keywords mean that your agent and lender use while you work together to purchase your home. It will also help you to understand what to expect in terms of the money involved and how it is being used in the home buying process. A few of these keywords are earnest money, aggregate adjustment, and an escrow account.
Finding Your New Home and the Term Earnest Money
Once you find the perfect home that fits your criteria, your real estate agent will work with you to write an offer to purchase to submit to the seller. Along with that offer you will be advised to write an earnest money check. This tells the purchaser you are sincere about purchasing their home. This check can be substantial based on the purchase price of the house. Generally, 1 percent to 2 percent of the purchase price of the home is put up in earnest money, so if the home is $250,000, your earnest money check will be $2,500 to $5,000. Depending on how the real estate market is at that time, the percentage can go higher. If homes are selling quicker in that market, you may be advised to put down a 3 percent earnest money deposit to win over other offers on the home. Your real estate agent should have a good understanding of what the market is doing and can guide you in this process.
One thing to remember about your earnest money check is that it will be used not only to make your offer stand out to the seller but it will be used for your down payment and closing costs of the home if your offer is accepted. During the purchasing process, your check will be held by a third party, generally a title company or your real estate agent. If your offer is not accepted or something happens in the midst of contract negotiations and the house purchase does not go through, your earnest money check will be returned to you. It is important to understand the contract terms for the reimbursement of your earnest money if such termination of the contract should happen.
The Mortgage Loan Process and the Term Escrow Account
Once your offer is accepted, it is time to work with a mortgage lender. You can work with your existing bank, or your real estate agent may have a recommendation based on your personal financial situation. Moving through the mortgage loan process entails a lot of documentation and signing of documentation. Your lender will be able to assist you with this entire process.
Your mortgage lender may ask you to set up an escrow account separately that will be used to pay homeowners insurance and property taxes on your new home. These funds will not be going to the seller, and lenders often do this to protect the property and their vested interest. You may hear the term aggregate adjustment during this process. This term relates to the amount of money you may still owe once the house has been purchased. As an example, if your lender required you to put in a certain amount into your escrow account but the amount needed to pay these insurance and tax bills was actually $100 more, then the aggregate adjustment that you need to pay into the escrow account would be $100.
Purchasing Your New Home and What Your Escrow Account Does
One of the options you can choose to do with your mortgage lender is adding to your escrow account each month along with your loan payment. Funds are added to your escrow account that the lender uses to pay your homeowners insurance and your property taxes for you. The lender has a special interest in making sure these payments are continuously paid, and it saves you those extra frustrations of making sure they are paid on time.
Purchasing your first home is truly an exciting time in your life. Your real estate agent and your mortgage lender will work with you through the entire process, but understanding a few key terms that you will be hearing and how they will impact you and your bank account is important to relieve some of the stress and concern. You should be comfortable with your agent and your lender in asking questions. Make sure you understand what is happening and how your money is contributing to your home purchase as well as your future ability to pay your monthly mortgage.