10 Real Estate Terms Everyone Should Know
Before starting the home buying or home selling process, it’s helpful to have a basic understanding of important real estate terms. Taking time to learn the lingo can remove some of the confusion during the process of buying or selling your home and make communication much easier between you and your real estate agent. Here are 10 Real Estate terms everyone should know:
Buyer’s Agent
The buyer’s agent is a licensed real estate professional who represents the buyer’s interests in a real estate transaction. When buying a home, the buyer’s agent gets their commission from the seller of the property and is usually paid at closing.
Listing Agent (Seller’s Agent)
The listing agent or seller’s agent is a licensed real estate professional who represents the seller’s interests in a real estate transaction. They list the property, prep and market the home for sale. The seller of the home will pay the listing agent’s commission.
Comparative Market Analysis (CMA)
A comparative market analysis, also known as a CMA, is an in-depth analysis of a home’s worth in today’s market by comparing prices of similar properties in the same area that have recently sold. A listing agent will present a CMA to a potential seller to help them determine a price to list and a buyer’s agent may prepare a CMA to a client when placing an offer on a home. It is important to remember that a CMA is not the same as an appraisal, which is performed by a licensed appraiser.
Pre-Approval Letter
The mortgage pre-approval letter is a letter from a lender stating that the buyers have applied for a mortgage and have the proper financing in place to purchase the home. It also states how much the money a buyer can borrow, which will help buyers know how much they can afford. It is also peace of mind for sellers because they know buyers will be able to get a loan when needed. Most buyer’s agents require a pre-approval letter when showing homes to buyers or, at the very least, before making an offer on a property.
Debt-to-Income (DTI) Ratio
The debt-to-income (DTI) ratio is defined as monthly debt payments divided by the monthly gross income. The housing DTI ratio is the house payment divided by monthly income and a total DTI ratio is total debt payments including the house payment divided by monthly income. Both are used by lenders to determine whether a buyer qualifies for a mortgage.
Home Inspection
A home inspection is scheduled after a buyer’s offer is accepted on a home. The inspector is hired by the buyer during the option period and is paid for by the buyer. The inspector will go over the home to check on the condition of the foundation, walls, heating, electricity, plumbing, and appliances and determine if they are up to code or need repairs. Once the buyer has the report, they can negotiate with the seller to complete or pay for certain repairs, or terminate the contract because repairs are too costly to want to continue with the purchase of the home.
Appraisal
A licensed appraiser determines an estimated property value using comparable homes that have sold in the area and by conducting an investigation of the property. This is required by the lender before they can approve the loan and is a buyer paid expense. It helps the lender decide if the property is worth the amount of the loan.
Closing Costs
Closing costs typically range between 2% and 5% of the purchase price of the home and are paid at the time of closing on the home. This covers fees for services provided by the lender and other parties. This would include loan origination fees, mortgage discount points, prepaid interest, title insurance fees, home appraisal fees, survey, document recording fees and property taxes, as well as expenses the home has incurred by buyers and sellers during any negotiations. Sellers would also incur the real estate commissions which typically range between 3% and 6%.
Closing
Closing is the scheduled day on which the sale of the property is officially finalized and when title is officially transferred from seller to buyer. A closing date is set with enough time for the buyer to conduct due diligence on the home and the lender to complete the underwriting process for the loan, which includes the home appraisal. During closing, the buyer will sign all the mortgage documents and pay all closing costs and the seller will complete the transaction with the buyer.
Title Insurance
A title insurance policy is important to protect the homeowner and lender against property loss or damage they might experience due to liens, encumbrances, or defects, which includes fraud, forged signatures on deeds, unknown property heirs, liens (contractors, child support, other legal judgments, etc.), and documentation errors. The title company will issue two separate policies, one to the homeowner and one to the lender, both of which are issued after closing. The homeowner’s policy is a guarantee from title that they will defend the homeowner in a lawsuit or indemnify you for any loss from a title defect. The lender policy protects the same way as the homeowner’s policy.
