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If you are a first-time home buyer, it may seem like your real estate agent is speaking a foreign language. Before you get too deep in the process, familiarize yourself with some of the lingo. Here are six words to know:
Appraisal: The determination of the worth of something by a professional, in this case the market value of a property. An appraiser uses an analysis of local market data along with the characteristics of the property. Your bank or other lender may refuse to loan you money if the appraisal price is subpar compared to the loan request. A home inspection is not the same as an appraisal.
Closing: The last stage in the transfer of property. The buyer, seller, their attorneys and the settlement agent will meet, usually in a formal setting, to sign some papers and seal the deal. According to the National Association of Exclusive Buyer Agents (NAEBA), this is when the buyer and/or seller will pay the closing costs, which include charges for obtaining the mortgage loan, prepayment of taxes and insurance, and other fees.
Contingency: Conditions that have been built in to a real estate purchase or sale agreement that must be met before the sale can be completed and legally binding. For example, an appraisal contingency would allow the buyer to back out of a contract without penalty if the appraisal price is not enough to secure a mortgage.
"This is by far the most important term or phrase to understand," says Zachary Schorr, the lead real estate attorney at Los Angeles-based Schorr Law.
Disclosures: The seller is required to provide the buyer with certain information (disclosures). The number and types of disclosures vary by region, but they may include information about conditions affecting the value or enjoyment of the property. The seller may know of an earth-shaking construction project that is about the start around the corner, which would impact the enjoyment of the property.
"While the term 'disclosure' is fairly common, the legal effect of these disclosures is important," Schorr says. "Buyers must read the disclosure statements in great detail."
A buyer will have a hard time bringing about legal action over a leaky roof if the seller told them about the roof situation in the disclosure statement, Schorr says.
Escrow: Funds, securities or other assets held by a neutral third party (an escrow company or agent) on behalf of the other two parties (in this case the buyer and the seller). The buyer will deposit the payment in an escrow account, proving to the seller that he or she will be able to uphold the other end of the deal. The escrow service will pay the funds to the seller once certain conditions pertaining to the sale have been met.
Mortgage: A loan that helps you purchase your house. You sign a contract promising to pay back the loan with interest over a certain number of years. A mortgage is likely the largest debt you will ever take on, and if you don't repay it, the lender can take back your property and sell it. The components of your monthly mortgage payments may be referred to as PITI: principal (the money that goes into paying down the loan), interest (which is paid to the lender for letting you borrow the money), (property) taxes and (homeowner's) insurance.
Buying a house and looking for a word that isn't here? Check out the Federal Trade Commission's comprehensive glossary of real estate lingo.