Crucial Real Estate Terms

Buying a home is a significant milestone in life, but the process can sometimes be overwhelming, especially if you're not familiar with the terminology used in the real estate industry. To ensure a smooth and informed home-buying experience, it's crucial to understand key terms related to the process.

Appraisal

An appraisal is a report conducted by a qualified third party hired by the lender to estimate the value of a property. Lenders rely on appraisals to ensure they are lending only what the home is worth. It is essential to understand the appraisal process to determine the fair market value of a property before making an offer. An appraisal contingency is necessary for a homebuying contract that safeguards the consumer's interests. Let's say you're purchasing a house valued at $1 million, but the appraisal determines its value to be $900,000. In such a scenario, you would be required to cover the difference of $100,000 out of pocket or renegotiate the price with the seller. This is because the lender will only lend based on the appraised value of $900,000. If you cannot cover the additional funds and the seller is not willing to adjust the price based on the contingency, you can cancel the agreement and recover your earnest money deposit. The appraisal contingency protects buyers if the appraised value falls short of the agreed-upon purchase price, ensuring the disparity does not financially burden them. In some cases, the appraisal value of a property may come in higher than the agreed-upon purchase price. This situation can be advantageous for the buyer as it creates built-in equity.

Closing Costs

Closing costs refer to the fees and expenses needed to complete a real estate transaction. These costs are typically paid at the closing of the deal, and they can include various items such as points, taxes, title insurance, and more. Request a complete list of closing cost items from your lender to understand the financial implications of buying a home. The closing costs can vary depending on the financing method and the agreement between parties.

Home buyers' closing costs are relatively lower if the purchase is cash. Generally, closing costs for buyers range from 2% to 5% of the purchase price. To navigate this process, it's essential to collaborate closely with your lender, who can provide guidance and clarity on the specific closing costs associated with your transaction.

Home sellers’ closing costs, which can differ based on various factors. At the lower end, sellers may expect closing costs of approximately 5% to 6% of the purchase price. However, on the higher end, closing costs can reach 5% to 10% of the purchase price, depending on factors such as the commission agreement and whether sellers choose to cover additional expenses like staging and home prep.

Credit Score

A credit score is a numerical representation ranging from 300 to 850 that reflects an individual's creditworthiness based on their credit history. Lenders evaluate credit scores to assess the likelihood of borrowers repaying their debts in the future. Understanding your credit score and its impact on your ability to secure a mortgage is crucial. Check out to learn more about credit scores and how to improve them.

Down Payment

The down payment is the initial amount of money the homebuyer pays toward the property's purchase price. It is typically a percentage of the total price, ranging from 3.5% to 20%. There are also programs available that offer 0% down payment options. Consulting with your lender will provide information on the down payment options you may qualify for.

Mortgage Rate

The mortgage rate refers to the interest rate the lender charges when borrowing money to purchase a home. Mortgage rates fluctuate over time, so staying informed about current rates and their potential impact on your monthly mortgage payments is essential. A lender can provide valuable insights on mortgage rates and how they affect your financing options.

Pre-Approval Letter

A pre-approval letter is a document issued by a lender indicating the amount they are willing to lend you for a home loan. This letter and an understanding of your savings can help you determine your target price range when house hunting. Consulting with a lender and obtaining a pre-approval letter can give you a competitive edge in home buying. Including a pre-approval with your offer is crucial because it shows the seller that you are a serious buyer.

Inspection Contingency

An inspection contingency is a provision in a contract that requires a thorough inspection of the property. This step provides vital information about the home's condition and potential repairs needed. Understanding the importance of an inspection contingency is crucial to make informed decisions and negotiating repairs if necessary.

Adjustable-Rate Mortgage (ARM)

An ARM, a variable-rate loan, offers a lower initial interest rate than a fixed-rate loan. However, the interest rate can change at specific intervals called adjustment periods. The rate adjustments are based on a published index that tracks changes in the current finance market. There are maximum and minimum limits on how much the interest rate can change during each adjustment period.

Closing Disclosure

A Closing Disclosure form provides the final details of your selected mortgage loan. It includes essential information such as the loan terms, projected monthly payments, and a comprehensive list of all fees and costs associated with obtaining the mortgage (closing costs). The lender is required to provide the borrower with the Closing Disclosure at least three business days before the scheduled closing on the mortgage loan.

Contingency

A contingency refers to a provision or condition incorporated into a real estate contract. To illustrate, one may choose to include a contingency in their offer, specifying that the purchase is contingent upon the successful completion of a home inspection. If the home fails the inspection, this provision safeguards you and enables you to make appropriate decisions. From a contractual perspective, unless you make a cash payment, you would typically have contingencies such as an appraisal, loan, or physical inspection contingency. Should these conditions not be met, you can withdraw from the agreement and recover your earnest money deposit. Ultimately, these contingencies are put in place to ensure the protection of consumers.

Counter-offer

A counteroffer is an offer made to respond to a previous offer. For instance, after the buyer presents their initial proposal, the seller may make a counteroffer with a slightly higher sale price or different terms. Counter-offers allow negotiations between the buyer and seller until both parties reach an agreement.

Deed of Trust

A Deed of Trust is a legal document in which the borrower transfers the property's title to a third party, the trustee. This transfer is done as security for the lender. Once the loan is paid in full, the trustee transfers the title back to the borrower. If the borrower defaults on the loan, the trustee can sell the property and use the proceeds to pay off the mortgage debt.

Escrow

Escrow refers to holding money or documents by a neutral third party coordinating the transaction between the buyers, sellers, lenders, and title company. The escrow agent ensures that all parties meet their obligations and manages the funds and necessary paperwork until the transaction's closing.

Earnest Money Deposit

The earnest money deposit typically represents 3% of the purchase price. The buyer deposits it into an escrow account to demonstrate their good faith and ability to proceed with inspections and due diligence. It serves as a portion of the overall purchase price. If the buyers adhere to the contractual obligations and choose to cancel the deal for any reason, the earnest money deposit will be returned to them.

Gift Letter

A gift letter is a written document provided by a family member to verify that a certain amount of money was given to you as a gift and that you are not required to repay it. Some mortgage programs allow you to use gifted funds towards a portion of your down payment, and the gift letter serves as proof of the gift.

Home Inspection

A home inspection is a professional evaluation of a property's condition. It typically includes an assessment of the plumbing, heating, and cooling systems, roof, electrical wiring, foundation, and potential pest infestation. A home inspection helps the buyer understand the property's overall condition and identify potential issues.

Homeowner's Insurance

Homeowner's insurance is a policy that protects both you and the lender from various risks. It covers damages to the house's structure caused by events such as fire or flood. It also includes liability protection if someone gets injured on your property and covers damage to your personal belongings, such as furniture, clothing, or appliances.

Home Warranties

Warranties are written guarantees provided by the seller that assure the quality of a product or property. In real estate, a warranty typically covers repairing or replacing defective parts or systems in the home. Seller-paid warranties are often offered for a specific period, typically one year, to provide peace of mind to the buyer.

Affordability

Affordability refers to an individual's ability to qualify for a loan on a typical home based on the latest price, income, and mortgage rate data.

Listing Agent

"Listing agent" and "selling agent" are often used interchangeably. Both refer to the same role in a real estate transaction. The listing agent represents the seller, whether an individual, couple, corporation, or business. Their main objective is to secure the highest possible sale price for the listed property, ensuring the best outcome for the seller. They handle tasks such as receiving offers from buyer's agents, presenting bids to their clients, selecting the most advantageous offer, and negotiating with the buyer's agent to finalize the deal. Their fiduciary duty is to the seller.

Buyer’s Agent

The buyer's agent, also called the selling agent, is dedicated to helping the buyer maximize their advantages in a real estate transaction. A buyer's agent is crucial in assisting you throughout the home-buying process. They begin by understanding your preferences and requirements and asking relevant questions to narrow your neighborhood choices. With their expertise, they develop a customized method and plan to guide you effectively. The buyer's agent takes charge of arranging property showings, ensuring you have the opportunity to view potential homes that align with your criteria. Their dedicated support helps streamline your home search and enables you to make informed decisions. Their primary goal is to negotiate on behalf of their client, ensuring they secure the best possible terms and prices for their desired home. The buyer's agent also serves as a mediator, facilitating the offer-writing process and reaching agreements with the seller's agent.

Grant Deed

A grant deed is a legal instrument used to transfer property ownership from a seller, also known as the grantor, to a buyer, referred to as the grantee.

Conclusion

You can confidently navigate home-buying by familiarizing yourself with key real estate terms. Understanding concepts such as appraisals, closing costs, contingencies, and earnest money deposits will enable you to make informed decisions and protect your interests as a buyer.

Hire Us

Whether you are considering buying or selling a property in the Los Angeles area, we are here to provide expert assistance and support. Our dedicated team understands the local market dynamics and is committed to guiding you through a seamless and successful real estate experience. Whether you need help finding your dream home or maximizing the value of your sale, trust us to be your reliable partner throughout the process. Contact us today to get started, and let us help you achieve your real estate goals in Los Angeles. 310-422-9001