Confused about some of the terms being used when checking out homes? Use our Real Estate Glossary to help find the definitions of some of the terms, jargon and lingo you're bound to come across!
Contrary to other types of mortgages, a borrower only pays the interest on the loan for a certain period of time, or even till the end of the loan, and pays the principal amount in a lump sum or at specified intervals. Usually, the interest-only period is for 5,7, or 10 years, after which the borrower pays both interest and principal in each payment. The most common type of interest-only mortgage is generally an adjustable-rate mortgage where the interest-only period coincides with the fixed-rate portion of the mortgage; after the introductory period and the interest-only period ends, the rates will adjust, usually every year, up to a cap. Fixed-rate interest-only mortgages are even less common. These mortgages generally make sense for cash-rich borrowers who either don’t intend to be in the property for a long time or have an annual large bonus component that allows them to pay off a portion of the principal in a lump sum every year. The downside to this type of loan is that buyers don’t build equity in the property (except for the downpayment) until they begin paying down the principal, and subsequently don’t gain that value when the housing market goes up. When borrowers begin to pay down the principal, in addition to the interest, their monthly payments will rise significantly. Also, the requirements to qualify for an interest-only mortgage are pretty stringent.
A type of home loan that is not backed by the government, but instead by private lenders, banks, and credit unions, is a conventional mortgage. Since these mortgages are not backed by the government, they have more stringent requirements in terms of a credit score and the debt-to-income ratio than government-backed loans such as FHA loans. However, the down-payment requirement for these loans can go as low as 3% for a first-time homebuyer. In most cases, conventional mortgages are the same as conforming loans in the sense that they meet the requirements laid out by Fannie Mae and Freddie Mae that allow them to be guaranteed and purchased in the secondary market. However, they can also be non-conforming such as jumbo mortgages, which exceed the loan limits set by these government-sponsored entities.
Home loans or mortgages above the conforming loan limit (varies by county and state) set by the Federal Housing Finance Agency (FHFA) are called jumbo mortgages. These loans are generally used to finance expensive luxury homes and properties, or homes in highly competitive and expensive real estate markets (such as the Bay Area), and are not eligible to be backed or guaranteed by Fannie Mae and Freddie Mac like conforming mortgages are. Jumbo mortgages come with a special set of requirements and tax implications. In order to qualify for them, buyers must have excellent credit scores (700+), be able to make a downpayment of 10%-15%, have a low debt-to-income ratio (usually under 43%), and be able to show significant cash reserve and assets. Most affluent buyers tend to go for jumbo mortgages to purchase a home.
The title contingency gives the buyer (and their lender) the opportunity to review the preliminary title report prepared by the title company to ensure that the home is free of any liens or other encumbrances and that there is no conflicting ownership status over the home. The buyer and/or his attorney review the title report and agreements that are a part of the public record to ensure there are no issues so that a free and clear title can be transferred. This contingency protects the buyer by allowing them to walk away from the sale if there is a possibility of contested ownership or payments of debts that would affect the transfer of the title.
Buyers who are in the process of moving from one home they own to a new one will often include a home sale contingency where they will be able to walk away from the purchase if they are unable to successfully sell their current home by a particular time. This is designed to prevent them from having to pay two mortgages - one for the new home, and one for the old one before it sells - or to enable them to gain the liquidity they need from the sale of the first home in order to close on the second. A home contingency clause protects the buyer by allowing them to walk away from a sale contract without any legal consequences and with their earnest money deposit if they're unable to sell their current home. Sellers may counter with contingencies of their own, such as a Kick Out contingency, which will enable them to continue to market their home and accept qualified offers, then give the existing buyer a period of time (usually 72 hours) to remove the home sale contingency, after which if they do not, they are ""kicked out"" and the seller can terminate the contract and enter into a new one.
Buyers will often include a financing contingency in the contract to enable them to walk away without being on the hook for the home in case their mortgage financing falls through and they are unable to obtain a loan commitment letter. The intent of this contingency is to protect the interests of the buyer and allow them to get a complete refund of the earnest money in case they are unable to receive sufficient financing for the home. The time period for this contingency is usually between 30-60 days after which the seller can look for other buyers. However, if the contract is for an all-cash deal, it makes sense to waive the financing contingency, as there should be no mortgage lender involved in enabling the transaction.
To ensure that the buyer (and lender) is paying a fair amount for the home, buyers insert an appraisal contingency, which allows the buyer the ability to walk away from the purchase without penalty if the appraisal returns a value lower than a set value (usually the purchase price). Aside from walking away, the buyer can renegotiate for a lower price with the seller, request that their lender make an exception, and approve their loan as if the property had appraised to match the purchase price or make up the difference between the purchase price and appraised value via their own funds. In most cases, if the buyer makes use of the appraisal contingency to walk away, they are likely to receive a complete refund of their earnest money. However, buyers must be cautious and include this in the contract to avoid problems at a later stage.
To prevent buying a home that has hidden costs and problems not apparent during a showing and in the disclosures, buyers opt to include an inspection contingency, which will allow them to hire inspectors at their cost to assess the house. The resulting report(s) will give the buyer a better idea of the condition of the home, and allow them to renegotiate pricing, request repairs, or walk away based on the findings.
A fee charged by the lender for processing the loan is known as the loan origination fee. Typically in the United States, the fee amount ranges from 0.5% to 1% of the total loan amount. Think of the loan origination fee as an administrative fee that lenders charge as compensation for processing, underwriting, and funding the loan. Loan originators/mortgage brokers/loan officers work on behalf of the mortgage brokers or lenders and help buyers secure the loan. The fee that they charge, i.e. the loan origination fee is sometimes also referred to as origination points and is a percentage of the loan. However, at times this can also be a flat fee. Some lenders might advertise a zero origination fee. However, in most cases, these lenders make money by charging a higher interest rate on the loan which means the buyer ends up paying more over the lifetime of the loan. The loan origination fee is usually paid at closing along with the downpayment and other associated costs.
A type of mortgage loan that is issued by private lenders and backed by the U.S Department of Veteran Affairs that allows those actively serving in the military, veterans, and widowed military spouses, to buy a home. Those applying for a VA loan need not deposit a down-payment. Also, the interest rate of the loans is lower and allows the borrower to borrow almost 100% of the home’s value. Because the loan is backed by the government, borrowers do not need to purchase Private Mortgage Insurance (PMI). It is important to note that the government does not provide the loan. The loan is given through approved lenders and borrowers must meet the eligibility requirements for both the VA and the mortgage lender. However, if the borrower defaults on payment, the government agrees to pay a portion of the loan to the mortgage lender.
A complete inspection of the house during the offer review period, but before actually submitting an offer is pre-inspection. It allows the buyer to know what buying the house could mean in terms of repairs and maintenance costs associated with it before committing to making an offer. If there are a lot of issues found at this stage, a prospective buyer can simply decide to not make an offer, or work out if the costs of repair justify the sale price and adjust their offer accordingly. More importantly, a pre-inspection helps the buyer to stand out among other buyers if they submit an offer without an inspection contingency, since they have already obtained a pre-inspection report. This is something that sellers love, because if a buyer with a contingency finds issues during a home inspection, they can pull out of the deal, forcing the seller to start the process again. On the flip side, a pre-inspection does not guarantee a successful offer, much less a successful purchase. A buyer who wants to conduct a pre-inspection will need to obtain the seller's permission and schedule. In the time it takes for the pre-inspection report to come back and for a buyer to review it, the sellers may have already stopped accepting new offers and chosen one to accept, especially in areas with high demand for homes and low inventory. Additionally, a pre-inspection is an upfront cost that occurs before a home goes into contract, meaning that if a buyer makes a habit of paying for a pre-inspection for every offer they, they will continue to accrue costs until they finally complete a successful purchase.
An examination of the home, its physical structure, as well as the major systems is called a general home inspection. Typically, a home inspector is called to do a general home inspection before the final sale of the home to understand the condition of the heating and cooling system, plumbing, electric wiring, the foundation, walls, and more. Buyers are usually encouraged to attend the general home inspection (which can take anywhere between 2-4 hours) to ask the inspector about the various issues in the home and the upkeep required to maintain them. A buyer’s agent may also attend the inspection - however, there is some disagreement in the industry as to whether the presence of the buyer's agent helps facilitate understanding the findings or may instead color the buyer's impressions. The San Francisco Bay Area is fairly unique in that the vast majority of sellers will have already paid for a home inspector to prepare a report, which the sellers then include in their disclosures.
The initial deposit that the buyer puts down while making an offer on a home is known as earnest money. It is a kind of good faith money that shows to the seller that the buyer is serious about purchasing the home. This deposit is held by the listing agent’s office, and is often put into escrow till the completion of settlement, and is applied towards the Down Payment. However, if the buyer decides to walk away from the offer later (during the appraisal, loan approval stage, etc.), they can lose the earnest money. This would depend on the contingencies in the contract. Contingencies allow the buyer to end the contract, under specific circumstances but if they decide to leave the contract outside of such terms, the seller has the right to keep the earnest money as compensation for wasted time and possibly losing out on another offer that would have gone through.
Many real estate agents/brokers offer a ‘rebate’ on their commission as part of the homebuying process. Typically, agents earn a commission of 5-6% on a successful transaction. This is then split equally between the buyer’s and the seller’s agent. The buyer’s agent may then give their client a refund or a rebate from their portion of the commission. Many real estate agents and brokers offer a rebate on commission because it attracts more clients, and lowers their marketing costs. Furthermore, with buyers doing significant amounts of research online on sites like Zillow, ZeroDown, and Redfin, the homebuying process now requires less work for real estate agents than before, and many customers have begun to ask for a rebate to reflect this change.
A type of fee that a buyer pays to the mortgage lender in order to reduce the interest rate on the loan. Buying a point costs 1% of the total loan. So, if the total loan amount were $500,000, each point would cost $5,000. Also, each point usually lowers the interest rate by 0.25%, though this varies according to the lender, and the nature of the loan. So, if the rate of interest on the loan is 4.5%, and you buy 2 mortgage points by paying $10,000, your new interest rate becomes 4%. Buying a point can have a huge impact on your lifetime savings on the home. If you plan on staying in the house for a long period of time and have the additional funds to buy mortgage points after paying the downpayment and closing costs, it makes sense to consider them.
An inspection of the sewer line from the house to the main sewer line, done by a professional. The professional will use a special camera that is attached to the end of a hose, and run it along the entire line, getting images and videos on the condition of the sewer line. It is very useful to get a sewer scope done before buying a house because a sewer line is one of the most expensive repairs in a home. On average, a sewer scope can cost anywhere between $100-$300 but can save thousands if you avoid buying a house that will need a sewer line replacement...
A property that is owned by a lender/financial institution after it failed to sell in a foreclosure auction is known as Real Estate Owned (REO). Such properties are then usually sold by the bank/lender through a real estate agent, or by directly listing them on the bank website. REO properties tend to sell for an amount that is lower than the market value, as they are often sold as-is, and need considerable repair.
When someone dies without a will, their house is sold by the state in a process governed by the Probate Code through what is called a probate sale. Usually, an estate representative is appointed by the court, who in turn engages the help of a real estate agent. An appraiser helps to set the listing price of the home. Once a buyer makes an offer, a court appointment is set where bidding takes place. The highest bid wins, and the winner must give a cashier’s check for at least 10% of the sale price. The homes in probate sell for much lower than the market value but also come along with a lot of disadvantages. For one, the buyer gets the home as-is and has no idea about the hidden cost of repairs. Also, the process is really long, and can sometimes take up to a year, after winning the bid, before they obtain possession of the property.
"Tenancy in Common (TIC) refers to a type of ownership where two or more people own a piece of real estate, with equal rights to use the entire property. While the interest in the property can be divided into unequal shares (e.g., A owns 25%, B owns 25%, and C owns 50%), no single owner can claim a complete right over a particular section of the property. Instead, the TIC agreement will grant use rights for specific portions or sections of the property to specific interest holders and layout how the expenses for the property, include taxes, will be shared. Each of these interests has its own separate title, which can be conveyed separately from the other tenants in common. TICs also don’t have a right of survivorship, i.e. if a tenant-in-common dies, the property does not get equally divided amongst the remaining tenants-in-common. Instead, it is passed on to the estate of the deceased, or as laid out in their will.
Damage to wood structures caused by a type of naturally-occurring fungus that fosters due to damp timber. Pest inspections will look for indications of dry rot and identify them for remediation. Since dry rot can structurally damage a home, a seller can lose a significant amount of potential sale value if their home is seriously afflicted and opt not to make repairs.
"This is a test to check the level of radon (a colorless, odorless gas that is a byproduct of underground decaying elements such as uranium and thorium) in a home for sale. Usually, radon enters homes through the basement, cracks in concrete, pipe gaps, and floor joints, and inhaling the gas can increase the risk of lung cancer. Mostly, buyers get a radon test done by a certified professional and if levels are higher than the permitted limit, they can ask the seller to install a radon mitigation system."
Once all buyer/seller contingencies are met, a home moves to a Pending Sale stage. Such a home is no longer considered to be an active listing and remains in such a state till all legal paperwork is completed. This is the final stage of sale, after the completion of which, the home is sold/bought.
When the seller accepts an offer on a house, but the deal is dependent on some contingencies or clauses that the buyer or seller needs to fulfil, the house is listed as contingent. A contingent property does not mean that the sale is final, and the home is off the the market. It just means that if the conditions or clauses in the sale contract are met, the home would move to a sale pending stage.
For Sale By Owner (FSBO) refers to a method of selling a house, where the owner sells the property without the involvement of a broker or a real estate agent. Owners typically use the FSBO method to avoid paying a selling agent commission on the real estate transaction. However, it also means that the seller is responsible for completing all the work involved in the sale of the house. FSBO sellers must still negotiate the amount of compensation the buyer's agent would receive, either as a commission, fee-for-service, or a flat amount.
"When a house is bought or sold, or undergoes new construction, a supplemental assessment is made for the value of the house. This accounts for a change in the prior owner’s taxable value to the actual market value of the house when it is bought. This adjustment to the house’s taxable value is a one-time assessment and usually results in an increase in the value. Significant new construction such as a room addition, remodeling the basement, building a patio, or adding a pool, are all examples of changes to a house that can result in a supplemental assessment to its taxable value. Regular maintenance and repairs to a house do not result in such an assessment."
"A real estate agent or professional who is a member of the National Association of Realtors (NAR) and subscribes to its code of ethics. Realtors are experts in their field and are licensed to use the realtor trademark as part of their name. However, a realtor is not the same as a real estate agent. Any industry professional that helps facilitate the sale or purchase of a house in return for a commission is a real estate agent. If that agent is a registered member of NAR, they become a Realtor. Any agent, salesperson, property manager, or appraiser, that becomes a member of the NAR can use the Realtor trademark against their name. Realtors must abide by the code of ethics, and uphold the standards of the NAR."
"When a homeowner does certain types of repair or remodeling work on their property, they must seek a building/plumbing/electrical permit for the work. This is an official approval from the local government agency that allows the owner or the contractor to undertake a construction/remodeling/restructuring work on the property. The local body checks that the suggested plan complies with the local standards for things such as use of land, zoning, and construction. Every county keeps a record of the permit history of each house. It can give a view of previous repairs and improvements to the property, as well as bring up areas of possible concern. If there seems to be a discrepancy in the permit history according to the county records and those on the listing for the home for sale, it could be that unpermitted work has been completed at the property."
A real estate appraisal is an estimate of the market value of a property (residential or otherwise) for sale, assessment, or taxation.
Short for Homeowners’ Association, an HOA is an organization or elected group that make regulations, collect fees, and enforce rules for a planned community, subdivision or condominium.
The price that the seller is willing to accept for selling the house without countering for a higher price. This means that if a home is listed for $1.5m, the seller will sell it at this price rather than countering at $1.6m or more.
An opinion of what a property could sell for based on factors such as the current market conditions, demand and supply, the property features, and the sale price of comparable properties. Usually, the market value of a home is always more in the eyes of the seller than that of the buyer.
A multiple listing service (MLS) is a database or repository of properties that are available for sale. Established by cooperating real estate brokers and agents, MLS has the most relaible and comprehensive data available for those looking to buy or sell a home. Brokers can use this system to look at one another's listings and connect home buyers to sellers.
A contingency is a clause/condition in the sale agreement that must be met in order for the real estate transaction to be completed. If the contingencies in the contract are not met, the contract becomes void.
A Closing Disclosure (CD) is a a form that lists the final details of your mortgage loan including the loan terms, monthly interest payments, additional fee and more. The lender provides the CD to the homebuyer at least 3 days prior to closing the loan as a final document containing the actual details.
Comparable Properties or Comps refer to recently sold properties than can be used to determine the value of similar available properties. It helps a seller/buyer determine the fair value of the home they are selling/buying based on other homes with similar characteristics that were sold recently.
In simple terms, Close of Escrow (COE) is the transfer of home ownership from the seller to the buyer. It is the completion of the real estate transaction and marks the final sale of the home.
A real estate professional who assists the agent in by managing all the administrative tasks required in a real estate transaction. From opening escrow, to managing paperwork, to meeting deadlines, and closing the contract, a TC or transaction coordinator performs all the administrative duties.
A Mother-in-law unit is similar to an accessory dwelling unit except that it is attached to the main single-family home. A basement apartment is the perfect example of a MIL unit. A mother-in-law suite comes with an attached bathroom and can also sometimes have a separate entry, a small kitchen and a living area.
An accessory dwelling unit (ADU) is a secondary dwelling unit on the same grounds as your primary single-family house. It could be in the form of a a small cottage in the backyard, or an apartment over the garage. It is important to note that an ADU cannot be sold separately like a condominium. The owner of the home and ADU is the same and it is part of the same property as the main home.
Selling a home as-is means that the seller will sell the home in its current condition, and will make no changes or improvements to the home before the sale. Usually, a home is sold as-is when the seller can't afford to fix the flaws before the sale, or the home has gone through foreclosure and is now in possession of the lender.
Renegotiating your existing mortgage loan, or paying off your existing loan by taking on a new loan. Typically, homeowners refinance mortgage loans to take advantage of lower interest rates, or to shorten the term of their mortgage.
The fee that buyers and sellers pay, over and above the price of the property, to complete a real estate transaction. These include costs such as credit check fee, insurance, real estate commission, taxes, and appraisal fee.
A mortgage where the interest rate does not change over the lifetime of the loan. This makes budgeting easier for homeowners who want to have a predictable payment month on month.
It is the value assigned to a home by the municipality in order to assess property taxes. This takes into consideration the sale price of comparable homes, square feet area, home features and inspections. Typically, the assessed value is lower than the market value of the property.
A legal process that allows lenders to take ownership of the mortgaged property if the buyers defaults on the loan. The lender can exercise the right to sell the property to recover the loan amount.
A document detailing how much loan a lender will be willing to give to a potential home buyer after evaluating their credit history. SP: This is a document you'd get from a lender if you are interested in buying a home. It indicates they have pre-approved you for a loan up to a specific dollar amount (for instance, up to $600,000) based on two things: how much money you make and your credit score. The process to get a pre-approval letter can be quite quick. A buyer provides the pre-approval letter alongside an offer they make on a house. Once your offer is accepted, there is a vigorous underwriting process by which a lender makes a final decision on the loan amount and interest rate they can offer to you.
Escrow refers to a neutral third party that handles the property transaction, funds, and other related documents during the sale of a home, and ensures that the change of ownership is properly recorded in the public records. Being "in escrow" refers the period of time when funds are being held by the third party account before the final transfer to the seller. This gives the buyer time to perform due diligence on the property while also allowing the seller the confidence that once the due diligence is completed, the buyer has sufficient funds to close the deal.
Private mortgage insurance (PMI) is a type of insurance that you might be required to buy as a condition of a conventional mortgage loan. Most lenders require PMI when a homebuyer makes a down payment of less than 20% of the home's purchase price. PMI costs can range from 0.25% to 2% of your loan balance per year, depending on the size of the down payment and mortgage, the loan term, and the borrower's credit score.
Sellers are required by law to disclose any and all flaws in the home, that the sellers or their agents are aware of, to the buyer.
Enter your email below to stay up to date with all of our articles, analyses and company news!
We're constantly keeping up with the latest real estate trends and news - let us keep you in the loop!