Real Estate Terms Every Buyer Should Know

Navigating the home-buying process can be daunting, especially with the myriad of real estate terms that can seem like a foreign language to new home seekers. The process can be significantly simplified by understanding the basic terms used most often during the various stages of prospecting, buying, and selling a house.

Here’s a quick glossary of common real estate terms to help you feel confident on your journey to homeownership.

Appraisal

An appraisal is a detailed evaluation of a property’s market value conducted by a licensed professional appraiser. It is an essential component in the mortgage process because lenders may require it to ensure that the property’s value supports the loan amount you’re requesting. An appraisal report typically includes a comparison with similar properties (comparables), market trends, and an assessment of the property’s condition and features. Understanding an appraisal’s outcome is crucial not only for securing financing but also for making informed decisions about whether the asking price aligns with the home’s true market value.

Closing costs

Closing costs encompass a variety of fees and expenses that need to be settled to finalize a real estate transaction, beyond the home’s purchase price. These costs can include loan origination fees, title insurance, escrow fees, recording fees, and transfer taxes.

Additionally, they may cover prepaid expenses such as homeowners insurance and property taxes. As these costs can add up to between 2% and 5% of the purchase price, it’s crucial for buyers to budget accordingly to avoid any surprises at the closing table. Being aware of and prepared for these costs can prevent last-minute stress and financial strain.

Down payment

The down payment is the initial upfront portion of the home’s purchase price that buyers pay out-of-pocket when securing a mortgage. It represents a buyer’s initial shareholder equity in the property and usually ranges from 3% to 20% or more of the purchase price, depending on the loan type and lender requirements.

A higher down payment often leads to better loan terms, such as a lower interest rate or avoiding private mortgage insurance (PMI). Understanding your down payment options and how they align with your financial situation can significantly affect your home-buying strategy.

Earnest money

Earnest money is a deposit made by the buyer to the seller as a sign of good faith and serious intent to purchase the property. Usually held in an escrow account, this money demonstrates the buyer’s commitment and can be applied toward the down payment or closing costs upon successful completion of the purchase. If the transaction falls through due to unmet contingencies, such as an unsatisfactory home inspection or financing issues, buyers can typically reclaim their earnest money. However, be aware that forfeiting earnest money is a possibility if the buyer backs out of the deal without a valid contingency.

Equity

Equity refers to the portion of the property you truly own—the difference between its market value and any remaining mortgage balance or liens tied to it. Building equity is a significant financial advantage of homeownership, as it increases your net worth and can provide financial leverage, such as collateral for loans.

As you make mortgage payments and your property potentially appreciates in value, your equity grows. Understanding how equity operates can help you make decisions about refinancing, home equity loans, or selling your property.

Home inspection

A home inspection is a thorough examination of a property conducted by a professional inspector. It provides an assessment of the property’s condition, including systems such as roofing, plumbing, electrical, and HVAC. An inspection report identifies existing or potential issues that could affect the home’s safety, functionality, or value.

Knowing the results of a home inspection allows buyers to negotiate repairs with the seller or reconsider the purchase if significant problems are discovered. It’s a critical step in protecting a buyer’s investment by revealing any costly repairs that might be required.

Interest rate

The interest rate is the cost of borrowing money from a lender, expressed as a percentage of the outstanding mortgage balance. It is a crucial factor influencing your monthly payments and the total cost of a loan over its lifetime.

Understanding the difference between fixed-rate and adjustable-rate mortgages can help you decide which best suits your financial plan. A fixed-rate mortgage maintains a constant interest rate throughout the loan term, providing stability, while an adjustable-rate mortgage (ARM) may start with lower rates that fluctuate over time.

Loan pre-approval

Loan pre-approval is a preliminary agreement from a lender indicating the loan amount they are willing to offer you based on your financial status, including credit score, income, and debt obligations. It provides a clear understanding of your budget and strengthens your position in the eyes of sellers, as it shows you are a serious, qualified buyer. While not a guarantee of final loan approval, pre-approval allows you to act quickly once you find a property, making it a strategic advantage in competitive markets.

MLS (Multiple Listing Service)

The Multiple Listing Service (MLS) is a comprehensive database used by real estate professionals to share and access detailed information about properties for sale. This tool is a valuable resource for buyers as it provides extensive property details, including photos, descriptions, and often virtual tours. By tapping into the MLS, buyers can explore a wide range of available properties and efficiently narrow down their options based on specific criteria, such as location, price range, and features.

Contingency

A contingency is a provision in a real estate contract that stipulates certain conditions that must be met for the deal to proceed. Common contingencies include those for financing, appraisals, and home inspections. Contingencies protect buyers by allowing them to cancel the transaction and retain their earnest money deposit if specific conditions are not fulfilled. Understanding contingencies is vital for both buyers and sellers to manage expectations and provide a framework for negotiations during the buying process.

Armed with these real estate terms, you’re now better equipped to navigate the home-buying process with confidence. To further deepen your understanding and make informed decisions, use NeighborWho’s online tools.

NeighborWho’s mission is to help people find detailed information about properties and property owners, so you can learn more about your neighborhood and search for additional property information.

Explore available details on houses in your area, research current and past owners, access detailed property reports, and search public records on people living nearby. NeighborWho aggregates extensive public records to try and provide valuable insights on properties and people, helping you make informed real estate decisions.