Home Buying Terminology

Buying a home is most likely the largest financial commitment you will make. It is important to be knowledgable on the process and real estate terminology. Make sure you are prepared and well informed to make the best decision when buying a home.

Appraisals

Appraisals are a key step in the home buying process. But if you’ve never bought a house before, you may not be familiar with what an appraisal entails. 

What exactly is an appraisal? A home appraisal provides an objective estimate of a home’s value. It draws upon several factors, including the age, size and location of the house. Appraisals look not only at your home condition but also the selling price on other homes in the area.

What does the process include? An appraisal usually occurs after an offer has been accepted on a house. An appraiser often starts the process by conducting a phone or in-person interview with the homeowner, followed by a scheduled walkthrough of the house and surrounding property. The walkthrough typically takes an hour or two, during which the appraiser will take pictures while writing down details. These home details will include the home’s structure and layout as well as the condition of major in-home appliances like the furnace and air conditioning. After the walkthrough, the appraiser will compile a thorough report that takes all of the elements of the property (and comparable homes nearby) into consideration, and provides an estimate of what the house is worth.

What’s next? If the appraisal comes in at the same price or higher than the contract, then the next step ​​​​​​​is for lenders to finalize their loan to you as a buyer. This is known as mortgage underwriting. However if the appraisal is less than the contract price, you may need to negotiate with the seller to determine whether or not they will lower the contract price to maintain the terms of your loan. 

Contingency

Sometimes, a home sale will be complex and involve multiple contingencies. Before starting the process, let’s learn what a contingency is and how it impacts a potential sale.

What are they? The word “contingency” essentially means “depending on certain circumstances.” When a house is listed as contingent, it means an offer ​​​​​​​has been made and accepted, but some additional criteria must be met before the deal is complete.

What are some examples? Financing contingencies are some of the most common real estate contingencies. Additionally, there can be other contingencies relating to inspections, appraisals, tests for termites, potential toxins and more. Contingencies can also be for deeds, titles and HOA rules. Whatever the case, these stipulations in a contract usually work to a buyer’s advantage by letting them out of a contract when stated contingencies aren’t met.

Down Payment

Down payments are an important part of the home buying-process – and for some, the most stress-inducing. But how much do you know about down payments, particularly with regard to the options you have as a first-time buyer?

What is a down payment? In the simplest of terms, a down payment is a lump sum of money that represents a percentage of the price you pay for a new home. This lump sum is due at closing, when you sign all of the paperwork to make the house officially yours.

What is the standard percentage for a down payment? Traditionally, experts have advised setting aside 20% of the cost of the home as a down payment. Realistically, not everyone has that kind of money readily available. That’s why there are a number of different mortgage options available to buyers – especially first-time buyers – that allow for some flexibility.

How do I decide on the right amount for a down payment? The first thing you need to do is get a good sense of your finances. Find out your credit score, determine how much you have in savings and calculate your debt-to-income (DTI) ratio – essentially, the amount of money you owe per month, divided by the amount of pre-tax income you make. Remember that you shouldn’t invest all of your savings into a down payment, either – set aside money for closing costs, moving and post-move repairs.

Earnest Money

In competitive markets, earnest money can be used to show that you are a serious buyer.

What is it? Essentially a good faith deposit, earnest money is a sum you put down to demonstrate that you are serious about purchasing a home. In most instances, this sum acts as a deposit on the home you’re looking to buy.

How it works: Whenever a seller and buyer come to an agreement, the seller usually takes the home off the market. If the deal falls through, the seller must re-list the property and start the whole process again. Earnest money helps protect the seller if the home buyer backs out.

How much is it? Most often, earnest money amounts to 1 – 3% of the home sale price. The exact amount will depend on what’s customary in a specific market. The money is generally held in an escrow account until the deal is closed. If all goes well, earnest money is applied to the down payment or closing costs. If not, the money may be returned to the buyer or retained by the seller, depending on who is responsible for the deal falling through.

Lender

One of the most important elements of the home buying process is securing a loan for a mortgage.

What is a lender? In the simplest of terms, a mortgage lender is a person or company that loans buyers money to purchase a home.

What kinds of lenders are there? There are several different types of mortgage lenders from which to choose. The most common of these is called a mortgage banker. Banks and online agencies such as Quicken Loans or Rocket Mortgage are mortgage bankers. Credit unions are mortgage bankers as well, ​​​​​​​but only buyers who are members of that credit union qualify for a loan. Direct lenders provide loans from their own funds (or from funds that they procure from someone else).

Is a mortgage lender the same as a mortgage broker? No, mortgage brokers are a third party working with you to obtain a loan from lenders. They are essentially paid intermediaries who help you determine which loan is best for your circumstances.

Which mortgage is right for me? It depends entirely on our situation. An experienced real estate agent can help connect you with a local lender who can advise you on the best loan type for you.

Trust an experienced real estate agent. 

For many more real estate terms, view this glossary. An experienced real estate agent will make sure you are well informed on the home buying process and real estate terminology. With professional guidance, you can make informed decisions that align with your current wants, housing needs, and long-term goals. At ERA First Advantage Realty, we know experience matters. Connect with a local ERA agent today!