18 essential real estate terms you should know
For those new to home buying and selling, real estate lingo can add layers of confusion to an already convoluted process. Taking time to understand the vocabulary can help buyers and sellers educate themselves on the process, eliminate confusion, and better prepare for a swift and smooth transaction.
Real estate terms we’ll explain:
An appraisal is required to gather the estimated value of a piece of real estate. During the home sale, the mortgage lender sends out an appraiser to get a professional opinion of the value of the property. This helps the lender decide if the property is worth the amount of the loan the potential buyer is seeking.
Buyer’s agent/listing agent
A buyer’s agent is a licensed real estate professional whose job it is to find buyers their dream home, and represent their interests in the sale.
Listing agents represent the sellers’ interests in the transaction, prepping and marketing a home for sale.
A purchase and sale contract, or purchase contract for short, is a binding document that outlines the terms of a property sale. When a home is “under contract” it means the buyer and seller have signed off on the contract price and other terms of sale.
Closing is when the home sale becomes final. The closing date is set for a time that allows the buyer to conduct due diligence, such as a home inspection, and the lender to complete the underwriting process, including a home appraisal. At closing, the parties execute the final paperwork and the buyer typically receives the keys.
Closing costs are categories of costs that are paid at closing. Typical closing costs cover taxes, the appraisal, title search, and loan fees and processing. Learn more on our blog about the various expenses during the closing process.
Contingencies refers to contingency clauses within the purchase contract. These are conditions that must be met in order for the sale to go forward. Common contingency clauses include home appraisal — the home must appraise for the contract price for sale to go through — and financing contingencies —the buyer must obtain financing for the home in a given time frame. With these contingencies, if the home does not appraise well or the buyer cannot obtain financing, the buyer can back out without losing their earnest money deposit.
Debt-to-income, or DTI, ratio is a number used by mortgage lenders to see how much you can afford to pay monthly for a mortgage.
Your DTI is the total of your debt expenses plus your monthly housing payment, divided by your gross monthly income. Then multiply by 100.
Lenders typically look for borrowers who pay 28 percent, or less, of their total monthly income on housing, and less than 36 percent of their income on debt payments, according to Investopedia. If either percentage is on the higher side, and you want to buy a home, you might need to adjust your budget.
Due diligence refers to researching and understanding a legal obligation before deciding to take it on. The due diligence period is the time negotiated in the purchase contract where the buyer examines the home, usually via an inspection.
Earnest money is a deposit a buyer pays after a seller has accepted his offer on a home. It’s typically between 1 to 3 percent of the contract price, and is held by the escrow company.
Earnest money is designed to protect the seller if the buyer walks away after the parties have gone into contract. However, buyers can get their earnest money back if a contingency allows them to cancel the contract. If the sale goes through, the earnest money is generally applied to the buyer’s down payment for the home.
Escrow usually refers to a unbiased third party that keeps an eye on a transaction. It comes up a couple different ways during a home purchase.
First, during the sale process, the parties’ escrow agent holds all funds, instructions, and documents related to the purchase of the home, including the earnest money, down payment, documents for the sale, documents for the loan, hazard and title insurance, and the deed from the seller. At closing, the escrow ensures signatures on final paper work, disburses the funds, and oversees the transfer of the deed.
Second, as a buyer, your lender may require you to deposit funds in an escrow account for insurance premiums or property taxes. Agreeing to escrow these amounts reassures the lender that they won’t go unpaid.
This is the investment a homeowner has in their home. To calculate equity, take the market value of the home and subtract any mortgages or liens against the property. The amount leftover is the amount of equity you have in the home.
If you buy a home worth $250,000 for $240,000, you gain what is known as instant equity, because there is a $10,000 difference between the value and the cost. When you sell a home you bought for $250,000 for $260,000, you’ll get to keep the equity in the home after the close, once all the expenses are paid.
It’s important to build equity as homeowners can leverage this financial asset to obtain loans to help finance items such as home repairs, college for the kids, or to pay off higher interest debt.
An iBuyer is a company that uses technology to make an offer on your home quickly or “instantly” as the term implies. iBuyers take on the burden of owning, marketing, and reselling your home. Depending on the service you choose, the benefit is the certainty of an all-cash offer and more control over when you move. Opendoor launched the iBuyer category in 2014. Read our in-depth guide “What is an iBuyer” to learn all about this new type of real estate businesses.
An inspection happens when buyers pay a licensed professional inspector to visit the home and prepare a report on its condition and any needed repairs. The inspection often happens as part of the due diligence period, so buyers can fully assess if they want to buy a particular home as is, ask the seller to complete or pay for certain repairs, or walk away because repairs are too costly to want to move forward with the sale.
Multiple listing service (or MLS)
A MLS is a database that allows real estate agents and brokers to access and add information about properties for sale in an area. When a home is listed for sale, it gets logged into the local MLS by a listing agent. Buyer’s agents often check the MLS to see what’s on the market and what similar homes have sold for. According to one source, there are 1400 MLS organizations in the United States. Over half of them are affiliated with the National Association of Realtors (NAR).
Buyers make a formal offer on the home they want to purchase. The offer can be the full list price, or what you and your agent deem a fair market value.
The buyer’s agent puts the offer in writing, asks you to sign it, and then submits it to the seller’s agent. The seller might immediately accept it, in which case it becomes the parties’ purchase contract, or may make what’s known as a counter offer. It’s the art of negotiation, recorded in paperwork.
The principal balance of a mortgage loan is the amount of money owed to the lender, not including interest. Say you borrow $600,000. That’s the principal of the loan, or what you borrowed to buy the home. Buyers pay the principal plus interest each month. Payments nearly always go toward interest first, then toward paying down the principal. After all, the interest is the reason the bank agrees to make the loan.
Real estate agent and realtor are often used interchangeably. A Realtor with a capitalized “R” refers to an agent who is a member of the National Association of Realtors. A certified Realtor upholds the ethics of the association and keeps up with their membership and education.
Sellers may offer concessions to incentivize buyers to purchase the home, or sweeten the deal. According to FHA.com, seller concessions for a FHA loan may include:
- Loan discount points, also known as interest rate buy downs, are fees paid to the lender to decrease the mortgage interest rate.
- Home warranties, or an insurance plan that covers home repairs for a length of time after the home purchase.
- Closing cost assistance, where they provide a certain amount of cash to assist buyers in paying closing costs, which can be 2 to 5 percent of the purchase price.
- Credits at closing for HOA fees or outstanding repairs, offered as cash given by the seller to the buyer.
There are usually limits to what a seller can contribute, which will vary based on the type of loan. Total seller concessions are typically capped for conventional mortgages at 3 to 9 percent, according to Credit.com.
A title search examines public records for the history of the home, including sales, purchases, and tax and other types of liens.
During the process of buying a home, a title company will conduct this search to ensure the seller rightfully owns the home and there are no obligations that need to be paid before sale.
Once you have a firm grasp of the most important real estate definitions, the process becomes easier. If you’re familiar with the terms, you can ask the agents and the escrow company more informed questions, which can help you understand the process and understand exactly where your money, and your lifestyle, are going.
by Lauren Bowling – July 9, 2018