If you’re thinking of buying a home or selling the one you own, you may be confused by the vocabulary of either process. Here’s a glossary of terms that might help:
Appraisal – the estimated value of a particular piece of real estate. An appraiser is sent by the mortgage lender during the purchase process to determine a professional opinion of the property’s value; this value helps to decide the amount of the loan that the lender will approve.
Buyer Brokerage Agreement – a legal agreement between the person who is looking for a home and the buyer’s agent that specifically describes the duties and responsibilities of both parties and describes the services the broker will provide. Here’s our explanation of why it’s important to sign a buyer brokerage agreement.
Buyer’s Agent – the licensed real estate professional whose role is to help the buyers find the home they’d like to purchase and represent their interests in the process.
Closing – the finalization of the sale. The closing date is scheduled to allow for the buyer to conduct due diligence, like a home inspection, and the lender to complete the process of underwriting, including the home appraisal. Buyer and seller complete final paperwork at closing and the buyer usually receives the keys.
Closing Costs – categories of expenses, such as taxes, appraisal, loan fees, title search, and processing, that are paid at the closing.
Commissions – typically 2-3% of the contract price which is paid to the buyer’s agent and to the seller’s agent at the closing of a sale; the seller usually pays both commissions.
Contingencies – clauses within the contract that must be met to complete the sale. The home appraisal contingency is common; the home must appraise for at least the contract price in order to go to closing. Financing contingencies require that the buyer obtain financing within a specific time frame. If contingencies are not met, the prospective buyer may be released from the contract without losing their earnest money deposit.
Contract – a binding agreement giving the terms of a property sale, also known as a purchase and sale contract. When both buyer and seller have signed the contract and agreed to the price and other terms, the home is “under contract.”
Debt-to-Income Ratio (DTI) – a number used by mortgage lenders to determine how much a buyer can afford to pay monthly for a mortgage – the total of your debt expenses plus your monthly housing payment divided by your gross monthly income, multiplied by 100. Generally, lenders like borrowers to pay 28 %, or less, of their total monthly income for housing and less than 36 % of their income on debt payments. You might need to rethink your budget if either percentage is higher than these numbers.
Due Diligence – a term that refers to the buyer’s research and understanding of the legal obligations of purchase before going through with it. The due diligence period is the time noted in the contract during which the buyer can examine the home, typically through a home inspection.
Earnest Money – a deposit paid by a buyer after a seller accepts his offer, generally between 1-3 % of the contract price and held by the escrow company. Earnest money protects the seller if the buyer walks away after the contract is signed. Earnest money is returned to the buyer if a contingency allows for canceling the contract; if the sale goes to closing, the earnest money is applied to the buyer’s down payment.
Escrow – an unbiased third party that oversees a transaction. An escrow agent holds funds, documents, and instructions related to the home’s purchase, including earnest money, down payment, documents for the sale and the loan, title, and hazard insurance, and the seller’s deed; the escrow ensures signatures on paperwork, disburses the funds, and oversees the deed’s transfer at closing. In addition, the lender may require the buyer to deposit funds in an escrow account for property taxes or insurance premiums to assure that the lender will be paid.
Equity – the investment a homeowner has in their home, calculated by subtracting the amount of mortgages or liens against the property from the market value of the home; the remainder in the equity. A buyer gains instant equity if a home worth $250,000 is bought for $240,000; equity is $10,000, the difference between value and cost. If a home is bought for $250,000 and sold for $260,000, the seller keeps the equity after closing and paying any expenses. Building equity is important as homeowners can use that financial asset to obtain loans if needed to finance home repairs, pay off higher interest debts, or obtain college loans for their children.
Hazard Insurance – coverage under homeowners’ insurance that refers to coverage for the structure of the home only for “hazards” such as fire damage, hail damage, vandalism, theft, etc.
Home Warranty – an annual service contract that covers the repair or replacement of systems or appliances that break down over time.
Inspection – an assessment of a home by a licensed professional inspector who prepares a report on its condition and any needed repairs. The home inspection is typically done as part of the due diligence period, allowing the buyers to determine if they want to purchase the home as-is, request that the seller complete or pay for certain repairs, or walk away from the contract due to the extent of repairs.
Listing Agent – the licensed real estate professional who represents the sellers’ interests in the prepping, marketing, and transaction of a sale.
Mortgage Discount Points – fees paid directly to the lender at closing in exchange for a reduced interest rate, sometimes called “buying down the rate,” which can lower the monthly mortgage payments. One point costs 1% of the mortgage amount (or $1,000 for every $100,000).
Multiple Listing Service (MLS) – a database in which agents and brokers may access and add information about properties for sale. Listing agents add to the local MLS; buyer’s agents check the MLS to see what homes are on the market and how much the similar home sold for.
Offer/Counter Offer – the amount that the buyer will pay for a property, which may be the full list price, or what the buyer and buyer’s agent consider fair market value. The offer is put in writing by the buyer’s agent, signed by the buyer, and submitted to the seller’s agent. The seller may choose to immediately accept the offer, which becomes the purchase contract, or the seller and seller’s agent may return a counter offer. The negotiations are recorded in paperwork until an agreement is reached or negotiations fail.
National Association of REALTORS® – America’s largest trade association, representing 1.3 million members.
Principal – the balance of a mortgage loan is the amount of money owed to the lender, not including interest. For example, if a buyer borrows $300,000, that is the principal, and the buyer pays toward the principal plus interest each month; payments usually go toward interest first, then toward paying down the principal.
REALTOR® – a real estate professional who is a member of the National Association of REALTORS® and subscribes to its strict Code of Ethics.
Seller Concession – incentives for buyers to purchase the seller’s home. Depending on the type of loan, there are usually limits on seller contributions and are typically capped at 3-9 % for conventional mortgages. For FHA loans, seller concessions may include:
- Mortgage Discount Points (or interest rate buy-downs) – fees paid to the lender to decrease the mortgage interest rate.
- Home Warranty – an insurance plan that covers home repairs for a length of time after purchase.
- Closing Cost Assistance – a certain amount of cash to assist the buyer in paying closing cost, typically 2-5 % of the purchase price.
- Credits at closing for HOA fees or outstanding repairs.
Title Company – a business that ensures that the title to a property is legitimate and issues title insurance.
Title Insurance – a form of insurance that protects real estate owners and lenders against financial loss because of liens, encumbrances, or defects in the title to the property.
Title Search – an examination of public records for the home’s history, including sales, purchases, taxes, and liens. A title company conducts the search to ensure the seller rightfully owns the home and that there are no obligations that must be paid prior to sale.