Homebuying: Common Real Estate Terms You Need to Know
Real estate can be overwhelming, especially when you aren't familiar with some of the terms that you may hear along the way. We're sharing the most common terms that will come up during a real estate transaction. Knowing these key terms will help you know what to expect, and what to look for while you are buying or selling a home. If there is a term that you aren’t familiar with, or need more information on, be sure to reach out to us. We are here to help!
Listing: A listing is essentially a home that is for sale. The term gets its name from the fact that these homes are often “listed” on a website or in a publication.
MLS (Multiple Listing Service) – An MLS is a database that allows real estate agent and broker members 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.
Seller's Market: This means there are more buyers wanting to buy a home than there are homes to be purchased. Available home inventory is low and active listing prices are higher than comparable sale prices. Homes are typically sold in a matter of days or weeks.
Buyer's Market: This means there are more homes available to be purchased than there are buyers that want to buy them. Available home inventory is high and comparable sales prices are higher than active listing prices. Homes typically stay on the market longer.
Real Estate Roles
Real Estate Agent: A real estate agent is a professional with a real estate license who works under a broker and assists both buyers and sellers in the home-buying process.
Real Estate Broker: A real estate broker is a real estate agent who has passed a state broker's exam and met a minimum number of transactions. These brokers are able to work on their own or hire their own agents.
Realtor: A Realtor is a real estate agent who specifically is a member of the National Association of Realtors. NAR has a code of standards and ethics that members must adhere to.
Buyer's Agent: This is the agent who represents the buyer in the home-buying process.
Listing Agent: This is the agent who represents the seller in the home-buying process.
Mortgage Broker: A licensed professional who works on behalf of the buyer to secure financing through a bank or other lending institution.
Dual Agency: Dual agency is when one agent represents both sides. This is ONLY allowed in Missouri, but we do NOT recommend this type of agency.
Real Estate Financial Terms to Know
Pre-Qualification: A basic assessment of income, assets, and credit score to determine what, if any, loan programs a borrower might qualify for. Getting pre-qualified is a quick assessment by a lender of the buyer's financial situation based solely on what a buyer tells a lender, and not based on any proof or verifications.
Pre-Approval: A thorough assessment of a borrower's income, assets, and other data to determine a loan amount they would qualify for. Once this is in hand, the lender can give the buyer a letter stating the exact loan amount they have been pre-approved for along with the total sales price they are approved for. A real estate agent will request a pre-approval or pre-qualification letter before showing a buyer a home.
Debt-to-income ratio (DTI): A ratio that compares a home buyer's expenses to gross income.
Proof of funds: When you make a cash offer, sellers will require you to submit proof of funds. If you're buying a house with a mortgage, it shows them that you have the cash available for your down payment and closing costs.
Mortgage Interest Rate: The price of borrowing money. The base rate is set by the Federal Reserve and then customized per borrower, based on credit score, down payment, property type, and points the buyer pays to lower the rate.
Fixed-Rate Mortgage: There are two types of conventional loans: the fixed-rate and the adjustable-rate mortgage. In a fixed-rate mortgage, the interest rate stays the same throughout the life of the loan.
Adjustable-rate mortgage: In an adjustable-rate mortgage, the interest rate can change over the course of the loan 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 rates can suddenly skyrocket depending on market conditions.
FHA Loan: FHA is an alternative to a conventional mortgage. FHA loans are insured by the government. They have the advantage of lower credit score requirements, smaller down payment, and greater flexibility for buyers with recent bankruptcies.
VA loan: A VA loan is a loan guaranteed by the government and available to the military, active and retired, and even for some eligible spouses, at low-to-no-down payment scenarios with competitive rates and fees.
Principal, Interest, Property Taxes, and Homeowners Insurance (PITI): The components of a monthly mortgage payment. When taxes and insurance are collected as part of the monthly payment, they are collected at 1/12 of the cost monthly. The lender will create a “cushion” so the escrow account (where the interest and taxes are held until paid) doesn't go below zero. There is a calculation the lenders must adhere to so they do not collect too much “cushion”.
Private Mortgage Insurance (PMI): A fee charged to borrowers who make a down payment that is less than 20% of the home's value. The fee, 0.3% to 1.5% of the yearly loan amount, can be canceled in certain circumstances when the borrower reaches 20% equity.
Points: Prepaid interest owed at closing, with one point representing 1% of the loan. Paying points, which are tax-deductible, will lower the monthly mortgage payment.
Principal: The principal is the amount of money borrowed to purchase a home. Paying off the principal allows a buyer to build equity in a home. The principal is combined with interest to determine the monthly mortgage payment.
Interest: This is the cost of borrowing money for a home. Interest is combined with the principal to determine monthly mortgage payments. The longer a mortgage is, the more you will pay in interest when you have finally paid off the loan. The typical home loan collects more interest at the beginning of a loan than at the end of the loan. It is weighted. You can see an example of this on an amortization schedule.
You Found a House, Now What?
Seller Disclosure: A seller's disclosure is a written disclosure by the seller of information about the property, which could affect a buyer's decision to purchase the property, all of which to the best of the seller's knowledge.
A seller must also indicate items that are not specific to the property itself but related to a person's enjoyment of the property, such as pest problems, property line disputes, knowledge of major construction projects in the area, military base related noises or activities, association-related assessments or legal issues, unusual odors caused by a nearby factory.
Offer: This is the initial price offered by a prospective buyer to the seller. A seller may accept the offer, reject it, or counter with a different offer. The buyer's agent puts the offer in writing, asks the buyer 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.
Purchase and Sale Agreement (PSA): A purchase and sale agreement is commonly referred to as a written contract between the buyer and seller, which outlines the terms of the parties to sell and purchase real property.
When a home is “under contract” it usually signifies that the Buyer and Seller have formalized their commitment to sell and purchase the real property.
Comparative Market Analysis: Comparative market analysis (CMA) is a report on comparable homes in the area that is used to derive an accurate value for the home in question. Comparable homes are sometimes called “comps”.
Contingencies: This term refers to conditions that have to be met in order for the purchase of a home to be finalized. For example, there may be contingencies that the loan must be approved or the appraised value must be a minimum of the final sale price.
Inspection Contingency: Also known as a “due diligence contingency,” the inspection contingency is a clause sometimes offered in a purchase agreement that grants buyers a predetermined amount of time during escrow to perform any necessary inspections.
Loan Contingency: A loan contingency is a clause or addendum (also known as a mortgage contingency) in an offer contract that allows a buyer to back out of a deal and keep their deposit if they are unable to secure a mortgage with specified terms during a fixed period of time.
Home Sale Contingency: A home sale contingency is for a buyer to indicate to a seller that part of their condition to purchase the seller's property relies on the buyer's ability to finalize a close on their current property. This is often negotiated with a clause in a contract or with an addendum to a contract. An example of how such a contingency can be used would be if a buyer needs to sell their property in order to have the down payment required on the purchase of the new property, or would rather use their sale proceeds instead of their savings to make the down payment.
Depending on the market, it could hamper negotiations with a seller when a contingency is part of the picture.
Seller Concession: Sellers may offer concessions to incentivize buyers to purchase the home, or sweeten the deal. Or the buyer will ask the seller for concessions as part of their offer.
Concessions are most readily seen as a contribution towards the buyer's closing costs, up to certain limitations and approvals by a buyer's lender, which ultimately leaves more money in a buyer's pocket when all is said and done.
Your Offer is Accepted, What's Next?
Inspection: Home inspections are encouraged once a potential buyer makes an offer and that offer is accepted by the seller. Typically, they cost between $200 and $1,500 – depending on the inspections done. The purpose is to check that the house's plumbing, foundation, appliances, and other features are up to code. Issues that may turn up during an inspection may factor into the negotiation on a final price. Failing to do an inspection may result in surprising costly repairs down the road for the home buyer.
Appraisal: In order to get a loan from a bank to buy a home, you first need to get the home appraised so the bank can be sure they are lending the correct amount of money. The appraiser will determine the value of the home based on an examination of the property itself, as well as the sale price of comparable homes in the area.
Assessed Value: This refers to the Tax Assessed Value which is often NOT the same as the actual value. The assessed value is how much a home is worth according to a public tax assessor who makes that determination in order to figure out how much city or state tax the owner owes.
Title Search: A title search examines public records for the history of the home, including sales, purchases, tax, and other types of liens.
Title Insurance: Title insurance protects lenders and buyers from financial loss due to defects in a title to a property. A title insurance policy will cover numerous risks like flawed records, incorrect ownership, and falsified documents.
Closing: The closing refers to the meeting that takes place where the sale of the property is finalized. At the closing, buyers and sellers sign the final documents, and the buyer makes the down payment and pays closing costs.
Closing Costs: In addition to the final price of a home, there are also closing costs, which will typically make up about 2 to 5% of the purchase price. This does not include the down payment. Examples of closing costs include loan processing costs, title insurance, and excise tax.
Other Key Terms
Home Warranty: This warranty protects from future problems to things such as plumbing and heating, which can be extremely expensive to fix. This is an optional purchase by the homeowner/buyer. Oftentimes there are many limitations to the Home Warranty, be SURE to read the fine print.
HOA (Home Owners Association): An HOA is the governing body of a subdivision, planned community, or condominium complex. It's run by a board of volunteers who usually live there. When you buy a home in that neighborhood, you automatically become a member. That means you'll owe monthly or yearly payments and will need to follow a set of rules. The HOA's function is to enforce those rules, which are called Covenants, Conditions, and Restrictions, or CC&Rs. HOA dues go towards your neighborhood's shared amenities (pool, trails,etc) and certain guidelines are in place so that your neighborhood remains clean and attractive.
Rent-Back: Rent-back, or leaseback, refers to an arrangement whereby the buyer, who is now the new homeowner, agrees to allow the seller, the now-tenant, to stay in the house beyond the close of escrow. The terms are negotiated prior to the situation occurring and will often involve a lease deposit, a daily rental rate, and a length of time allowable. We would recommend a leasing agreement as well as a sales contract if this route is taken.
Equity: Equity is ownership. In homeownership, equity refers to how much of your home you actually own—meaning how much of the principal you've paid off. The more equity you have, the more financial flexibility you have, as you can refinance against whatever equity you've built. Put another way, equity is the difference between the fair market value of the home and the unpaid balance of the mortgage. If you have a $200,000 home, and you still owe $150,000 on it, you have $50,000 in equity.
Being familiar with these real estate terms will help guide you to being a more savvy real estate investor, and make you feel more confident and comfortable during your home purchase. It is important to know that when you have the Ask Cathy Team behind you, you are absolutely not alone. We strive to educate you throughout your entire transaction by maintaining clear, timely, and transparent communication with you, your lender, and any other key people involved. Trust us to guide you through and make every effort to make buying your home a smooth experience.