First-time buyers think they’ve got it all figured out, but the real estate world is full of complex terminology and concepts. It’s easy to get swept away if you’re not prepared for the buying process, which is why you should start learning some essential real estate terms.
There are, obviously, hundreds of separate terms that you’ll hear throughout the buying process. Some of these are pretty straightforward and obvious to everyone, while others are less well-known. We’ll skip the obvious terms and go straight to the ones you’re unlikely to know!
Appraisal
Most people know what an appraisal is in general terms, but it can be slightly confusing when buying a property. When something or someone is being appraised, it means they’re being assessed for their competencies. A work appraisal looks at how you do your job and assesses whether you’re meeting the right standards or need to be replaced.
The confusion with real estate appraisals lies with what is being appraised. Some first-time buyers think they’re under appraisal – but that’s not the case! In this scenario, an appraisal relates to your assessment of the home. It’s something you pay a professional to do, and they will check the property to gauge how much it’s worth.
The goal of an appraisal is to see if the seller’s asking price matches the home’s true market value. Think of it as a critical way to avoid overspending or accidentally buying a home with lots of hidden issues.
Option Period & Option Fee
You’ll come across these two terms in some parts of the country, and they’re closely linked to appraisal. An option period is a specific amount of time that you can carry out your appraisal and inspect a property after agreeing on a sales price. No money or contracts are exchanged – it gives you enough time to thoroughly assess the property and decide if you want to back out.
Option periods can last one or two days or, in some cases, up to ten days. The option fee is a payment made by the buyer to the seller that lets them terminate the contract before a deposit is put down. In other words, if you don’t like what you see during the option period, you can pay a fee to back out of the contract.
Liens
Most first-time buyers will be unaware of liens and won’t know what they mean. That’s an issue, considering this is one of the most important terms to be aware of before buying a home. It’s a legal term that means there’s been a legal claim against a property. A simpler explanation is that the current homeowners owe someone some money, and their home is used as collateral.
Here’s why liens are important to know about: if you buy a house with a lien, you inherit that legal claim against the property. A lender or credit agency will technically have a legal claim against your new home because of the lien – this means they’re within their rights to seize the asset and recover their losses.
As you can imagine, it’s not the ideal situation to be in after buying a home. Thankfully, liens are normally in public records, and you can conduct a property lien search on any home before agreeing to a contract. The biggest issue with a lien is that the seller isn’t technically forced to disclose this information on any property listings. It’s highly likely to come up during the buying process, but only when you approach a mortgage lender or get very close to purchasing the home – at which point, it could be too complicated to back out, and you’ve wasted a lot of time.
So, be aware of what a lien is and stay away from a home if you find one. What if you find your dream home and nothing else comes close to it? In that case, you could work with a lawyer to get the seller to agree to pay what they owe using the money they receive from the sale. It’s a bit complicated, which is why staying away from liens is the better choice.
Earnest Money Deposit
More commonly known as a good faith deposit, your earnest money deposit is a sum put down to signal your intent. It’s not the down payment you pay to obtain a mortgage; it’s a smaller sum that shows the seller you’re seriously considering buying their property. Buyers have to pay this, or sellers risk getting into long-winded negotiations that never go anywhere.
Putting down an earnest money deposit doesn’t mean you’ve agreed to buy the home – it just shows your good intentions. You could back out of the deal at any point, but the seller will keep your deposit as a token of good faith.
Escrow
Escrow is one of those technical terms you’ll never hear about until you start buying a home. It’s used many times throughout the buying process and represents a financial agreement between the buyer, seller, and a neutral third party. In essence, a third party will hold funds for either of the other two parties until the sale is finalized.
As the buyer, you will need an escrow account to keep your good faith deposit until the sale goes through or you walk away. It’s used to protect your money, ensuring the seller can’t immediately take and spend it. A neutral third party will house the money in escrow until it needs to be used.
Private Mortgage Insurance (PMI)
PMI – or private mortgage insurance – is a type of insurance required by lenders for certain mortgage loans. They usually ask you to take out PMI if your downpayment is under 20% of the home’s sale price.
It’s one of those boring technical terms you need to know about, as lenders are unlikely to give you a less than 20% mortgage if you don’t have this insurance. It protects them in case you can’t afford to make repayments.
There will be other key real estate terms to know when buying your first home, but these are the most complex and lesser-known ones. Arm yourself with as much knowledge as possible to make the home-buying process easier!
