Having a basic understanding of important real estate concepts before you start the home buying process will give you peace of mind now and could save you a fortune in the future. Here are ten real estate terms you should know before you start looking for a home.
1.Buyer’s Agent vs. Listing Agent: There are usually two agents involved when you buy a home; the “buyer’s agent,” who represents you, and the “listing agent,” who represents the home seller. Dual agency is when there is only one agent representing both sides of the
2. Fixed Rate vs. Adjustable Rate Mortgages: Conventional loans include “fixed rate” and “adjustable rate” mortgages. A fixed rate mortgage has a predetermined interest rate throughout the life of the loan; the most common are for 30 years. An adjustable rate mortgage has a variable interest rate; the most common are for 5, 7, or 10 years. Make sure to shop around so you can get the best mortgage possible, which will save you a lot of money in the long run. Ask your friends, family, and real estate agent for lender recommendations.
3. Pre-approval letter: Before you apply for a mortgage or even start looking for a home, you should get a pre-approval letter from the bank, which is an estimate of how much they’ll lend you. This letter will help you determine what you can afford and ensures home sellers that you will be able to get a loan when needed. When you go in for a pre-approval letter you should be clear on what the bank is offering. Ask them about closing costs, what fees are involved, what you’re getting for that fee, and if they’ll lock in your loan at a specific interest rate. If you end up competing for a home against other offers, it can help to have a local lender. Local lenders want continued referrals and really care about their reputation; listing agents prefer to deal with them for this reason.
4. Listings: Real estate agents frequently refer to homes for sale as “listings.” A “listing” on a website shows information about the home, like the price and number of bedrooms. Brokers have access to the multiple listing service (MLS), which real estate agents are required to update, so the information is more accurate than sites who aren’t affiliated with a brokerage. In a competitive real estate market, you can miss out on a good deal if you use sites that don’t show all the homes for sale.
5. Inspection: After you’ve made an offer on a home, you’ll need to schedule an inspection, which costs around $500 – $800, depending on the market. The inspector will go through every inch of the home and review things like the plumbing, electrical, foundation, walls, heating, and appliances. Ask your Realtor to recommend a good inspector. If they find something wrong, you can negotiate for a reduced price. If they miss something, you could be stuck with expensive repairs after you’ve purchased the home.
6.Appraisal: When you apply for a mortgage, your lender will require an appraisal of the home you want to buy. A licensed appraiser will estimate the home’s value based on comparable homes that have sold in the area and an investigation of the property. If the appraised value is less than the offer you are making on the home, you might not be approved for a loan. The bank doesn’t want to invest in a home that’s overpriced (and neither do you!). Before making an offer, ask your agent to do a comparative market analysis, which will tell you what comparable homes have sold for nearby. If you’re a seller, get an estimate on how much your home is worth as well as how to increase your home appraisal value.
7.Contingencies: When you put in an offer on a home, you can specify certain conditions that must be met before the deal will go through – these are called contingencies. You have to make sure you can actually get the loan (a financing contingency), that the inspection doesn’t show anything too crazy (inspection contingency), and that the appraised value is close to what you’re offering to pay (appraisal contingency). Those are just a few common examples; there are several other types of contingencies, which you should discuss with your agent. If you’re in a bidding war on a home, sometimes it can help to shorten contingency periods or waive them altogether. You may not necessarily have to pay more money, just be more flexible.
8. Offers and Contracts: Once you find the right home, you’ll make an offer on the property with the help of an agent or attorney. If the seller counters your original offer, it’s usually because they want more money or a faster timeline for closing the deal, at which point you’ll have to negotiate. When submitting an offer, it’s a good idea to add a personal touch by including a cover letter that explains why you want to buy the home. Choosing an experienced realtor is key to winning in negotiations. Do your research to find one who has done recent deals in your area, and be sure to read online reviews.
9.Closing Costs: Be prepared to pay a lot of fees when you purchase a home. Typically, closing costs will amount to 2-5% of the purchase price of the home, and that doesn’t include the down payment. Common fees include excise tax, loan-processing costs, and title insurance. Ask your lender about every fee involved in the Good Faith Estimate, and see if you can shop around for a better price for those services or negotiate down. Examples include homeowner’s insurance, wire transfers, underwriting and settlement fees.
10. Title Insurance: After all the negotiations are done and the seller has accepted your offer, you should receive a home title report within a week. Most mortgage lenders require you to pay title insurance as part of the closing costs; title insurers search the public records to make sure the home seller actually had rights to the title and that there are no liens on the home (like an unpaid contractor or unpaid taxes)
11. What is an Earnest Money Deposit (EMD): EMD is submitted by the buyer typically within 48 hours after terms are accepted as outlined in the RPA. Earnest money is a deposit made to a seller that shows the buyer’s good faith in a transaction
12. Additional Deposit: An option where the buyer can put additional money down. This may be used as part of the EMD or not.
13. Promissory Note Secured by Deed of Trust: A note, usually known as a promissory note, which is a written promise to repay a loan. Whereas, a trust deed is a document used to protect paying back of a loan that is being documented as a lien counter to the borrowers real estate
14. Due Diligence Period: Due diligence is the investigation or exercise of care that a reasonable business or person is expected to take before entering into an agreement or contract with another party, or an act with a certain standard of care. The Due Diligence Period refers to the amount of time a buyer, in this instance, has to inspect the residence and back out of the RPA without penalty.
15. IRC 1031 Exchange: Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), a taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property, a process known as a 1031 exchange.