Whether you are buying your very first home, considering a real estate investment, or upgrading to a larger house, understanding the terminology used by agents is important. Unfortunately, most buyers do not fully understand the terms, conditions, and guidelines used by agents and lenders. Without this understanding, you may be making costly mistakes. Here are a few real estate terms you need to know before buying a property.
One of the most commonly-misunderstood real estate terms is a preapproval. A preapproval from your lender is a letter that states you are ready and willing to make an offer to purchase the home. Preapproval letters are not required to look at properties to buy, but they are helpful when making an offer on a home because it shows the seller you are serious.
Preapprovals are often confused with a prequalification.
A prequalification from a lender is a good first step to take once you decide to purchase your home. The lender will run a quick credit report and look through your income statements to prequalify you for a specific amount of home. Most real estate agents require at least a prequalification from a lender before showing a home.
You may come across the word, contingent when looking through real estate listings. Or, you may hear the term when you are selling or making an offer on a home. Again, most buyers do not really understand contingencies in regards to real estate.
If a property is listed as contingent, an offer is already pending. Another buyer may have made an offer on the home based on their own contingencies, such as they need to sell their current home before closing. Even though a home is listed as contingent, you can still look at and make an offer on the property if you desire.
Once you make an offer on a property, you can specify certain conditions that must be met before finalizing the deal. These conditions are known as contingencies. Contingencies may state you will only purchase the home if the financing is approved and the inspection report comes back clean.
Lastly, you must understand escrow completely when buying a home.
Escrow is basically an account that holds important funds and documents. It is usually managed by an attorney until the final closing details are sorted out.
At closing, the attorney will sort and disburse payments that are made to real estate agents, and mortgage lenders. In addition, your escrow account may hold prorated charges that will be sent to cover taxes, homeowner's insurance, and any dues for homeowner's associations.
Without understanding these key terms, buying real estate can become overwhelming. This guide will help you sort out real estate terminology so you can make a smart, valuable home purchase.