Sellers: 18 Simple Terms that Scare Homebuyers

It’s common for a first-time homebuyer to be overwhelmed when it comes to real estate industry jargon, but you have to make the terms understandable.

Confusion can lead to discouragement and the possibility of a sale going out the window. Misunderstanding can lead to future problems, so it’s imperative that you take time to enlighten your client on vital terms. Who knows, you might even use these terms to entice potential buyers to check out your property.

Here are the real estate market terms that every first-time homebuyer should get acquainted with and the explanations that will help them understand them.

1. Appraisal

An appraisal is the estimated value of a property. A property is appraised to know the amount of money that a lender is willing to lend for a buyer to buy a particular property.

If the appraised amount is less than the asking price for the property, then that piece of real estate might be overpriced. In this case, the lender will refuse to finance the purchase.

Appraisals are designed to protect both the lender and buyer. The lender will not get stuck with a property that is less than the money lent, and the buyer will avoid paying too much for the property.

2. Certificate of title

This document ensures that a particular property is legally owned by the seller and that no other individual owns it or can lay claim to it.

3. Closing

Closing happens when you meet up to close the deal. It’s also referred to as settlement. It involves the buyer and his or her attorney, the seller and his or her attorney, as well as the escrow agent.

4. Closing costs

This refers to the additional expenses spent in financing and purchasing the property. Costs usually include lawyer’s fees, loan origination fee, escrow impounds, appraisal, survey and title search fees. The closing costs usually amount to 6 percent of the sale price of the property.

5. Comparative market analysis (CMA)

The CMA is conducted to determine the market value of a property, which is needed to make a fair asking price. The analysis is done by comparing the property in question to other similar properties that have been sold recently in the area. It’s one of the ways to find out the salable factors of a property.

6. Contingency

This term enumerates conditions that are needed to be met before the sale can proceed. These conditions involve financing, appraisal contingency and inspection contingency.

7. Due diligence

Due diligence refers to the actions that a responsible buyer must conduct. These include verifying the representations of the seller and questioning pertinent facts that might not have been disclosed but can have a bearing on his decision to purchase the property.

8. Earnest money deposit (EMD)

This money is committed by the buyer to signify his good intentions in purchasing the property. The cash is usually deposited in an escrow account. If the sale pushes through, the cash is applied to the down payment. If it doesn’t, the buyer can forfeit the deposit and take the money.

9. Escrow account

This account is where the closing costs will be deposited. The lender will use this account to pay for insurance and taxes on the buyer’s behalf on an annual basis.

10. FICO score

This term refers to the financial information compiled by three major credit card reporting agencies, which are then calculated by the Fair Isaac Corp.

The score contains information such as debt payment history, owed amounts and credit history. The score ranges from 300 to 850. The higher the score is, the less credit risk to lenders, which increases the buyer’s chances of getting loans.

11. Fiduciary duty

The fiduciary refers to the broker that the real estate agent works for. By law, a fiduciary has duties to the buyer, including confidentiality, disclosure, diligence, loyalty and reasonable care.

12. Good faith estimate (GFE)

The GFE is a form given by borrowers to lenders. By law, lenders are required to provide the information needed by borrowers so they can compare terms and rates from different lenders.

The form must include a list of fees associated with the mortgage loan and must be given to the borrower within three days of loan application.

13. HOA docs

This term refers to homeowners association documents. A buyer has the right to view these documents when buying a condo property or house in a managed community.

The documents have information such as meeting minutes and budget. Viewing these documents can orient a buyer on the basics of condo association fees.

14. Loan-to-value ratio (LTV)

The LTV is a ratio used by lenders to assess the risks involved in a mortgage loan. The amount of mortgage will be divided by the appraised value of a property. If the LTV is high, then it is considered a high-risk loan.

15. Mortgage

The document that binds the house to the lender, which also serves as the security for the money borrowed for the purchase.

16. Prequalification

This is the process in which it’s determined if a borrower is qualified to secure a loan. An approximate of the amount he might receive is provided from this process.

17. Principal, interest, taxes and insurance

This sums up the monthly mortgage payment. The principal goes to the loan amount itself, and the interest goes to the lender. The taxes and insurance are other nonnegotiable parts of the mortgage payment.

18. Private mortgage insurance

The PMI serves as a protection for the lender in case the buyer defaults on his payments. This insurance is applied to high-risk loans, for LTVs with a score of more than 80.

These are only some of the terms that clients will hear as you negotiate for the purchase of the house. Don’t hesitate to ask your client about things he doesn’t understand; it’s your responsibility to fill him in on the details. No piece of information is too unimportant for major purchases such as home property.