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10 Real Estate Transaction Terms You Should Know

Submitted by Nest Bend on

Every single business has a terminology all its own. This includes the business of real estate. Whether buying or selling a home, there are some real estate related terms that you need to know.

When you talk with a realtor, he or she will be using these terms. When you go to your bank or other lender to get a loan, they will be using some of these terms. Should you look for advice on the internet, the people giving you that advice will be using these terms as well!

So here’s a quick run-down on real estate transaction terminology.

1. Pre-qualifying

Before you can start to look seriously for a home, you need to know how much money a bank or other financial institution will loan you – based on your credit history and that of your spouse (if any) and your annual income.

Talk with several lenders to see how much they are willing to loan you and to compare interest rates and the types of loans (mortgages) available.

You’ll need to bring several figures with you – your credit score, your total income annual income, the number of income sources you have, the amount of credit you have available via credit cards (not how much you owe on those credit cards), and the number of dependents you have.  Anyone who is going to co-sign the loan will also need to bring this information.

Your loan officer will take a look at the numbers and tell you how much his or her institution will be willing to loan you.

2. Mortgage

A mortgage is a loan made specifically for an individual to purchase real estate.

The loan is amortized, meaning it is paid through monthly payments over a series of several years – typically 10, 15, 20, and often 30.

The two basic types of mortgages are fixed-rate (FRM) and adjustable-rate (ARM).

A fixed-rate mortgage is one that has a fixed interest rate over the life of the mortgage. An adjustable-rate mortgage is one where the interest charged is linked to the interest rate on Treasury securities.

A mortgage with a balloon payment is typically to be avoided. In this case, the mortgage interest is typically very low, but the mortgage must be paid in full in a relatively short amount of time.

The interest rate is how much your lender is charging you to use their money.  Depending on the duration of the mortgage, interest charges can almost double the cost of the house! Note, however, that if you can itemize your tax returns, mortgage interest is tax deductible.

Once you’ve found out how much money your financial institution is willing to give you to purchase a house, and you have some idea of the monthly payments to repay that loan, you can search for your house, either on our own or using a realtor.

Once you find a home you like you can make an offer on it. If the home owner accepts the offer, you will both sign a contract – the home owner committing to selling you the home at the agreed upon price and you agreeing to pay the agreed upon price.

But there are extra charges and procedures involved.

3. Contract

The contract is a legal document between you the buyer and the seller of the home. Contracts are unique to each home purchase and it is imperative that you read through the contract thoroughly and make sure it has various clauses that will protect you as the buying process continues.

It’s only once you’ve committed to buying the house that a title search is instituted and a home inspection is carried out.

Clauses in the contract should specify that if the buyer can’t get the loan he or she anticipated, the agreement is null and void. If the title search reveals irregularities, the agreement is no longer binding.

It will also state who is responsible for paying for any repairs needed according to the home inspection. Read the contract thoroughly.

4. Title Search and Title Insurance

A title is the document providing the history of transactions regarding the property – from the first day it was sold to the last.  It will also tell you if there are any liens on property. Liens are money owned to someone, and it is against the property, not the owner.  So if someone is able to successfully sell you a house with new windows and hasn’t paid the bill, you will be liable to pay that bill.

Typically, the seller must pay for the title search, but the buyer must pay for title insurance. The buyer must protect himself or herself should there be undiscovered fraud in a transaction regarding the home, for example.

5. Closing costs

Closing costs are costs that the buyer must pay, over and above the down payment. As a rule of thumb these costs are 2% to 5% of the cost of the house

Example Closing Costs:

The fee for the lender to appraise the home to satisfy themselves that it is worth what you’re paying.Points – the lender’s fee to cover administrative costsThe cost of the credit report the lender acquired on you during the pre-qualification processHomeowner’s insurance premium -homeowner’s insurance is mandatoryTitle insuranceCharges to transfer the title and record the transfer on the abstract (the official document that records all transactions of a piece of property).Pro-rated property taxesInterest on the mortgage loan from the closing date to the first mortgage payment!

6. Escrow

Real estate transaction funds are held by a neutral party in a secure account for future use. For example, in the case of a mortgage, funds for insurance and property taxes may be accumulated by a lender until tax and insurance bills are due.

7. Listing Contract (also called Listing Agreement)

A written agreement between a property seller and a real estate broker (or agent, acting on behalf of the broker) giving the broker rights to represent the seller and advertise the property. Generally a commission payment to the brokerage is contingent on the agent producing a qualified buyer for the property before the end date of the Listing Contract.

8. Negative Amortization

When mortgage payments are not enough to cover both principal and interest, the difference is added to the original mortgage, increasing the amount owed instead of reducing it. Therefore the amortization is negative.

9. Real Estate Owned REO

Typically as a result of a loan default and subsequent property foreclosure, real estate may be owned by a financial group or bank.

10. Title Insurance

To protect the new owner of a property, an insurance policy may be purchased to protect against any liens against the title. The issuer of the policy will do a search of country records etc. before writing the policy.

Knowing some of the terminology you’ll encounter during your real estate transaction will help to alleviate stress during the process.