The homebuying process involves many steps — from initially prequalifying for a loan to closing day when the keys are finally in your hand. It also involves various players, such as a lender, real estate agent, home inspector and a title company representative.
During this whole process of trying to make a home your own, you’ll hear all kinds of real estate-related lingo — some of which may be familiar and some that won’t. Or you may think you know what something means, like “prequalifying,” but you later find out you were wrong.
Realtor Chantay Bridges said, “I have had excited home buyers state with glee how excited they are because they are approved for a house loan. I hate to burst their bubble but must advise them: A pre-qualification is not an approval.”
Rather than flying blind through this process, why not take a crash course in real estate terms? Right here, right now, you can pick up some knowledge that will help make your homebuying journey a little easier — or at least easier to understand.
“Real estate transactions will use addendums to modify an original lease or purchase agreement,” said Juan Marin, real estate agent and investor for IBR Group Corp. “Usually, an addendum is attached to the signed lease or purchase agreement and describes financing terms and property inspection requirements. Addendums are in frequent use within the real estate market.”
“An appraisal is a process of determining the value of the home,” said Yadlynd Cherubin-Eide, a licensed real estate associate broker. “During the home sale, the mortgage lender sends out an appraiser to get a professional opinion of the value of the property. The appraiser provides the bank with a detailed report with recent sales and the condition of the property being purchased. This helps the lender decide if the property is worth the amount of the loan the potential buyer is seeking.”
“An appraisal contingency is a clause written in the contract of sale that allows a buyer to back out of a purchase agreement without financial penalty if a home’s appraised value is less than the sale price,” Eide said. “Lenders want to ensure they are not ‘overpaying’ for a property.”
“An association estoppel is defined as a legal document obtained from a property’s governing homeowners association, condominium owners’ association or some other common-interest community, and shows all outstanding fees or fines due as of a certain date,” Marin said. An association estoppel may also be known as an HOA status letter, HOA closing statement or HOA certificate.
Comparables or Comps
“Comps are recent sales of similar properties,” said James McGrath, a licensed real estate broker and founder of Youreevo, “and you can use that information to determine how much the house you’re considering should sell for.”
“Your agent will put together comps and review them with you,” he said. “It’s important to know about comps before starting the process because you might not know to look for them and how important they are. Agents will often spit out a number after the viewing which should be a big red flag. There should always be data underlying any suggested offer.”
“A concession is a tool used by sellers to make a purchase more attractive to the buyer and is often used to either encourage a sale or secure a closing,” said Tony Mariotti, realtor and CEO of RubyHome.”For example, a seller will offer a concession to pay for closing costs, to pay for repairs (often following inspection reports) or other incentives to make the deal better for the buyer. Knowing this empowers buyers to understand their negotiating power, particularly for sellers who are eager to make a quick sale. Seller concessions often leave buyers with more money in their pocket to spend elsewhere (like on cosmetic repairs).”
“A contingency is written into an offer/contract and allows the buyer or seller to back out of the deal without repercussion if the conditions aren’t met,” said Erik Wright, owner of New Horizon Home Buyers. “Most contracts have an inspection contingency for a period of time that allows the buyers to have an inspection to determine the condition of the house. As long as it’s within the time period, if something comes up in inspection, they can cancel the contract.”
“Another example of a contingency would be a home sale contingency which basically means that the offer is dependent on the buyer selling their own home before purchasing the current one,” Wright said. “How a buyer uses and chooses not to include contingencies in an offer can make the offer more attractive to the seller.”
“You may read a real estate listing and in the notes, see something that states, ‘buyer to conduct their own due diligence, the seller is not providing any guarantees or warrants,'” Bridges said. “In other words, you, the buyer, have a specific amount of time to check out the property, conduct inspections and check for permits. It’s up to you to look into these things. Later on, you cannot state, ‘I did not know.’ You, as the buyer, must conduct your own due diligence and not just rely on what you see on the outside.”
Earnest Money Deposit
“This is especially important in the current competitive market because making an offer with a larger earnest money deposit can help make it stronger than other offers,” Wright said. “An earnest money deposit is basically a deposit made on the purchase of a home as part of the contract. It is held by a third party and is only refundable under specific conditions spelled out in the contract, such as an inspection revealing issues with the home. Should the buyer simply change their mind then the deposit is forfeited to the seller.”
“A foreclosure, on the other hand, is when the owner of the property has not paid the mortgage on the property and the lender files court proceedings to evict the owners and then sell the property to recoup the monies owed to them,” said Lisa Bonhotal, sales associate for Coldwell Banker. “Buyers may get a deal on the property but they must be aware that it is what you see is what you get. The buyers can do an inspection for their eyes only, banks will not negotiate the price for inspection issues. Often, the utilities of the property, (water, electric and gas) are turned off therefore the inspection is limited.”
“Also, I would advise buyers to run a title search to see what exactly is owed on the property and see if there are any liens,” Bonhotal said. “Oftentimes, the buyer is responsible to pay that back if it has not been accounted for already.”
“A title search performed by a title company or real estate law firm determines the vested owner, the liens or other judgments on the property, the loans on the property and the property taxes due,” Marin said. “An unrecorded lien is an involuntary debt placed against the property that will not be shown in the public record.”
“The loan-to-value ratio or LTV is the comparison of the current loan amount to the value of the property, expressed as a percentage,” said a Chase spokesperson. “For example, a loan amount of $150,000 for a home valued at $200,000 would have an LTV ratio of 75%.”
“PITI, which stands for principal, interest, taxes and insurance is a term that you will see all throughout the loan paperwork,” said Tomas Satas, founder and CEO at Windy City HomeBuyer. “PITI typically makes up the overwhelmingly greater part of your monthly mortgage payments. It assists both the lender and the buyer to figure out the affordability of an individual mortgage.”
“Every serious offer on a home must include either a preapproval or prequalification letter,” Mata said. “Both of these will also help you determine how large of a loan you can qualify for and may also allow you to lock in a specific interest rate for a set period of time. Before you begin to look for your dream home, you need to go through the prequalification process. This will give you an approximation of how much home you can afford to buy based on income and financial assets. It’s a quick process that can usually be taken care of over the phone or online.”
“If you are serious about purchasing a home and want to set your offer apart from the others then you need to chat with your lender or mortgage broker about acquiring preapproval for a loan,” Mata said. “Contrary to prequalification, preapproval is an in-depth process and requires that a buyer submits financial paperwork. A seller most likely will prefer a buyer that has already been preapproved.” Common things a lender looks at during the preapproval process are credit score, income, assets, liabilities and job history.
Subject to Inspection
“This sounds simple on the surface, but homebuyers must be aware of what it really means,” Bridges said. “The seller is not allowing you, the buyer, to see the property until after your offer is accepted. That means you will not be able to walk through, view, take pics [or] measure. Nothing can happen until after the fact — after you place an offer, after you have provided an earnest money deposit, after they choose yours over others.”
“Underwriting is step three in the loan process (after pre-qualification and pre-approval),” said Cynthia Kellogg, a real estate agent with Avenue 8. “[It’s] an analysis to determine whether the risk of the loan is acceptable to the lender. This involves an evaluation of the appraisal and the borrower’s ability and willingness to repay the loan.”
More From GOBankingRates
- Money’s Most Influential: Where Do Americans Get Their Financial Advice?
- Don’t Miss Out on Nominating Your Favorite Small Business To Be Featured on GOBankingRates — Ends May 31
- ‘Rich Dad Poor Dad’ Author Robert Kiyosaki: You Should Never Say ‘I Can’t Afford That’
- Everything You Need To Know About Taxes This Year