6 Home Buying Terms to Know
Whether you're a first-time homebuyer or have purchased properties before, there are many terms in the real estate world that might be new or require a refresher. To help you out, here are a few of the most common terms you should be familiar with:
1. Pre-qualification and Pre-approval
Pre-qualification: Pre-qualification is an initial step in the loan application process. It involves providing basic information to a lender about your financial situation, such as your income, debts, and assets. Based on this information, the lender can give you a rough estimate of how much you may be eligible to borrow. Pre-qualification is typically a quick and simple process that can often be done online or over the phone. However, it is not a guarantee that you will be approved for a loan.
Pre-approval: Pre-approval is a more comprehensive assessment of your financial situation by a lender. To get pre-approved, you typically need to complete a loan application and provide documentation such as income verification, bank statements, and credit history. The lender will review your information, check your credit score, and may perform a more thorough analysis of your financial standing. Pre-approval gives you a more accurate idea of how much you can borrow and demonstrates to sellers that you are a serious buyer. It is a more reliable indication that you will be approved for a loan when you formally apply.
2. Earnest Money
Earnest money is a sum of money paid by a buyer shortly after a contract has been signed by both parties. The purpose of earnest money is to show the seller that the buyer is serious about the transaction and committed to seeing it through (good faith deposit).
The amount of earnest money can vary, but in Colorado it is typically 1% of the purchase price. The earnest money is usually held in an escrow account by the title company.
If the sale or contract is completed, the earnest money is applied towards the purchase price. If the buyer does not complete the transaction for a valid reason, they are entitled to have the earnest money returned to them after the contract terminates. If a buyer backs out of the contract outside of the contract terms, the seller may be entitled to keep the earnest money as compensation for the time and effort spent on the transaction.
Contingencies refer to specific conditions or requirements that must be met for the contract to be binding and for the sale to proceed. Contingencies serve as safeguards for buyers, allowing them to back out of the contract (and receive their earnest money back) or negotiate changes if certain conditions are not met. It's crucial for both buyers and sellers to clearly define and understand the contingencies included in the purchase contract. Each contingency has a deadline for which is must be completed. Here are the most common contingencies seen in contracts:
Loan Availability/Termination: This contingency allows the buyer a specified period (typically around 30 days) to secure a mortgage loan. If the buyer is unable to obtain financing within the agreed-upon timeframe, they can withdraw from the contract without penalty.
Inspection: This contingency allows the buyer to conduct an inspection of the property to assess its condition. If the inspection reveals significant issues or defects, the buyer may negotiate repairs, request a price reduction, or choose to terminate the contract.
Appraisal: If the appraisal comes in lower than the agreed-upon price, the buyer may have the option to renegotiate the price, request additional funds from the seller, or terminate the contract.
Home sale contingency: This contingency applies when the buyer needs to sell their current home before completing the purchase. It allows the buyer a specific period to sell their property. If they are unable to sell within that timeframe, they can cancel the contract.
Title contingency: This ensures that the property has a clear title, free from any liens, encumbrances, or legal issues. If any title defects are discovered during the title search, the buyer may have the right to terminate the contract or require the seller to resolve the issues.
Association: If the property is part of a homeowners association (HOA) this contingency allows the buyer to review and approve the HOA rules, regulations, financial documents, and other relevant information. If the buyer finds the HOA terms unsatisfactory, they may have the option to terminate the contract.
It's crucial for both buyers and sellers to clearly define and understand the contingencies included in the purchase contract. Each contingency has a deadline for which is must be completed.
4. Offer, Counterproposal, & Under Contract
Once a buyer submits an offer outlining purchase and terms (terms include contingencies, timelines, etc.), the seller has a timeframe for which they can accept the offer, counter (counterproposal) the offer, or decline the offer. When both parties have signed an offer it becomes a contract they are "under contract".
An appraisal is a professional evaluation of a property's value. It is done by an appraiser who considers factors like the property's location, size, condition, and recent sales in the area. The purpose is to determine an unbiased estimate of the property's market value. Appraisals are important in real estate transactions to help buyers, sellers, and lenders understand the property's worth. A lender orders the appraisal once the property is under contract and is a part of the financing contingency.
Inspections are when a trained professional examines a property to find any problems or issues. They check things like the structure, major systems (like plumbing and electricity), and overall condition of the property. The inspector then creates a report with their findings, including any repairs or maintenance needed.
If the inspection report shows problems, buyers can terminate the contract, negotiate with the sellers to ask for repairs, seller concession, or a reduction in the price. Sellers can then decide whether to agree to the requested repairs or negotiate a different solution.
Inspections are important because they help buyers understand any potential issues with the property and give them a chance to negotiate with the sellers for necessary fixes.
Buying a house can feel overwhelming with all the information you need to know. However, don't worry! I'm here to assist you and guide you through the entire process. Feel free to ask any questions, and I'll happily explain what each step entails. Contact me here!