Are you thinking about buying or selling a home in the near future? For those who are new to real estate, the industry lingo can be confusing. Taking the time to understand some of the most common real estate jargon will help prepare you throughout the buying and selling process.
Here are some of the most common terms you may encounter and what they mean:
Appraisal
An appraisal refers to the estimated value of a property/piece of real estate. During the home buying process, a mortgage lender will have a professional appraiser give their opinion on the property’s value. An appraisal is important because the lender will decide if the property is worth the amount of the loan. If the property in question is appraised for less than the sale price, the buyer may need to come up with the funds to pay the difference.
Closing Costs
Besides the final price of the home and the down payment, there are also closing costs associated with buying real estate. The closing costs generally cover taxes, the appraisal, title search, loan fees, and other processing costs.
Comparative Market Analysis
To determine a fair value for any property in question, an agent will provide a comparative market analysis (CMA). This report includes comparable homes in the area that recently sold. Both sellers and buyers agents will run CMAs to determine how much a client should list their home for and what price a buyer should offer.
Contingencies
When writing a purchasing contract, contingency clauses refer to conditions that must be met for the sale to go forward. These usually include the home’s appraisal (appraisal should match purchase price) and financing contingencies. If a buyer cannot obtain their financing, they can back out of the sale without losing their earnest deposit.
Earnest Money
Earnest money refers to a deposit the buyer gives the seller “good faith” to buy the home. This gives the buyer time to get financing, conduct the title search, and have the property appraised and inspected before closing. This deposit can be delivered when the sales contract or purchase agreement is signed, or it can be attached to the offer. It may also be referred to as an escrow deposit or good faith money.
Equity
Simply put, equity refers to ownership. When it comes to real estate and home ownership, it refers to how much of your home you actually own (or how much of the principal you’ve paid off). Another way to look at it is the difference between the fair market value of the home and the unpaid mortgage balance. Equity does not include interest and taxes.
Escrow
Escrow typically refers to a financial arrangement where a third party holds and regulates the payment of the required funds for two parties involved in a real estate transaction. This ensures the security of all funds until the terms of the agreement are met.
Inspection
Once a potential buyer makes an offer on a home, they should have a professional inspection to check the home’s plumbing, foundation, appliances, and other features, and make sure everything is up to code. Any issues encountered can factor into the final home price.
Pre-Approval
When you make the decision to purchase a home, it’s a good idea to get pre-approved/a pre-approval letter from a lender. This gives an estimate on how much the lender is willing to lend the buyer and how much the buyer can actually afford.
Private Mortgage Insurance
If a buyer is putting less than 20% down, the lender may require the borrower to purchase private mortgage insurance. This insurance premium protects the lender in the event the buyer defaults on their mortgage. With a conventional mortgage, these payments can end once the buyer builds at least 29% equity in the home.
Title Insurance
Title Insurance is a common fee paid as part of the closing costs. It includes research into public records to ensure that the title is clean and ready for sale. In the event the buyer later finds out there are liens on the home, title insurance will protect you.
