Navigating the world of real estate can feel overwhelming, especially when you encounter unfamiliar terms and phrases.
Whether you’re buying your first home or selling a property, understanding some common terms and phrases will help you feel more confident in the process. We’ve compiled a beginner-friendly glossary of common real estate terms that you’re likely to encounter during a transaction.
Escrow
Escrow is a neutral third-party account used to hold funds, documents, or property until all terms of a real estate transaction are met. For example, when you’re buying a home, your earnest money deposit is typically held in escrow until the closing process is complete.
In CT, NY, and GA real estate attorneys or title companies typically handle escrow.
Earnest Money
Earnest money is a deposit, in your purchase agreement/offer it is referred as the initial deposit, made by the buyer to show they’re serious about purchasing the property. This money is typically held in escrow and applied toward the purchase price at closing. If the buyer backs out of the deal without a reason included in the agreement as a contingency, the seller may keep the earnest money.
Contingencies
Contingencies are conditions that must be met for a real estate transaction to proceed. Common contingencies include:
- Home Inspection Contingency: Allows the buyer to back out if the inspection reveals significant issues or a chance to negotiate repairs or price.
- Appraisal Contingency: Ensures the property appraises for the agreed-upon price.
- Financing Contingency: Protects the buyer if they’re unable to secure a mortgage.
Inspection
A home inspection is an evaluation of a property’s condition, typically conducted before the sale is finalized. A professional inspector provides a report of the home’s major systems like plumbing, electrical, roofing, and HVAC to identify potential issues.
Appraisal
An appraisal is an independent estimate of a property’s value conducted by a licensed appraiser. Lenders require an appraisal to ensure the property’s value aligns with the loan amount being offered. Mortgage lenders won’t lend if the mortgage/purchase price is more than the appraised value.
Pre-Approval
A pre-approval is a lender’s conditional agreement to lend a buyer a certain amount of money based on a review of their financial information. Getting pre-approved gives buyers a clear budget and shows sellers they’re serious. After you get an accepted offer, you will need to go through the final approval process. The lender will look at your financial information again using the numbers for the house that you want to purchase.
Closing Costs
Closing costs are the fees and expenses associated with finalizing a real estate transaction. These costs typically include:
- Mortgage fees: Origination, underwriting, and other fees associated with the mortgage
- Property inspection fees: Fees for inspecting the property
- Title insurance: Fees for title insurance and title search
- Real estate commissions: Fees for the real estate agent
- Taxes: Property taxes, transfer taxes, and other government fees
- Attorney fees: Fees for preparing and recording legal documents
- Pre-paids: Property tax prorations and homeowner’s insurance premiums paid before the buyer’s first mortgage payment
Buyers and sellers often negotiate who pays for certain closing costs.
We suggest you budget between 2–5% of the home’s purchase price for closing costs. The exact amount depends on the loan size, the home’s purchase price, and other factors
Underwriting
Underwriting is the process lenders use to assess the risk of approving a mortgage loan. This involves evaluating the buyer’s credit history, income, debt, and the property’s value.
Title and Title Insurance
The title is the legal document proving ownership of a property. Title insurance protects buyers and lenders from financial losses due to issues with the title, such as liens, disputes, or errors in public records.
FHA Loan
An FHA loan is a government-backed mortgage designed to help first-time and low-to-moderate-income buyers. It is important to note that a first-time buyer is someone who has not owned a home the past 3 years. This particular loan has a lower down payment and credit score than conventional loans.
HOA (Homeowners Association)
An HOA is an organization that manages a community or building, such as a condominium or subdivision. Members pay fees to maintain shared spaces and adhere to community rules.
Escalation Clause
An escalation clause is a term in an offer that automatically increases the buyer’s bid up to a certain limit if competing offers are received. This helps buyers stay competitive in a multiple-offer situation.
Closing
Closing is the final step in a real estate transaction, where all documents are signed, and ownership of the property is officially transferred from the seller to the buyer. At this point, the buyer receives the keys to their new home.
Final Thoughts
By familiarizing yourself with these terms, you’ll feel more confident and prepared as you navigate the buying or selling process. If you have questions or need guidance, don’t hesitate to reach out to an RH Agent who can help decode the language and ensure a smooth transaction.
