11 Real Estate Terms and How to Explain Them To Your Clients

When it comes to buying and selling homes, there are so many real estate terms to be familiar with in order to have a clear understanding of the process.  Knowing the key terms and how best to explain them to buyers and sellers will help not only do away with confusion but allow for a smoother transaction. This knowledge is a key tool you need to succeed at this real estate game.

Below are 11 real estate terms to help you better understand the real estate home buying/selling process.

1. Real estate agent vs. Realtors – Two of the most confusing real estate terms

Two real estate terms that many people may not know the difference between is real estate agent vs. REALTOR®.   Not every REALTOR® is a real estate agent and not every real estate agent is a REALTOR®.  Both do have to be licensed to sell real estate, the key difference is that a REALTOR® is a member of the National Association of REALTORS®.

How to explain this to your client:

A REALTOR® can be anything from a real estate agent to a broker-associate among a variety of other common terms.  The part that most consumers are concerned with is the REALTOR® Code of Ethics, which includes 17 articles.  These are ethics that every REALTOR®  must abide by.  Being honest and putting the client’s interests first, are the two most important ethics that drive the basis for the way a REALTOR® operates.

2. Title Insurance

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Title insurance is one of those real estate terms that relates to fees you will encounter when you are closing on your loan.  It basically protects the “insured” from any financial loss related to the ownership of a property. You have the lender’s policy, which is required, and the owner’s policy which is optional.  This is paid upfront as a one time fee and is not a part of your mortgage payment.

How to explain this to your client:

We don’t need to go into much detail about the lender’s policy because this is a requirement.  What the buyer does need to give thought to is the owner’s title insurance.  As they go through the home buying process,  the property’s ownership history will be checked by a title research company.  Hopefully, the home has what is called a “clear title.” This means the current owner has complete ownership of the property.  There are no legal claims against it (i.e. a lien or levy from a lender, creditor or the government).

If the title research company gives the property the green light, why get title insurance?  This is where the “what if” scenario comes into play.  What if there is an unknown issue that could affect ownership of the property years after the purchase. This could be anything from an oversight made by the research company, an heir to the property that no one knew existed or even a pending lawsuit.  The point is that something could arise down the line and wind up costing they buyer in legal fees or even the loss of the property and the money they put into it.  The owner’s title insurance will help protect against the potential unknown.

So should they proceed with getting the owner’s title insurance?  Many people look at it like: better to be safe than sorry.  If they do move forward,  they can expect to pay somewhere between $1k and $4k.  Prices vary by state.

3. Contingencies

“Contingencies” is a real estate term that refers to clauses that are in the purchase contract.  They are conditions that must be met by either the seller or the buyer in order to move forward with the sale.  Pretty much every real estate contract has them and they are there to protect the buyer and the seller.  If the contingencies are not met, the transaction could fail to close.

How to explain this to your client:

There are common contingency clauses that you will typically see and they almost always protect the buyer.

    • Mortgage contingency: 

      This clause states that the buyer will obtain a mortgage loan for a specific amount within a certain time period. Once the mortgage loan is secured, the contingency clause is removed from the contract. If the buyer does not get approved for a mortgage, they can withdraw from the contract without being penalized.

    • Home inspection contingency: 

      This contingency usually expires within 7-14 days.  The home will be inspected for any major structural or other issues with a property like faulty wiring.   If the home does not pass inspection,  the buyer has the right to exit the contract without losing their earnest money deposit.  If the issues are fixable, the buyer can request the seller to make the necessary repairs.  Should the seller not agree to this, the contingency must remain on the contract and the contract will then be voided.

    • Home appraisal contingency: 

      This contingency protects the buyer from purchasing a home that is over market value.  Typically, the bank will send out a licensed appraiser to determine the fair market value of the home based on location, its general condition and the sale prices of similar properties in the area (aka comparative sales, or comps). When the home gets appraised, it must be for the agreed contract price or higher.For example:  Let’s say you’re buying a house for $400,000 with a $40,000 down payment and a $360,000 mortgage. If the house is appraised at $350,000, the bank will only loan you that amount.  You now need to throw in that $10k difference. If the seller is not willing to lower the price to make up that difference, you can walk away from the deal and get your deposit back.

    • Sale of home contingency:

      This contingency helps buyers who also have a home to sell and need that sale to make their new home purchase work. If the buyer does not find someone to purchase their current home within a specified amount of time, they have the freedom to walk away from the sale and keep their earnest money deposit.  Side note:  Most sellers will pass on an offer that comes with this contingency.

4. Fixed-Rate vs. Adjustable Rate Mortgages

When it comes to conventional loans, there are two types of mortgages to choose from.  “Adjustable-rate” and “fixed-rate” mortgages.  Let’s get familiar with these two real estate terms.

How to explain this to your client:

In order to help your clients understand the nuances of these mortgage loan types and decide which would be best for their individual situation, you want to discuss some important factors.  First let’s define what each mortgage type is.

  • Fixed-rate mortgage:

This comes with an interest rate that remains for the life of the loan.  This means the exact same monthly payment will be made for the duration of the loan.  30 years is the typical length of a fixed-rate mortgage loan. Pretty straight forward.

  • Adjustable-rate mortgage:

This has a variable interest rate.  This means the interest rate will remain fixed for the first few years (typically 5, 7, or 10 years) but after that time, the rate will fluctuate based on the limitations of the loan and fluctuations in market interest rates.  This type of mortgage can be attractive since the rate the first few years is typically lower than what you would get with a fixed-rate mortgage loan.

Factors to consider

  • Factor #1: 

How long do they plan to live in the home? If the plan is to live in the home for a few years and then sell, an adjustable-rate mortgage may make sense. This is because the interest rates for the period during which they would be living in the home would be lower than those for a fixed-rate mortgage.  This, of course, would save a nice chunk of money.

  • Factor #2:

What if they have to stay in the home and can’t sell after a few years?  Since this is a variable-rate mortgage, the rate will adjust and they need to consider the worst-case scenario.  Do they have enough income or savings to pay the mortgage should the monthly payment reach the maximum dollar amount allowed?  Pro tip: Have them find out what the rate cap is on the loan and how often the loan will adjust.  These terms may help them make that final decision.

When it comes down to it, the mortgage to choose should be based on lifestyle and personal finances.  It is impossible to predict what the economy will do overtime but your client has a pretty clear idea of their own financial position.

5. Debt-to-income ratio

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Debt-to-income ratio, or DTI, is a number that the mortgage lender uses to determine how much of a mortgage payment someone can afford to pay each month.

How to explain this to your client:

Lenders look at the total of the monthly mortgage payment plus any monthly debt payments and divide that by your gross monthly income.

Lenders look to see that you are not spending any more than 28% of your income on housing and less than 36% on debt payments.  If the numbers are looking outside of this range, advise your client to adjust their budget accordingly.

6. Due diligence

Due diligence means “do your homework.”  Clients should research and understand the legal obligation they are about to take on.  With the purchase of a home, they want to make sure they are not getting a money pit.

How to explain this to your client:

During the due diligence period, the home will go through various tasks.  Here are some of them:

  • A home inspection:

We discussed this above.  A home inspector will come in and check the home for anything faulty.  Bad wiring, leaky roof, termites, etc.

  • A title search:

Before legal ownership is taken of the property, a title search will be performed to make certain the home is free and clear.  This means ensuring the home has no pending lawsuit, lien or that a long lost brother is not coming to claim ownership of it. This is the reason we talk about needing title insurance above.

  • HOA rules or condo rules:

If your client is planning on purchasing a condominium or buying into a community that has an HOA, they will want to review the rules and restrictions.

7. Earnest money

Earnest money is the deposit a buyer pays if their offer is accepted by the seller. The deposit is held by the escrow company and is usually between 1%-3% of the sale price.

How to explain this to your client:

This deposit is meant to protect the seller in the event the buyer changes their mind and walks away from the deal.  With that being said, the buyer can get this deposit back with a contingency that lets them cancel the contract.  If the sale moves forward, the deposit is usually added as part of the down payment for the home.

8. Escrow

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Escrow in real estate usually refers to a third party that handles the property transaction, the exchange of money and any related documents.

How to explain this to your client:

During the sale process, an escrow account will house important items like earnest money and all legal contracts until the home officially changes hands.  The escrow agent is there to make sure that everything during the transaction moves forward smoothly.  This includes the transfer of money and documents as well as holding onto assets in a safe escrow account until ready for disbursement.  The escrow protects all parties by ensuring no funds or property changes take place until all conditions in the agreement have been met.

9. Equity

This is one of those real estate terms every buyer hopes to be so lucky to get with the home they are about to purchase.  Equity is the difference between the market value of a home and the amount that is owed to the lender.  The amount that is leftover is the amount of equity they have in the home.

How to explain this to your client:

If the home they are purchasing is $260,000 and they get it for $250,000, they now have instant equity.  That $10,000 difference is the amount of equity they now have in the home.  They get to keep these dollars after the close, once all the expenses are paid. Keep in mind,  a check isn’t being written and they will not be given a lump sum of cash.  The equity remains tied up in the home.

10. Seller concession

In an effort to incentivize buyers, sellers may offer concessions to help sweeten the deal.  Based on the type of loan, there are usually limits to what a seller can contribute.  For a conventional mortgage, seller concessions are typically capped at 3 to 9 percent.

How to explain this to your client:

If a Federal Housing Administration, or FHA loan, is what your buyer is working with, seller concessions might include:

  • Loan discount points:  These help lower the mortgage interest rate and are fees that are paid to the lender.
  • Warranties on the home/insurance:  This covers home repairs for a specified period of time after the home purchase.
  • Assistance with closing costs:  Money is provided to buyers to help out with closing costs.  This is typically 2 to 5 percent of the purchase price.
  • Credits at closing:  Cash is given to the buyer on behalf of the seller for HOA fees or outstanding repairs.

11. Closing Costs

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When the sale of the home enters the final stages, you are at closing. This is where closing costs come into play.  They are an assortment of fees—not including agent commissions—that are paid by both buyers and sellers at the close of a real estate transaction. They typically cover costs for taxes, the appraisal, title search as well as loan fees and processing.

How to explain this to your client:

The home buyer will typically pay between 2 to 5 percent of the home purchase price in closing fees. So, if the home cost $175,000, then closing costs might be between $3,500-$8,750.

When the loan application is completed, the lender will provide a loan estimate that includes what the closing costs are expected to be.  This is just an estimate, and if any fees change, they should provide a revised loan estimate.  Many times, these fees can be negotiated with the lender.  Advise your client to shop around as fees do vary by lender.

About three days before closing, the lender should provide a Closing Disclosure statement that outlines the closing fees. This should be compared to the loan estimate and the lender should explain each individual fee and why it is needed.  Keep in mind, there should not be any surprises with these fees.  There are limitations on the amount that lenders can differ fees from when they give out the Loan Estimate to when they provide the final Closing Disclosure.

Real estate terms defined

Real estate transactions can be quite confusing with all the different terms that are used throughout the process.  In order to have a smooth buying/selling process, you need to know key real estate terms.  The above list of terms will become imprinted in your memory as you negotiate deals.  Before you know it, people will come to know you as a real estate pro who knows their stuff.

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