10 Critical Real Estate Terms To Know When Buying a Home
The homebuying process involves many steps, from initially prequalifying for a loan to closing day when the keys are finally in your hand. It also involves various players, such as a lender, real estate agent, home inspector and a title company representative.
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During this whole process of trying to make a home your own, you’ll hear all kinds of real estate-related lingo — some of which may be familiar and some won’t. You may even think you know what something means, like “prequalifying,” but later find out you were wrong.
Rather than flying blind through this process, why not take a crash course in real estate terms? Right here, right now, you can pick up some knowledge that will help make your homebuying journey a little easier — or at least easier to understand.
1. Appraisal
“An appraisal is a process of determining the value of the home,” said Yadlynd Cherubin-Eide, a licensed real estate associate broker. “During the home sale, the mortgage lender sends out an appraiser to get a professional opinion of the value of the property. The appraiser provides the bank with a detailed report with recent sales and the condition of the property being purchased. This helps the lender decide if the property is worth the amount of the loan the potential buyer is seeking.”
2. Appraisal Contingency
“An appraisal contingency is a clause written in the contract of sale that allows a buyer to back out of a purchase agreement without financial penalty if a home’s appraised value is less than the sale price,” Eide said. “Lenders want to ensure they are not ‘overpaying’ for a property.”
3. Comparables (Comps)
“Comps are recent sales of similar properties,” said James McGrath, a licensed real estate broker and founder of Youreevo. “You can use that information to determine how much the house you’re considering should sell for.”
According to McGrath, it is your agent who puts them together and reviews with you. “It’s important to know about comps before starting the process because you might not know to look for them and how important they are,” he said. "Agents will often spit out a number after the viewing which should be a big red flag. There should always be data underlying any suggested offer."
4. Contingencies
“A contingency is written into an offer/contract and allows the buyer or seller to back out of the deal without repercussion if the conditions aren’t met,” said Erik Wright, owner of New Horizon Home Buyers. “Most contracts have an inspection contingency for a period of time that allows the buyers to have an inspection to determine the condition of the house. As long as it’s within the time period, if something comes up in inspection, they can cancel the contract.”
“Another example of a contingency would be a home sale contingency which basically means that the offer is dependent on the buyer selling their own home before purchasing the current one,” Wright said. “How a buyer uses and chooses not to include contingencies in an offer can make the offer more attractive to the seller.”
5. Debt-to-Income Ratio (DTI)
“One term that is important in the mortgage application process, yet often misunderstood, is the debt-to-income ratio,” said a Chase spokesperson. “A person’s debt-to-income ratio (DTI) reflects their total debt due each month against their monthly gross income. In addition to your credit score, lenders use DTI to help determine how much a prospective borrower may qualify for.”
Lenders typically look for a lower DTI, though exact limits vary by loan and lender.
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6. Earnest Money Deposit
“This is especially important in the current competitive market because making an offer with a larger earnest money deposit can help make it stronger than other offers,” Wright said. “An earnest money deposit is basically a deposit made on the purchase of a home as part of the contract. It is held by a third party and is only refundable under specific conditions spelled out in the contract, such as an inspection revealing issues with the home. Should the buyer simply change their mind then the deposit is forfeited to the seller.”
7. Loan-To-Value Ratio
“The loan-to-value ratio or LTV is the comparison of the current loan amount to the value of the property, expressed as a percentage,” said a Chase spokesperson. “For example, a loan amount of $150,000 for a home valued at $200,000 would have an LTV ratio of 75%.”
8. PITI
“PITI, which stands for principal, interest, taxes and insurance is a term you will see all throughout the loan paperwork,” said Tomas Satas, founder and CEO at Windy City HomeBuyer. “PITI typically makes up the overwhelmingly greater part of your monthly mortgage payments. It assists both the lender and the buyer to figure out the affordability of an individual mortgage.”
9. Preapproval
“If you are serious about purchasing a home and want to set your offer apart from the others, then you need to chat with your lender or mortgage broker about acquiring preapproval for a loan,” Mata said. “Contrary to prequalification, preapproval is an in-depth process and requires that a buyer submits financial paperwork. A seller most likely will prefer a buyer that has already been preapproved.”
Common things a lender looks at during the preapproval process are credit score, income, assets, liabilities and job history.
10. Underwriting
“Underwriting is step three in the loan process (after pre-qualification and pre-approval),” said Cynthia Kellogg, a real estate agent with Avenue 8. “[It’s] an analysis to determine whether the risk of the loan is acceptable to the lender. This involves an evaluation of the appraisal and the borrower’s ability and willingness to repay the loan.”
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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