NOV 23, 2022
If you're reading this, there's a chance you're thinking about buying or selling your house and weren't sure what a specific real estate term meant. I've compiled a list of the most common terms below that apply to both first-timers and seasoned homebuyers.
Appraisal
This is something the buyer's bank will order (paid for by the buyer) in order to gauge the value of the house by a 3rd party professional. The appraiser will look at recent sales in the area for similar homes, and provide a certified value of the home to the lender. The buyer's bank needs this appraisal in order to confirm that the offer and loan amounts are justified. Here's an example: If a buyer offers $100k for a home that appraises for $50k, the bank will only approve a loan up to $50k (minus any down payment the buyer provides). This means in this example, the buyer will either have to come up with an additional $50k to purchase the house - or the seller will have to reduce the price by $50k... or the bank may deny the loan.
As-is
When you see a property marketed as "as-is" it typically means the seller is not willing to perform any repairs, or provide credits towards issues that may come up. Does this mean the house is a complete train-wreck and buyer-beware? Not always. Sometimes, the seller is just unable to compromise on the sale price any further, and wants to make it clear to all buyers beforehand.
Closing Costs
These are the total fees & costs charged by: lenders, title companies, attorneys, insurance companies, homeowner associations, taxing authorities, agents, and any other closing related companies. Closing costs are usually paid at the time of closing by the buyer, depending on what credits are being provided (e.g. seller provides credits towards closing costs for buyer). As a buyer, you should budget for around 3-5% of the home value towards your closing costs.
Escrow
Whenever someone says their money is in escrow, it means their money is being held by an impartial 3rd party that both sides of the transaction can trust. For example, as a buyer, instead of giving your deposit funds to the seller to hold, you provide it to your (or the seller's) attorney who will hold it within their escrow account. Once the funds are "in escrow" the attorneys know that the money is secure & real, and you can proceed with the transaction.
Contingency
A contingency when purchasing/selling your home is a condition that needs to be satisfied in order for the transaction to complete. For example, popular buyer contingencies are: mortgage & appraisal. In this scenario, if a buyer has a mortgage contingency and have signed contracts - they can back out if they're unable to qualify for a mortgage. Contingencies serve as a protection for the party that is placing them in the contract.
Home Inspection
This is a standard contingency on most home purchases that are bought with a mortgage, and something I advise all my clients to never waive. A home inspection is something the buyer orders during the due diligence period (after offer accepted, before contracts signed). During the inspection process, a certified & licensed home inspector will point out any issues with the home (minor & major) and include it in their final report. Depending on what the seller's position is, they may be open to providing credits, price reductions, etc. if the buyer points out anything they're unhappy with that was uncovered during the inspection.
Rate Buy-Downs / Discount Points
Discount points (also referred to as buy-downs) can be purchased by the buyer in order to offset their long term monthly obligation on the mortgage. For example, if your mortgage rate is 5%, and you choose to 'buy-down' 1% of it, you would pay 1% of the loan volume up front in order to be charged a total rate of 4% on the subsequent mortgage payments. This helps the borrower to reduce their long term monthly obligation through the duration of the loan. Buy-downs can also be a fraction of a percentage (0.5%, 0.35%, etc.).
Proof of funds
In competitive markets, most sellers will request a "proof-of-funds" document from buyers (usually before a showing) to ensure that they have the necessary funds in their account to purchase the house. A proof-of-funds document is usually a recent bank statement (with account number crossed out) showing the amount of funds in the account. This is requested in order to make sure that sellers aren't wasting their time showing their home to non-serious buyers.
Loan Principal
This is the amount of money you're borrowing from the bank. For example, if you're buying a house for $500k with $100k down: Your total principle balance will be around $400k (taking into account closing costs and fees). This is different than the total interest charged, as the interest is the cost of borrowing the money from the bank.
Pre-approvals
A mortgage pre-approval is provided by a bank as a means to figure out whether or not you're creditworthy to qualify for a home loan. Usually, when shopping for homes in a competitive market, you will need one prior to working with an agent and viewing homes. Banks are able to provide your pre-approval after you submit a credit check and other financial documents (W2 proof, bank statements, etc.).
Seller concession
In buyer markets, a lot of seller will offer concessions in order to motivate buyers to purchase the house. A concession is usually the amount the seller is willing to pay towards the buyer's closing costs, and should be approved by the lender before both buyer & seller have agreed on an amount.
Title Search
A title search is usually ordered by the buyer's attorney (paid for by the buyer) and looks at all public records associated with a home. This usually includes a history of the home's previous sales, tax records, and liens. Whenever someone says that a property has a "clean title," it means that there are no issues associated with the property's history. Title searches are ordered in order to protect the buyer in instances there is an unpaid lien discovered on the property, the lien will have to be satisfied before the purchase is completed.
Note that this content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.
