If you are in the market to buy or sell real estate, it can be overwhelming trying to understand all of the jargon.
Understanding some basic terms in real estate will help you feel confident as you start your journey. Here is a list of 20 essential real estate terms to know.
1. Addendum
Real estate transactions need to clearly express the agreement between both sides, but there are many things along the way between acceptance of an offer and closing the sale. When things need to change within the existing contract, your realtor will file an addendum.
2. Annual Percentage Rate (APR)
Your home loan will have an annual percentage rate. This is the percentage of interest you will be charged over the course of each year while you pay off the loan.
3. Appraisal
This document shows what the house is worth. An appraiser will walk through the home to confirm information about the home such as the number of bedrooms and baths.
Gathering information about other homes in the area of similar size, the appraiser will then use all this information to determine the fair market value of the home.
4. Buyer vs Listing Agent
Real estate agents represent the buyer and seller during these transactions. The buyer’s agent will focus on taking care of the buyer, while the listing agent is the agent who takes care of the seller.
5. Closing Costs
Be prepared for the fees associated with buying or selling your home. Closing costs will include any mortgage and title fees, realtors fees, and taxes.
Expect closing costs to be between 2-5%, depending on how much the bank needs to set up your escrow accounts. These costs do not include the realtor commissions.
6. Commission
When a property sells, the buyer’s and seller’s agents are paid by receiving a percentage of the home sale. The amount can vary, but is typically around 5-6%, split between the two agents.
7. Contingencies
Contingencies are conditions that must be in place in order to fulfill the terms of the contracts. As a buyer, for example, you need to assure you can pay for the home, that there aren’t issues with the home that would make you change your mind, or that the house appraises according to the price you are willing to pay.
Both buyers and sellers can place a contingency on the sale of a home in order to protect themselves during the transaction.
8. Deed vs Title
When a property changes ownership, there are two separate legal documents that are important real estate terms to differentiate between. In simple terms, the title is evidence of the transfer of ownership, and the deed states who legally owns the property.
You can also request a document called abstract of title that will show you the property’s history. There’s more to know about how an abstract of title works and what it contains if you want more information on the property.
9. Down Payment
When purchasing a home, the amount of money you can offer in cash as part of closing the sale is your down payment. The amount of your down payment can affect pieces of the process such as how much you qualify for and whether or not you’ll be required to pay mortgage insurance.
10. Due Diligence
It is a buyer’s responsibility to investigate the property they are buying to make sure they still wish to purchase it. There is a period of time in which this due diligence must be completed during a real estate transaction.
11. Earnest Money
When a buyer wants to sweeten the deal to make their offer more attractive to the seller, they will offer some money upfront as earnest money. This money is an assurance against the buyers backing out of the sale.
Remember contingencies from our earlier real estate terms? Contingencies are written into the contract for who would get the earnest money under certain circumstances.
12. Equity
The difference between the worth of the property and what you owe on the property is your equity. This is the value that belongs to and is considered as part of your net worth.
13. Escrow
Escrow is a third-party account where money for a given transaction is held until the terms of a contract are fulfilled or the payment due date arrives. Earnest money is held in an escrow before the closing of a sale. Your mortgage company will set up an escrow for your taxes and insurance as part of your payment.
14. Fixed vs Adjustable Rate (ARM) Mortgage
You learned about APR in the earlier real estate definitions. When that APR will not change throughout the life of your loan, you have a fixed rate mortgage.
Some mortgages are set up to be reevaluated at a certain time (usually 3-5 years) and your payment would change at that point based on the current interest rate.
15. Home Inspection
When understanding real estate phrases, knowing the purpose of a home inspection is important. The buyer requests a home inspection to check for any hidden or unforeseen issues with a home. This information can be used to negotiate with a seller or back out of a sale before the due diligence deadline.
16. Mortgage Insurance
Any mortgage company that carries a loan for a property that is more than 80% of the worth of the property will require mortgage insurance. This insurance protects the mortgage company if you default on your loan.
You will need to buy separate mortgage insurance if you would like your loan covered in case of accident or death.
17. Offers and Counter Offers
An offer is the initial offer from the buyer to the seller. The seller will send back a counter offer with any changes they would like before accepting.
18. Pre-Approval Letter
Getting pre-approved for a loan amount before home buying will help make your offers stronger. Your mortgage lender will give you a pre-approval letter to show what you can offer.
19. Preliminary Report
You can request a preliminary report on the home you are considering purchasing. This could include an abstract of title or other information you need.
20. Seller Disclosure
When listing their home, sellers will fill out a disclosure stating everything they know about the condition of their home. The buyer receives this document after the sale is under contract so they have as much information as possible during the due diligence phase.
There Are More Real Estate Terms to Know
This is a comprehensive list of real estate terms to know, but there are many more to research. If you have a grasp of these 20 basic terms you will be in a good position to understand others as they come up.
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