Glossary of terms every homebuyer needs to know

Homeownership and the terms you need to know

Buying a home can be so stressful. But in the midst of it all, there are terms and jargon used by people from the real estate industry, and that you are expected to understand. What is the difference between floor and carpet areas, do you pay extra for the open balconies you love? Does the size of the house change from the carpet area to the built-up area, what is used to calculate your interest?

Here are some explanations, to help you understand what the real estate industry and make an informed choice.

Calculating the area of a home you plan to buy

Carpet Area: According to the Real Estate Regulatory Authority (RERA), Carpet area is the net usable floor area of an apartment, excluding the area covered by external walls, the area under utility shafts, exclusive balcony, or verandah area, and exclusive open terrace area. The carpet area includes the area covered by the internal partition walls of the home.

Built-up area: The built-up area of a home is measured at the external perimeter wall surfaces. It is made up of the carpet area plus the wall thickness and other non-usable areas within the apartment such as the dry balcony, terrace, flower beds, etc. It is always greater than the carpet area. Built-up area is carpet area + area of walls

Super built-up area: The super built-up area is the saleable area, which includes the carpet area, the terrace, balconies, areas occupied by walls, and area occupied by shared structures (e.g. lift, stairs, etc). In some cases, builders include amenities such as a pool, clubhouse, and garden. Builders use the carpet area load factor to arrive at the super-built-up area. Super built-up area = Built-up area + common areas

Exclusive: The term “exclusive balcony or verandah area/exclusive terrace area” means the area of the balcony/ verandah/terrace that is a part of the net usable floor area of an apartment, meant for the exclusive use of the unit only

Glossary of common housing terms

Actual Cash Value: An amount equal to the replacement cost of damaged property less depreciation
Adjustable-rate mortgage: There are two types of conventional loans: Fixed-rate and Adjustable-rate mortgage. With an adjustable-rate mortgage, the interest rate on the loan can change at five, seven, or ten-year intervals. For homeowners who plan to stay in their home for more than a few years, this is a risky loan as interest rates can suddenly spike depending on market conditions
Adjustment Period: There is usually an initial adjustment period, that begins with the start date of the loan and ranges from 1 to 10 years. After the initial adjustment period, adjustment periods are usually 12 months, which means that the interest rate can change every year
Amortization: Repayment of a loan over a specified period of time and at the interest rate specified in a loan document. Amortization of a loan includes payment of interest and a portion of the amount borrowed in each mortgage payment
Annual Percentage Rate (APR): Annual cost of a loan, a standardized method of determining the total cost of a loan. The APR includes the interest rate, points, broker fees, and certain other credit charges a borrower must pay. The fees are expressed as percentages and added to the actual interest rate to determine the total APR
Appreciation: An increase in the market value of a home due to changing market conditions and/or home improvements
Arbitration: A process by which disputes are resolved before a fair and neutral third party (the arbitrator). The disputing parties agree in advance to agree with the arbitrator’s decisions
Back-End Debt-to-Income Ratio: A comparison of your monthly debt payments to your monthly income, and is a widely used measure of your credit worthiness. You calculate your debt-to-income ratio by dividing your minimum monthly debt payments, not including your rent or mortgage, by your net monthly income
Balloon Mortgage: A mortgage with monthly payments based on a 30-year amortization schedule, with the unpaid balance due in a lump sum payment at the end of a specified period (usually 5 or 7 years). The mortgage includes an option to “reset” the interest rate to the current market rate and extend the maturity date if certain conditions are met
Cap (Interest): An interest rate cap is a consumer protection measure on an ARM which limits the amount of change of the annual interest rate and over the life of the loan
Cap (Payment): A payment cap is a consumer protection measure on an ARM that limits the amount by which monthly payments can change
Closing (Closing Date): The completion of the real estate transaction between the buyer and seller. The buyer signs the mortgage papers and closing costs are paid. Also known as settlement date

Closing Disclosure: A form that contains the final details of the selected mortgage loan. It includes the terms of the loan, the expected monthly payments, and lists all fees and other costs of obtaining the mortgage (closing costs). The lender is required to send the Closing Disclosure to the borrower at least three business days before closing the mortgage loan
Collateral: Property that is used as security for a debt. In the case of a mortgage, the collateral would be the house and property
Commitment Letter: A letter from your lender stating the amount of the mortgage, the number of years to repay the mortgage (term), the interest rate, the loan origination fee, the APR, and the monthly charges
Condominium: A form of home ownership in which the home buyer receives exclusive ownership of the interior of a multi-unit building (usually an apartment building or a townhouse), and shares ownership of to the common areas of the condominium (example parking spaces or a swimming pool)
Co-operative Housing: In real estate, co-operative housing is a form of multiple ownership in which a corporation or trust owns the property (usually an apartment complex) and grants occupancy rights to unit-owner’s tenants through their own leases
Credit Report: A credit report is a record of your personal credit history. It is compiled by credit bureaus/credit reporting agencies based on information provided by lenders and contained in public records. It contains very extensive information about your credit history and is probably the most important document lenders refer to when deciding whether to grant you credit

To read more how to calculate, click here

Debt-to-Income Ratio: The percentage of gross monthly income used for your monthly housing expenses, child support, car payments, as well as payments of other installment debts, and payments on revolving or open-ended accounts such as credit cards
Deed: The legal document that transfers ownership or title to a property
Default: The failure to fulfill a legal obligation. A default includes the failure to fulfill a financial obligation, but can also be the failure to perform an act or service that is non-monetary. For example, when leasing a car, the lessee is usually required to properly maintain the car
Depreciation: A decrease in the value of a home due to changing market conditions or lack of maintenance
Down Payment: A portion of the purchase price of a home, usually between 3% and 20%, that is not borrowed and usually paid upfront, with the balance paid at settlement. It is also the difference between the sale price of real estate and the mortgage amount
Equity: The value of your home above the total amount of the liens on your home. If you owe Rs. 10,00,000 on your house but it is worth Rs. 13,00,000, you have Rs. 3,00,000 of equity
Escrow Account: The safekeeping of money or documents by a neutral third party prior to closing. In a real estate purchase, the buyer is usually required to deposit a portion of their down payment into an escrow account where it is held until closing. After the property is purchased, a portion of each mortgage payment is usually deposited into an escrow account to pay the property’s taxes and insurance. It can also be a lender account (or servicer) into which the homeowner deposits money for taxes and insurance
Foreclosure: A legal action that terminates all ownership rights in a home if the homebuyer fails to make mortgage payments or otherwise defaults on the terms of the mortgage
Home-Equity Loan: Also known as a second mortgage, is a closed, secured loan where your home serves as collateral. The terms, interest rates and payments can be fixed or adjustable (they fluctuate based on a key index).Typically, you borrow a predetermined amount from your lender and pay it back in installments (usually monthly)
Homeowners Insurance: A policy that protects you and the lender from fire or floods that damage the structure of the home; a liability insurance, such as if a visitor to your home is injured; or damage to your personal property, such as your furniture, clothing or appliances
Housing Expense Ratio: The percentage of your gross monthly income that goes toward your housing costs
Interest: The cost you pay to borrow money. It is the payment you make to a lender for the money they lend you. Interest is usually expressed as a percentage of the amount borrowed
Lien: A claim or encumbrance on a property to pay a debt. With a mortgage, the lender has the right to take title to your property if you fail to make the mortgage payments. Liens are always against property, usually real property
Loan Estimate: A written statement from the lender detailing the approximate costs and fees associated with the mortgage. A lender is required to provide prospective borrowers with an estimate within three business days of receiving a loan application
Loan Origination Fees: Fees paid to your mortgage lender for processing the mortgage application. This fee is usually charged in the form of points. One point is equal to 1% of the mortgage amount
Lock-In Rate: A written agreement that guarantees a specific mortgage interest rate for a specific period of time
Market Value: The current value of your home based on the highest price a buyer would pay. And the lowest price a seller would accept. An appraisal is sometimes used to determine market value, which is the basis for a home’s “list price” or “asking price”
Mortgage: A loan in which a home serves as collateral. The term mortgage is also used to refer to the document you sign (to give the lender a lien on your home). It can also be used to refer to the amount of money you borrow, with interest, to buy your house. The amount of your mortgage is usually equal to the purchase price of the home minus your down payment
Open House: When the seller’s real estate agent opens the seller’s house to the public. You do not need a real estate agent to attend an open house
Pre-Approval Letter: A letter from a mortgage lender indicating that you qualify for a mortgage of a specific amount. It also shows a home seller that you’re a serious buyer
Pre-Qualification Letter: A letter from a mortgage lender that states that you’re pre-qualified to buy a home, but does not commit the lender to a particular mortgage amount
Pre-approval: A written agreement from a mortgage lender to grant a loan for a home purchase. The pre-qualification is based on the lender’s careful investigation and evaluation of the potential homebuyer’s income, credit history, employment history, personal assets, and debts. Pre-approval assures the seller that a buyer’s offer is valid. It also speeds up the buying process because, once an offer is made, there is no need to wait while the buyer finds a loan
Pre-qualification: An informal way to calculate an estimate of the approximate amount of money a homebuyer can afford to spend on buying a home. The pre-qualification, performed by a realtor or a potential homebuyer, compares the potential buyer’s income and assets to the buyer’s debts
Prepaid Items: Costs paid at closing for taxes, interest, and insurance. Because prepaid items are recurring costs that don’t relate to the acquisition of the property itself, they can’t be financed
Principal: The amount of money borrowed to buy your house or the amount of the loan that has not yet been repaid to the lender. This does not include the interest you will pay to borrow that money. The principal balance (sometimes called the outstanding or unpaid principal balance) is the amount you owe on the loan less the amount you have repaid
Qualifying Ratios: Calculations that are used in determining whether a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio, and total debt obligations as a percent of income ratio
Rate Cap: The limit on the amount an interest rate on an ARM can increase or decrease during an adjustment period
Refinance: Getting a new mortgage with all or some portion of the proceeds used to pay off the original mortgage
Repayment Plan: This is an agreement that gives you a fixed amount of time to repay the amount you are behind by combining a portion of what is past due with your regular monthly payment. At the end of the repayment period, you have gradually paid back the amount of your mortgage that was delinquent
Secured Debt: A secured debt is tied to a specific piece of property, such as a house. The property, called collateral, guarantees repayment of the debt. If you don’t pay, the creditor can take the property back
Title: Written evidence of the right to or ownership of property. In the case of real estate, the documentary evidence of ownership is the title deed that specifies in whom the legal estate is vested and the history of ownership and transfers. The title may be acquired through purchase, inheritance, devise, gift, or through foreclosure of a mortgage
Title Insurance Policy: A contract by which the insurer agrees to pay the insured a specific amount for any loss caused by defects of title to real estate, wherein the insured has an interest. Homebuyers usually must purchase lender’s title insurance to protect the lender’s interest and may choose to purchase buyer’s title insurance to protect their own interest
Underwriting: Mortgage underwriting is the analysis of the risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report, and the borrower’s ability and willingness to repay the loan
Warranties: Written guarantees of the quality of a product and the promise to repair or replace defective parts free of charge
Variable Interest Rate: A variable interest rate is adjusted, usually quarterly, based on an economic indicator. They are commonly based on an economic index such as the prime interest rate, Treasury Bill rate, or the Federal Funds rate

So here are the ones that will help you. And, as you go through the process, there may be many more that may puzzle you, which you may need to understand. We hope you reach out here, leave us a comment and we will do our best to help.

And, we hope to see you in your dream home very soon.