Home-Buying Dictionary

 

Words & Definitions to Know for Anyone Buying a Home

 

Buying a home is a complicated process, and first-time homebuyers, in particular, can find the process overwhelming.  Anyone who has bought a home can attest to the fact that there are many steps to buying a home, and that there is a lot of room for mistakes to be made during the process.  This prospect is daunting enough to a first-time homebuyer, and to make things more complicated, they often are faced with a feeling of ignorance due to not being familiar with the common phrases and definitions that are associated with real estate transactions.  This is a beginner’s guide to real estate terms that are important to know.

 


Acceptance

Acceptance happens when the party who received an offer accepts its terms and thereby creates a contract between the two parties.  If a Buyer puts forth an offer to purchase real estate and receives acceptance from the seller, the contract is begun.  Likewise, if a seller counteroffers the buyers’ original offer, and the buyer accepts the terms of the counteroffer, acceptance has been reached and the contract is binding.

 

Appraisal

An appraisal is an estimation of a home or property’s market value.  Appraisals are completed by licensed appraisers, and they look at comparable homes that recently sold near the home in question.  Appraisals are typically ordered by lenders during the home financing process to ensure that the investment the lender is considering is a worthy one.  If the appraisal results indicate that the home’s value is less than the loan amount, the lender may refuse to finance the loan.

 

Closing

The closing date is when the ownership of the home is transferred from the seller to the Buyer.  A closing takes place at a title company, where both buyer and seller will settle all credits and debits before signing the paperwork to transfer ownership of the home.  The certificate of title, abstract, and deed are prepared by an attorney, and the buyer signs the lender's mortgage paperwork.  The closing date is typically established during the negotiation stage of buying a home, but it is subject to certain criteria that could cause the date to change.  The closing essentially finalizes the original contract entered into by the buyer and seller.

 

Closing Costs

Closing costs are expenses other than the cost of the property in the transaction, and they are paid during the closing.  Closing costs can be incurred by either the Buyer or seller.  Closing costs typically include such expenses as the escrow fees, the real estate agent commission, the attorney fee, the appraisal, the inspection, the attorney’s fee, and more.  Some closing costs are tax-deductible, so be sure to save your closing statement and have it handy, come tax-time.

 

Commission

The commission is the money typically paid by the seller to a real estate agent as compensation for finding a Buyer and completing the sale.  The commission can be a flat fee or a percentage of the sale price, depending on the agency agreement.

 

Contingency

Contingency is a word that means that a certain condition must be met before a contract is legally binding.  When a contract is contingent on something, a provision in the contract clearly states that some or all of the terms of the contract will be altered or voided by the occurrence of a specific event, usually by specific dates leading up to the closing.  For instance, a contingency clause in a contract can state that if the Buyer doesn’t approve the inspection report for the property, the buyer can back out of the contract.  The two most common contingencies in the home buying process are that the home must pass the inspection and the borrower must be approved for the loan.

 

Counteroffer

A counteroffer occurs when a seller has made an offer on a property that rendered a response of a different offer from the seller.  When a counteroffer is made on real property, it essentially nullifies the original offer, giving the Buyer a chance to refuse and not be accountable for their initial offer in any way.  A counteroffer is intended to begin negotiations for a transaction to occur, depending on the amount and terms agreed upon by both the buyer and the seller.

 

Disclosure

A disclosure is a legal document that a seller is required to sign when listing their home for the purpose of disclosing any major physical defects in the house that they are aware of, as well as the presence of lead-based paint, radon, or other potentially hazardous materials, conditions, or contaminants.  A Buyer, before asking their agent to prepare an offer for a home, should ask to see the disclosures to make sure that there are no major hazards within the home that would prompt them to not move forward with the purchase.  When putting in an offer, a buyer will be required to sign the disclosures to acknowledge that they have read and understood them. 

 

Downpayment

The downpayment is the amount of money to be paid by the Buyer to the seller upon signing the closing paperwork.  The buyers’ loan amount is the downpayment subtracted from the purchase price from the home.

 

Earnest Money

Earnest money is a deposit made to the seller from the Buyer.  An earnest money deposit is intended to show the sellers the buyers’ good faith in their offer and intent to proceed with the transaction.  If the sale goes through, the earnest money deposit counts toward the downpayment of the home.  Unless the offer to purchase expressly states that the earnest money will be refundable if the sale does not go through, the buyer typically forfeits the earnest money in the event that the contract is not executed.  It is important to note that an earnest money deposit is not necessary to offer; it is simply to imply good faith to the seller.  Furthermore, it is not necessary that earnest money be money at all; it can be in any form that is deemed acceptable by both buyer and seller.

 

Escrow

Escrow typically refers to the escrow account, in which funds are held until the occurrence of a sale, afterwhich the funds are released to a designated individual.  Typically the escrow account holds money from the Buyer for the lender; the escrow account will store the mortgage payments, which can consist of the principal, interest, and insurance. 

 

Home Inspection

A home inspection is usually ordered by the Buyer in a real estate transaction for the purpose of obtaining a report on the home’s condition.  A home inspection is carried out by a licensed inspector, who, after completion of inspection, provides both buyer and seller with a report detailing any concerns, repairs, maintenance, or potential issues that exist within the home. 

 

Home Warranty

Sometimes offered by a seller to give their home a competitive edge in the marketplace, a home warranty covered the costs of repairs to specified parts of the home over a specified period of time.  The home warranty, if offered, is provided by the seller as a condition of the sale.  However, a Buyer can request a home warranty and write it into their offer on the home.

 

Homeowners' Association

A homeowners’ association is an organization made up of residents in a neighborhood who are concerned with managing and maintaining common areas of a subdivision or condominium complex.  Many homeowners’ associations require a monthly or annual fee from residents of the neighborhood that contributes to the maintenance of those common areas.  The association is also responsible for enforcing any covenants and restrictions that apply to homes in the neighborhood.

 

Homeowners’ Insurance

Homeowners’ insurance is a form of insurance specifically to protect a home and its possessions from damage.  A lender will require some documentation of homeowners’ insurance while processing your loan, because the lender also wishes to protect his investment in your home.

 

Mortgage

A mortgage is a lien on real property given by the Buyer to a lender as security for money borrowed.  The loan term, interest rate, and type of loan within the mortgage is typically decided upon by an in-depth assessment of a client's finances and current situation with the help of a lender.  

 

Multiple Listing Service

The Multiple Listing Service is a computer-based service commonly referred to as the MLS.  It provides real estate agents a number of services and benefits.  Agents use the MLS to disburse their listings to other agents, so that any agents working with buyers can easily see if the property is something that their client would be interested in.  An agent can also look to the MLS to get comparable properties to help the seller decide on a fair and reasonable asking price for their home.  The MLS isn’t just a tool for agents, however.  The MLS also serves as an exporter of listings and their information to other websites that the public has access to, such as REALTOR.COM or Zillow.

 

Offer

When you find the home that you would like to purchase, your real estate agent will prepare an offer to be submitted to the seller.  This offer contains the date of your offer, a description of the property, the amount of your earnest money deposit, the amount of money you are wanting to pay for the property, financing details, your name and address as well as the seller’s name and address, the closing date, and any other special requirements or contingencies you’d want to ask for.

 

Pre-Approval

Pre-Approval takes place after pre-qualification, and it tends to be a much more complicated and involved process than pre-qualification.  For pre-approval, potential borrowers will complete a mortgage application and supply the lender with all the documentation necessary for them to complete an extensive examination of your credit and finances.  After this analyzation, the lender can tell you the specific mortgage amount for which you are approved, meaning that you will have a more concrete idea of what homes you can look for.  With pre-approval, potential borrowers then receive a conditional commitment in writing for an exact loan amount, even if the potential Buyer hasn’t yet found a property they’re interested in.  Pre-approval usually happens after finding a home on which to make an offer, but it can be done during the Home Search.  Doing this step earlier can actually give potential buyers an advantage with a potential seller, because it’s one less step that must be completed for the contract to continue.  Once a buyer has found the home they are wanting to purchase, they only need to fill in the property information and they are ready to proceed with funding.

 

Pre-Qualification

Pre-qualification is the initial step in the mortgage process, and it should be done prior to beginning the Home Search.  The process of getting pre-qualified allows you to discuss any goals or needs you may have with your lender, and your lender can explain your various options and give his or her recommendations.  The pre-qualification process begins by supplying your lender with your overall financial situation, including debt, income, and assets.  The lender then analyzes your situation and can give you an idea of the mortgage amount you will likely qualify for.  Often, the pre-qualification process can be done simply, quickly, and over the phone or online.  The reason that this step should be done before the home search begins is because it allows buyers to look only at homes in their price range.  Often, without prequalification, a Buyer will fall in love with a home outside of their price range, and will subsequently be let down by every home that comes on the market, no matter how perfect or lovely the home may be. 

 

Restrictive Covenants

Private restrictions limiting the use of real property. Restrictive covenants are created by deed and may "run with the land," binding all subsequent purchasers of the land, or may be "personal" and binding only between the original seller and Buyer. The determination whether a covenant runs with the land or is personal is governed by the language of the covenant, the intent of the parties, and the law in the State where the land is situated. Restrictive covenants that run with the land are encumbrances and may affect the value and marketability of title. Restrictive covenants may limit the density of buildings per acre, regulate size, style or price range of buildings to be erected, or prevent particular businesses from operating or minority groups from owning or occupying homes in a given area. (This latter discriminatory covenant is unconstitutional and has been declared unenforceable by the U.S. Supreme Court.)

 

Survey

A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. A survey is often required by the lender to assure him that a Building is actually sited on the land according to its legal description.

 

Underwriting

The process by which a lender decides whether to make a loan to a potential home Buyer based on an in-depth analysis of credit, employment, assets, and other factors and the weighing of this risk to an appropriate rate, term, and loan amount.

 

Zoning Ordinances

Zoning ordinances are the regulations set forth by local government that dictate what kind of property use can be utilized within a certain property.  For instance, some zoning restrictions will prevent property being utilized as farm land.  Zoning ordinances also are regulatory forces regarding Building permits and what kind of improvements can be made to property.

 

While this isn't a complete list of every term that a Buyer will be exposed to during the Home Search and purchase process, it provides a basic knowledge of terms, at the least.  It is important for homebuyers to ask questions during the process, if ever they feel confused about what is happening or like things are too moving too fast.  Choose an agent that you are comfortable with and who suits your personality.  During the lending process, too, it is important that you choose a lender with whom you feel comfortable with and who gave you the best options for your situation.  Never be afraid to ask questions, because professionals in the industry know that there is a lot to know.  They have no problem helping you along the way.