Buying a home in Denver, Colorado, can be an exciting yet overwhelming experience, especially for first-time buyers. To help you navigate the mortgage process with confidence, we’ve compiled an extensive glossary of essential terms. We’ve divided this glossary into three sections: before you buy, during the loan process, and closing terms. Let’s get started!
Section 1: Before You Buy – Real Estate Terminology Made Simple
As-is:
A term used to describe a property being sold in its current condition, with the buyer accepting responsibility for any repairs or improvements needed. When a property is listed as “as-is,” the seller typically will not make any repairs or offer any concessions. Buyers should carefully consider the potential costs of repairs and improvements before purchasing an as-is property.
Buyer’s agent:
A licensed real estate professional who represents the buyer in a property transaction. The buyer’s agent helps clients find a suitable property, negotiate the price, and guide them through the closing process. In Denver’s competitive housing market, a buyer’s agent can provide valuable insight into local market conditions and help buyers make well-informed decisions.
Commission:
A fee paid to real estate agents for their services, typically calculated as a percentage of the property’s sale price. Commissions are usually split between the listing agent and the buyer’s agent. For example, if a property in Denver sells for $400,000 with a 6% commission, the total commission would be $24,000, with each agent receiving $12,000.
Concession:
A benefit or discount offered by the seller to the buyer, such as covering a portion of the closing costs or providing a credit for repairs. Concessions can help make a property more attractive to buyers and may be used as a negotiating tool in the home-buying process.
Contingency:
A condition specified in a purchase agreement that must be met before the contract becomes legally binding. Common contingencies include securing financing, completing a satisfactory home inspection, and the sale of the buyer’s current home. In Denver’s competitive market, having fewer contingencies can make a buyer’s offer more appealing to sellers.
Counteroffer:
A response made by the seller to a buyer’s initial offer, proposing new terms or a different sale price. Counteroffers are a common part of the negotiation process, and buyers should be prepared to either accept, reject, or make a counter-counteroffer.
Earnest money deposit:
A payment made by the buyer to demonstrate their commitment to the purchase. This deposit is typically held in escrow and applied toward the down payment at closing. In Denver’s competitive market, a larger earnest money deposit may signal to sellers that a buyer is serious and financially capable.
Home inspection:
A thorough examination of a property’s condition conducted by a licensed inspector, helping buyers identify any potential issues or needed repairs. In Denver, a home inspection usually includes a review of the property’s structure, systems (such as HVAC, plumbing, and electrical), and any safety concerns. Buyers can use the inspection report to negotiate repairs or concessions with the seller or to back out of the purchase if significant problems are discovered.
Listing agent:
A real estate agent who represents the seller and is responsible for marketing the property and negotiating the best possible terms for the seller. In Denver, a skilled listing agent can help sellers effectively showcase their property, price it appropriately, and navigate the complexities of the local market.
Multiple Listing Service (MLS):
A database of property listings maintained by real estate professionals, providing information on properties for sale in a specific area. The MLS allows agents and buyers to access property details, photos, and comparables. In Denver, the local MLS is an invaluable resource for both agents and home buyers searching for the perfect property.
Preapproval:
A written commitment from a lender indicating the maximum loan amount a borrower may be eligible to receive, based on a review of their credit, income, and other financial information. Preapproval offers a competitive advantage in Denver’s hot housing market, as it shows sellers that a buyer is financially prepared and serious about purchasing a home.
Prequalification:
A preliminary assessment of a borrower’s creditworthiness and ability to obtain a mortgage, based on a review of their income, assets, and debts. While not as strong as a preapproval, prequalification can give buyers an idea of their borrowing power and help them focus their home search on properties within their budget.
Purchase agreement:
A legally binding contract between a buyer and seller outlining the terms and conditions of a property sale. In Denver, the purchase agreement typically includes the property’s sale price, contingencies, closing date, and any other agreed-upon terms or conditions.
Real estate owned (REO):
Properties owned by a bank or other lending institution, typically as a result of a foreclosure. In Denver, REO properties can sometimes be a good opportunity for buyers seeking a lower-priced home, but they often require extensive repairs or come with additional risks.
Section 2: During the Loan Process – Mortgage Terms to Know
Adjusted gross income (AGI):
An individual’s total income minus certain deductions, used by lenders to determine a borrower’s eligibility for a mortgage. In Denver, lenders will look at a borrower’s AGI to ensure they have sufficient income to afford the mortgage payment and associated homeownership costs.
Amortization:
The process of repaying a mortgage through regular payments over a specified period, gradually reducing the principal balance and interest owed. An amortization schedule shows the breakdown of each payment into principal and interest, illustrating how the loan balance decreases over time.
Appraisal:
A professional assessment of a property’s market value, conducted by a licensed appraiser and used by lenders to determine the amount they are willing to lend for a mortgage. In Denver, appraisals are crucial for ensuring that the loan amount does not exceed the property’s value, protecting both the buyer and the lender.
Annual percentage rate (APR):
The yearly cost of a mortgage, expressed as a percentage, which includes the interest rate and other fees associated with the loan. The APR provides a more comprehensive view of the total cost of borrowing and is useful for comparing different mortgage offers.
Automated underwriting system (AUS):
A software program used by lenders to evaluate mortgage applications and determine a borrower’s eligibility for a loan based on predefined criteria. An AUS streamlines the underwriting process, providing faster decisions and potentially reducing the time it takes to close on a home in Denver.
Basis points (BPS or ‘bips’):
A unit of measure for interest rates, equal to one-hundredth of a percentage point (0.01%). Basis points are commonly used to express changes in mortgage rates, for example, an increase of 25 basis points would mean an increase of 0.25%.
Closing costs:
Fees and expenses paid by the buyer and seller at the closing of a real estate transaction. In Denver, closing costs can include loan origination fees, appraisal fees, title insurance, and escrow fees, among others. Buyers should be prepared to pay between 2% and 5% of the home’s purchase price in closing costs.
Combined loan-to-value (CLTV) ratio:
The total amount of all outstanding loans secured by a property, divided by its appraised value. The CLTV ratio is used by lenders to evaluate the risk associated with a mortgage, particularly in cases where borrowers have multiple loans, such as a first mortgage and a home equity line of credit.
Conventional mortgage:
A type of home loan not insured or guaranteed by the federal government. Conventional mortgages typically require a higher down payment and have more stringent credit requirements compared to government-backed loans like FHA, VA, or USDA loans. In Denver, a conventional mortgage might be a suitable option for borrowers with strong credit and a larger down payment.
Credit score/credit report:
A numerical representation of a borrower’s creditworthiness, based on their credit history and current financial situation. Lenders use credit scores and credit reports to evaluate a borrower’s ability to repay a mortgage. In Denver, a higher credit score can increase the likelihood of mortgage approval and result in more favorable loan terms.
Debt-service coverage ratio (DSCR):
A financial metric used to assess a borrower’s ability to make their mortgage payments, calculated by dividing their net operating income by their total debt service. DSCR is primarily used for evaluating commercial or investment property loans rather than residential mortgages.
Debt-to-income (DTI) ratio:
A measure of a borrower’s ability to manage monthly debt payments, calculated by dividing total monthly debt obligations by gross monthly income. In Denver, lenders typically prefer a DTI ratio of 43% or lower to ensure borrowers can comfortably afford their mortgage payments.
Down payment:
The initial cash payment made by a buyer towards the purchase price of a property. In Denver, down payments typically range from 3% to 20% of the purchase price, depending on the type of mortgage and the borrower’s financial situation.
Escrow account:
A neutral third-party account used to hold funds for various purposes during a real estate transaction, such as the earnest money deposit or funds for property taxes and insurance premiums. In Denver, escrow accounts provide a level of protection for both buyers and sellers, ensuring that funds are distributed appropriately upon closing.
FHA loan:
A government-backed mortgage insured by the Federal Housing Administration, designed for borrowers with lower credit scores and smaller down payments. In Denver, FHA loans can be an attractive option for first-time homebuyers or those with less-than-perfect credit.
Fixed-rate mortgage:
A type of mortgage where the interest rate remains the same for the entire loan term. Fixed-rate mortgages provide predictable monthly payments, making them a popular choice for Denver homebuyers who plan to stay in their homes long-term.
Lender’s title insurance:
A policy that protects the lender against financial loss resulting from defects in the title, such as liens, ownership disputes, or fraud. In Denver, lender’s title insurance is typically required by the mortgage lender as a condition of the loan.
Loan estimate:
A standardized document provided by lenders to mortgage applicants, detailing the estimated costs, fees, and loan terms associated with a specific mortgage offer. In Denver, borrowers should use the loan estimate to compare different mortgage offers and select the best option for their needs.
Loan-to-value (LTV) ratio:
The ratio of the mortgage loan amount to the appraised value of the property, expressed as a percentage. In Denver, a lower LTV ratio generally indicates lower risk for the lender and may result in more favorable loan terms for the borrower.
Mortgage broker:
A licensed professional who acts as an intermediary between borrowers and mortgage lenders, helping clients find the best loan options for their needs. In Denver, a mortgage broker can save borrowers time and effort by shopping around for the most competitive mortgage rates and terms.
Mortgage lender:
A financial institution that provides funds for a mortgage, such as a bank, credit union, or mortgage company. In Denver, mortgage lenders offer a variety of loan products with varying interest rates, terms, and qualification requirements, giving borrowers multiple options to choose from when financing their home purchase.
Mortgage points:
Also known as discount points, these are fees paid to the lender at closing to reduce the interest rate on a mortgage. One point is equal to 1% of the loan amount. In Denver, buying mortgage points can be a cost-effective strategy for borrowers who plan to stay in their homes for an extended period, as the lower interest rate can result in significant long-term savings.
Origination fee:
A fee charged by the lender for processing, underwriting, and funding a mortgage loan. Origination fees are usually expressed as a percentage of the loan amount and can vary depending on the lender and borrower’s creditworthiness. In Denver, borrowers should compare origination fees among different lenders to find the best overall mortgage terms.
Private mortgage insurance (PMI):
Insurance that protects the lender against losses if the borrower defaults on their mortgage. PMI is typically required for conventional mortgages with a down payment of less than 20% of the home’s purchase price. In Denver, PMI can add to the overall cost of a mortgage but can be removed once the borrower’s equity reaches 20%.
Rate lock:
An agreement between the borrower and lender to secure a specific interest rate for a set period, protecting the borrower from potential rate increases during the loan process. In Denver, a rate lock can provide peace of mind for borrowers in a fluctuating interest rate environment.
Refinancing:
The process of replacing an existing mortgage with a new loan, typically to obtain a lower interest rate, change the loan term, or access equity in the property. In Denver, refinancing can be a strategic financial decision for homeowners seeking to reduce their monthly payments or pay off their mortgage faster.
Section 3: Closing Terms – Understanding the Final Steps of the Home Buying Process
Closing:
The final step in the home buying process, during which the property title is transferred from the seller to the buyer, and funds are disbursed to the appropriate parties. In Denver, the closing process typically involves signing various documents, paying closing costs, and receiving the keys to the new property.
Closing agent:
A neutral third party responsible for overseeing the closing process, ensuring that all required documents are signed and funds are distributed appropriately. In Denver, closing agents can be title company representatives, escrow officers, or attorneys, depending on local customs and requirements.
Closing disclosure:
A document provided by the lender to the borrower at least three business days before closing, detailing the final terms and costs associated with the mortgage loan. In Denver, borrowers should carefully review the closing disclosure to ensure it aligns with their loan estimate and that they understand all fees and costs involved.
Final walkthrough:
A buyer’s last opportunity to inspect the property before closing, typically conducted within 24 hours of the closing appointment. In Denver, the final walkthrough allows buyers to verify that any agreed-upon repairs have been completed and that the property is in the expected condition.
Homeowner’s insurance:
A policy that protects homeowners against damage or loss to their property, as well as potential liability for injuries or accidents that occur on the property. In Denver, homeowner’s insurance is typically required by mortgage lenders to protect their investment in the property.
Owner’s title insurance:
An optional policy that protects the homeowner against financial loss resulting from defects in the title, such as liens, ownership disputes, or fraud. In Denver, owner’s title insurance is highly recommended, as it can provide valuable protection against potential legal issues related to property ownership.
Property taxes:
Annual taxes levied by local governments based on the assessed value of a property. In Denver, property taxes help fund essential public services like schools, infrastructure, and public safety. Homeowners should be prepared to pay property taxes as part of their ongoing homeownership costs.
Recording fees:
Fees paid to the local government for recording the transfer of property ownership in the public records. In Denver, recording fees are typically paid by the buyer at closing and can vary depending on the specific jurisdiction.
Settlement statement:
A detailed document outlining the final financial transactions between the buyer and seller, including adjustments for taxes, utilities, and other expenses. In Denver, the settlement statement, also known as the HUD-1 statement or ALTA statement, is reviewed and signed at closing, providing a clear record of all funds exchanged during the transaction.
Title search:
A process conducted by the title company to examine public records and verify the property’s ownership history, identifying any potential liens, easements, or other encumbrances. In Denver, a thorough title search is crucial for ensuring a clear title to the property and avoiding future legal disputes.
Conclusion:
Understanding the terminology associated with buying a home in Denver can be crucial to navigating the home-buying process with confidence. By familiarizing yourself with these key terms, you’ll be better prepared to make informed decisions and ultimately find the perfect Denver home that meets your needs and budget. Remember that your real estate agent, mortgage lender, and other professionals involved in the transaction are valuable resources to help guide you through the process and answer any questions you may have along the way.
At A Better Choice Mortgage, our team of experienced professionals is here to help you every step of the way, from understanding these key terms to securing the best mortgage for your Denver home. If you’re ready to embark on your home-buying journey, contact us today for personalized guidance and support. Let A Better Choice Mortgage be your partner in making your dream of homeownership a reality.