Having a basic understanding of important real estate concepts before you start the process of buying or selling your home will give you peace of mind now and could save you a fortune in the future. Here are ten real estate terms you should know before you start looking for a home. First you should know the difference between a Buyer’s Agent and a Listing Agent. There are usually two agents involved when you buy a home; the “buyer’s agent,” who represents you if you’re buying, and the “listing agent,” who represents the home seller. Dual agency is when there is only one agent representing both sides of the transaction. When buying a home, you don’t pay your real estate agent, they’ll get a commission from the home seller.
You should also learn the difference between Fixed Rate and Adjustable Rate Mortgages if you plan on buying. Conventional loans include “fixed rate” and “adjustable rate” mortgages. A fixed rate mortgage has a predetermined interest rate throughout the life of the loan; the most common are for 30 years. An adjustable rate mortgage has a variable interest rate; the most common are for 5, 7, or 10 years. Adjustable rate mortgages can make financial sense if you’re planning to sell or refinance your home before the introductory period ends; but if you’re planning to own your home longer than five years, it’s less risky to choose a fixed rate loan. Ask your real estate agent for lender recommendations. Along with your loan, whether you buy or sell you should know what a Pre-approval Letter is. Before you apply for a mortgage or even start looking for a home, you should get a pre-approval letter from the bank, which is an estimate of how much they’ll lend you. This letter will help you determine what you can afford, and ensures home sellers that you will be able to get a loan when needed. When you go in for a pre-approval letter you should be clear on what the bank is offering. Ask them about closing costs, what fees are involved, what you’re getting for that fee, and if they’ll lock in your loan at a specific interest rate. Note that if you end up competing for a home against other offers, it can help to have a local lender. Local lenders want continued referrals and really care about their reputation; listing agents prefer to deal with them for this reason.
Inspection is an interesting term if you are going to buy. After you’ve made an offer on a home, you’ll need to schedule an inspection, which costs around $500, depending on the market. The inspector will go through every nook and cranny, and review things like the plumbing, electrical, foundation, walls, heating, and appliances. Get advice from your realtor on a good inspector. If they find something wrong, you can negotiate for a reduced price. If they miss something, you could be stuck with expensive repairs after you’ve purchased the home. An inspection is different than an appraisal. When you apply for a mortgage, your lender will require an appraisal of the home you want to buy. A licensed appraiser will estimate the home’s value based on comparable homes that have sold in the area and an investigation of the property. If the appraised value is less than the offer you are making on the home, you might not be approved for a loan. The bank doesn’t want to invest in a home that’s overpriced (and neither do you!). Before making an offer, ask your agent to do a comparative market analysis, which will tell you what comparable homes have sold for nearby. If you’re a seller, get an estimate on how much your home is worth as well as how to increase your home appraisal value.
Contingencies are a good term to know. When you put in an offer on a home, you can specify certain conditions that must be met before the deal will go through, these are called contingencies. You have to make sure you can actually get the loan (a financing contingency), that the inspection doesn’t show anything too crazy (inspection contingency), and that the appraised value is close to what you’re offering to pay (appraisal contingency). Those are just a few common examples; there are several other types of contingencies, which you should discuss with your agent. If you’re in a bidding war on a home, sometimes it can help to shorten contingency periods or waive them altogether. You may not necessarily have to pay more money, just be more flexible. Ask your agent about this if the situation comes up.
You should know what Closing Costs are. Be prepared to pay a lot of fees when you purchase a home. Typically, closing costs will amount to 2-5% of the purchase price of the home, and that doesn’t include the down payment. Common fees include excise tax, loan-processing costs and title insurance. For more information on how much money closing costs will take out of your wallet. Ask your lender about every fee involved in the Good Faith Estimate, and see if you can shop around for a better price for those services or negotiate down. Examples include homeowner’s insurance, wire transfers, underwriting and settlement fees.
Finally learn about Title Insurance. After all the negotiations are done and the seller has accepted your offer, you should receive a home title report within a week. Most mortgage lenders require you to pay title insurance as part of the closing costs; title insurers search the public records to make sure the home seller actually had rights to the title and that there are no liens on the home (like an unpaid contractor or unpaid taxes). Ask your agent for recommendations, and shop around to find the best title insurance rates. You may also be able to negotiate some fees the insurance provider charges.
Education is key when you buy. Ask your agent a lot of questions to calm the nerves of buying a home way down!