Real estate has its own unique jargon and there are probably some terms that are unfamiliar. This can be overwhelming as a first time home buyer or if it has been a few years since buying a home. Familiarizing yourself with the common real estate terms ahead of time will make you much more confident as you navigate your real estate transaction.
An appraisal is a value assessment of a property provided by a third party. The lender will require an appraisal and will use it as a benchmark for their lending amount and requirements. Your home is an investment for the lender and they want to make sure that the property is not overvalued. Cash purchases do not need an appraisal.
Related Reading: Steps to Buy a Home
A buyers agent represents a buyer in the real estate transaction. They will guide and assist the home buyer in the process of purchasing their home. They have a fiduciary duty, which means the agent will work solely in the buyer’s best interest. A seasoned agent has seen it all, and their clients will benefit from their vast experience and expertise.
Related Reading: Partnering with the Right REALTOR
Closing costs are all the fees and charges that occur during a closing. As a buyer, a lender can provide you with a fee worksheet to itemize all closing costs before you even make an offer on a specific home. You will receive a settlement statement shortly before closing that will provide all finalized closing costs. These numbers are generally very close to the original estimation of the closing disclosure.
Common closing costs for sellers:
- Agent commissions
- Title company fees
- HOA fees
Common closing costs for buyer:
- Title company fee
- Recording fee
- Lender fees
Contingencies are conditions that the seller or the home must satisfy. They grant the buyer (and sometimes the seller) the freedom to withdraw from the agreement without forfeiting their earnest money if the conditions are not met.
A deed is a physical document proving ownership. Buyers will receive a deed at time of closing. There are various types of deeds, but the best and the most common is a [General] Warranty Deed in which the home seller guarantees full ownership of the property as far back as the original owner/grant. Other deed variations have time limits on their warranty.
Most loan programs require buyers to provide a cash downpayment. It is a myth that you need a 20% down payment in order to get a loan. Home buyers can secure a mortgage loan with a 0-3.5% down payment depending on the loan product and credit scores. Remember that the lower your down payment, the higher your monthly mortgage payment. Check in with your lender to see how your down payment amount will affect your monthly payment.
Due diligence refers to a buyer’s research of the various aspects of a property. The seller should provide the buyer with documentation, but the buyer can also look up information ahead of time such as zoning, permits for any home improvements, flood zone information, city plans around the area and more.
Related Reading: Home Inspection Insights for Colorado Springs
Earnest money is also called a good faith deposit. This deposit is provided at the beginning of a transaction to show the seller that you are committed to the house. The deposit will be held by the designated earnest money holder which is typically (and ideally!) a neutral third party like the title company. It will be applied toward the buyer’s closing costs at the time of closing. Don’t worry! Earnest money is refundable if contractual requirements are not met.
In the Contract to Buy and Sell, you will find details about inclusions and exclusions. Inclusions are all items that are included in the purchase price and will remain in the home. Exclusions are specific items that the seller will take with them. It is important to be detailed and list any additional items above and beyond the standard inclusions mentioned in the contract. Generally, anything attached to the home is included in the home sale, but this can get murky so it’s best to be specific in the contract.
Related Reading: Making the Offer
A home inspection is part of the due diligence period that generally lasts between 7-10 days. At a minimum, we recommend a general home inspection, a radon test and a sewer scope. Any property deficiencies and repair requests can be submitted by the home buyer in the Inspection Objection. The seller then responds with an Inspection Resolution and details which items they are willing to address and how.
Related Reading: Steps to Sell a House
A lease back occurs when you purchase a home, close on it, but the sellers lease it back from you to stay in the home beyond the closing date. This is a common scenario if the sellers are waiting to close on their next home. A property can be leased back up to 60 days.
Legal Description of Property
A legal description of a property is a unique identifier and is more accurate and specific than a street address. The legal description is used by the title company and for any official documents. You’ll often see a lot and block description for an urban property. Legal descriptions are especially important when purchasing vacant lots without an address.
A lien is when someone makes a claim, usually of a monetary nature, against your property. There are many different types of liens. Here are a few examples:
- Mechanics lien
- Work provided but not paid
- Tax liens for unpaid taxes
- HOA liens for unpaid HOA fees
A lienholder may have the right to foreclose on your property, but many times the homeowner is not aware of the lien. The lien clouds your ownership and makes it very difficult to sell your home until the lien is released. Lenders will not close on a home with an existing lien on it. Any liens have to be removed which is usually accomplished by paying the debt.
When a client wants to sell a home, the sellers real estate agent packages all the information about the home and uploads it onto the Multiple Listing Service (MLS). The listing gets syndicated from the MLS to websites all over the internet like Zillow, Trulia, etc.
A loan utilized to purchase a home or borrow against a home that you already own.
Related Reading: Tips for Choosing a Mortgage
There are several occasions during a home purchase when a buyer can object to a condition that is not satisfactory. For example, a buyer can submit an objection when issues come up during the home inspection or if the appraisal comes in below contract price. The seller can decide how they’d like to move forward, and the buyer in turn can agree or disagree with the seller’s solution. This is all about negotiation and things can be solved most of the time. If the buyer and seller can’t agree on terms, the parties will have to terminate the contract.
PITI (Principle, Interest, Taxes and Insurance)
- Principle: the actual amount that the homebuyer is borrowing to purchase the property.
- Interest: the cost of borrowing money based on the loan amount and term.
- Property taxes: the tax that the county requires you to pay on a yearly basis. In El Paso County (Colorado Springs’ county), homes are assessed every 2 years and then property tax is paid in arrears. Property tax in newer neighborhoods will be more expensive than older neighborhoods.
- Insurance: the amount charged for your homeowners insurance premium. It is collected by your lender and paid directly to your insurance company.
A prequalification is the lender’s assessment of the amount they can lend you for your mortgage. You’ll need to provide financial information to the lender for this process. Keep in mind that changes to employment, debt, credit, etc. can greatly impact the closing of your mortgage loan.
A sellers agent represents a seller in the real estate transaction. They will advise the seller before, during, and after the home goes on the market. Just like a buyers agent, the sellers agent has a fiduciary duty which means the agent will work solely in the seller’s best interest.
Sellers concessions are also referred to as sellers contribution to buyers closing costs. The buyer can use seller contributions to pay for closing costs, pay down debt, buy down the interest rate, etc. Run any plans to utilize sellers concessions by your lender.
Title insurance protects the homeowner if someone sues and states they have a monetary or ownership claim against the home in the time period before the homeowner purchased the property. This insurance basically insures against a past event. Regular homeowners insurance provides protection against future events.
These essential real estate terms will get you started on your journey to becoming a knowledgeable homeowner or investor. Whether you’re a first-time buyer or a seasoned pro, familiarizing yourself with these terms is crucial for navigating the real estate market with confidence. We are here if you questions or if you’d like to learn more about the home buying process. Download the Home Buyer Guide to discover your next steps towards moving into your dream home.