Buying a home can be exciting. It also can be somewhat daunting, even if you’ve done it before. You will deal with mortgage options, credit reports, loan applications, contracts, points, appraisals, change orders, inspections, warranties, walk-throughs, settlement sheets, escrow accounts, recording fees, insurance, taxes…the list goes on. No doubt you will hear and see words and terms you’ve never heard before. Just what do they all mean? Here are ten real estate terms and definitions 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.
When buying a home, you don’t pay your real estate agent – they’ll get a commission from the home seller.
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 15 and 30 years. An adjustable-rate mortgage has a variable interest rate, and the most common are for 5, 7, or 10 years.
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. Ask them about closing costs and if they’ll lock in your loan at a specific interest rate. This letter will help you determine what you can afford. Plus, it ensures home sellers that you will be able to get a loan when needed.
One of the first real estate terms you’re likely to encounter is “listings”. A “listing” on a website shows information about the home, such as the price, square footage, and number of bedrooms.
5. Home Inspection
After you’ve made an offer on a home, you’ll most likely need to schedule a home inspection, which costs around $200 – $500, depending on the market and size of the home. The inspector will go through every nook and cranny. Reviewing things like the plumbing, electrical, foundation, walls, heating, and appliances. If they find something wrong, you can negotiate for home sellers to fix it. Sometimes you can negotiate a reduction in the purchase price of the home.
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. 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).
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 real estate terms are called contingencies. You have to make sure you can actually get the loan (a financing contingency), that the inspection doesn’t show anything of concern (inspection contingency), and that the appraised value is close to what you’re offering to pay (appraisal contingency). If you’re in a bidding war on a home, sometimes it can help to shorten contingency periods or waive them altogether.
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.
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. It is important to do your research on how much closing costs are and which closing costs are negotiable before you are ready to close on a home.
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 make sure the home seller actually had rights to the title and that there are no liens on the home.
Having a basic understanding of important real estate terms before you start the homebuying process will give you peace of mind now and could save you a fortune in the future. The key is to be patient and prepared since the homebuying process can be lengthy. Choosing an experienced realtor is key to winning in negotiations.
Alex Jaffe is a licensed REALTOR® living within Northwest Austin and represents sellers that hope to gain from today’s market. He is an advisor with a specific process for comparing and presenting offers to his clients and proceeding towards the seller’s goals accordingly. To schedule a conversation specific to your home/address, contact Alex today – with no obligations – this is a free, no pressure discussion designed to answer your questions.