When you buy your first home or get ready to sell your home, there are a few terms you may be intimidated by. However, there's no reason to be. Here are a few common real estate terms you should know before buying or selling a home.
Appraisal and Assessed Value
Appraisal and assessed value seem to refer to the same things, but in reality, they're very different. The appraisal happens during the escrow process. Before a bank will loan a home buyer money, they must first determine whether the house is worth the amount given in the purchase agreement.
The lender determines this by sending an appraiser to the house to conduct an appraisal. The appraisal is an assessment of the home's market value. If the home does not appraise for the right amount, the lender will not approve the loan. The assessed value is the value of the house according to the tax assessor. Usually the assessment is not performed until after the house has been purchased. The tax assessment determines how much the new home owner must pay in annual property taxes.
Pre-approval and pre-qualification are both steps in the mortgage application process. Pre-qualification is the first step. To become pre-qualified, the home buyer must answer some basic questions about their financial status. Pre-qualification is a quick process that can help a home buyer gauge their ability to borrow money.
After you have been pre-qualified for a mortgage, you will need to submit documentation backing up the income you claimed on your application. As long as everything checks out, you will become pre-approved and receive a pre-approval letter. This shows you are very serious when you make an offer on a home.
This term refers to the guarantee of a lender giving you the required capital to purchase the home before you start looking. You will need to go through the full application process and the lender will pull your credit. If everything checks out, they will pre-approve you and give you a conditional approval letter.
Pre-approval is the second step of the mortgage application process. To get pre-approved, the home buyer must provide supporting documents to the lender. Pre-approval is a much more accurate gauge of the home buyer's ability to qualify for a mortgage. Because of this, offers from buyers who are pre-approved are often more attractive to sellers.
Good Faith Estimate
Your lender will give you a good faith estimate, which is the total amount needed to close on the property. This will include both closing costs and the down payment. It may also include taxes and other items, which may be prorated.
A common term used in real estate, MLS stands for Multiple Listing Service. This is where your real estate agent will go to find or list a property for you.
When an appraisal is done for a home or your real estate agent is trying to determine the market value, they will pull comps or do a CMA (Comparative Market Analysis). A comp is a comparable property in the same or similar neighborhood that has sold recently. The selling price of the comp is used to help determine the value of the home you are looking at or selling.
Home Warranty and Homeowner's Insurance
The home warranty is a policy that many home buyers get when they purchase a new house. Often, the home warranty is provided to the buyer by the seller. The warranty will pay to make repairs to some types of fixtures and appliances.
Homeowner's insurance will pay for repairs or replacement of certain parts of the home's structure in case a covered event occurs. Homeowner's insurance also pays to replace the homeowner's personal belongings if a covered event occurs.
Fixed-Rate Mortgage, Adjustable-Rate Mortgage
A fixed-rate mortgage is a type of mortgage that is paid back with one fixed payment over the life of the mortgage. Adjustable-rate mortgages have an adjustable interest rate. The amount the homeowner owes for their monthly mortgage payment depends on the interest rate.
Adjustable-rate mortgages often start with a lower payment than fixed-rate mortgages, but the amount is likely to raise over time. Different adjustable-rate mortgages have different terms. It's important for the home buyer to read and understand the terms of the mortgage before signing the final documents.
Escrow, Closing, and Closing Costs
Escrow is the period that occurs after an offer is accepted on a home, and before the home is sold. During the escrow period, the home buyer may perform inspections of the property, find a homeowners insurance policy, and perform other tasks.
Closing refers to the close of the escrow period. When the escrow period "closes," this usually means that the house is sold to the buyer.
Closing costs are the costs that a home buyer incurs when they buy their new home. Closing costs are separate from the down payment, and often consist of an additional 2% to 5% of the purchase price.
When an offer is accepted on a home, you'll write a check to the seller, to show you are committed to the purchase of the house. This money, called earnest money, is put into an account, called an escrow account. The earnest money is held by the escrow company until the sale closes or the home buying contract is canceled.
If you back out of the home buying contract under the wrong circumstances, you could lose your earnest money. Your real estate agent can help you understand when you can (and can't) back out of the contract without losing your earnest money deposit.
Don't Be Afraid of Real Estate Terminology
These are just a few of the basic, yet often misunderstood real estate terms you should be familiar with. After you hire an agent, they can help you with any other real estate terms you are unsure of.
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