It’s no secret that purchasing a home can be a major undertaking, especially if you’re a first-time buyer.
As you navigate the process, there are all kinds of real estate terms that you are likely to encounter along the way. Knowing and understanding these terms will not only help you communicate with your broker but will also make your journey toward homeownership more seamless. Here’s a brief primer to help familiarize you with some common terminology:
Pre-approval vs. Pre-qualification – A mortgage pre-approval is an estimate of the amount you can borrow based on a lender’s verification of your financial documents, employment and credit history. Pre-approval is essential in a competitive home-buying environment because it immediately demonstrates to a seller that you are a qualified buyer (keep in mind it is not an actual loan commitment, but it gives you an important head start on the process). Pre-qualification, on the other hand, is an informal, preliminary assessment of your borrowing power based on basic information you provide to a lender.
Comps – Short for “comparable properties”, comps help determine the current value of a property. They are chosen based on property attributes like price, location, condition, features and other criteria.
CMA – Also known as a Comparative Market Analysis, this pricing tool is an evaluation of a home’s current value based on recent comps. Once you’ve found a home you love, your broker will prepare a CMA to help you formulate an offer.
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Appraisal – If you are obtaining bank financing, the bank will order an appraisal, which is an opinion of a home’s value. Unlike a CMA, an appraisal is performed by a licensed appraiser who must follow a number of established guidelines. While appraisers use the same data as real estate agents to find comparables, they have additional guidelines to follow in order to protect the lender.
Pocket Listing – Also known as an exempt listing, a pocket listing is a property that has a signed listing agreement but is not yet listed on the Multiple Listing Service (MLS). This approach is typically used by sellers who want to protect their privacy or pre-market their home before it’s ready to show.
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Contingency – A condition that must be satisfied before closing occurs. These conditions are written into the contract and typically include things like a home inspection, mortgage financing or the appraisal. If you include a home inspection contingency with your purchase agreement, for example, you have the right to have the property inspected within a specified time period, and can cancel the contract or negotiate repairs depending on the results.
As-Is – When a home is listed for sale “as is”, it means the property is being offered in its present condition and the seller does not intend to make any repairs or improvements. As a buyer, you are usually advised to include an inspection contingency as part of the contract, giving you the option to walk away from the deal based on the inspector’s findings.
Fixed Rate vs. Adjustable Rate Mortgage – Two types of mortgages available to homebuyers. A fixed-rate mortgage has the same interest rate through the entire term of the loan, while an Adjustable Rate Mortgage (ARM) is a loan in which the interest rate periodically adjusts based on a specified index.
Earnest Money – A deposit, given by the buyer to the seller, which secures the contract until closing and lets the seller know you are serious about the transaction. An initial deposit must be given with the contract, and the balance of the earnest money is usually due upon attorney approval. Earnest money is typically held in an escrow account until the closing, when it may be applied to the down payment and/or closing costs.
Closing Costs – Expenses and fees associated with a real estate transaction that are paid at the closing. Examples of buyer closing costs include a loan origination fee, title insurance, survey, attorney’s fee, home inspection fee, appraisal and credit report fees, and prepaid items such as escrow deposits for taxes and insurance.
Title Insurance – An insurance policy that protects the buyer or lender against defects or problems with the title when property ownership is transferred. Title insurance protects against claims for past occurrences, while other forms of insurance protect against future events.