Like most specialized segments of business, real estate has its own language. Well, not really, but many of the terms and acronyms sprinkled through each conversation about buying a house can sound that way to first time home buyers. As a professional in the field, I’m always happy to offer my guidance to clients and explain anything they don’t understand. Sometimes though, people are nervous and don’t want to ask what something means because they fear it will make them look bad. In truth, understanding the terms and phrases usually leads to more questions because clients can see how these things will affect them and their purchasing decisions. These are the really good conversations that keep everyone on the same page. Here are a few things which sometimes confuse people.
It seems like everyone who has ever lived in a house will offer advice to a first time buyer. As with anything else, some of it is good and some not so much. One of the things people, including experts, will emphasize is getting a Home Inspection. Another thing you hear about is having a Home Appraisal. These sound like similar tasks, perhaps even synonymous with one another, but in real estate they are two distinct things. The Home Inspection should be completed by a certified inspector and will make the perspective buyer aware of the condition of the home areas you can’t really see or may not know to think about, ie. the foundation shifting or poorly done electrical repairs etc. The Home Appraisal is typically done by an agent of the lending agency and uses a set of criteria to determine the home’s market value which in turn determines the amount of money that will be lent to purchase it. So, both are very important but distinct and different things.
Two other terms that are sometimes confused are prequalified and preapproved. Both have to do with determining how much money a buyer will be able to borrow for a mortgage, but they are not the same thing. A buyer can be prequalified so they have an idea of what price range house they can begin considering. This is in no way a guarantee that they will get that much money and really just gives a general guide. When buyers have been preapproved for a mortgage however, they have gone much deeper into the process and completed and provided many more documents. The lending agency looks more specifically at their qualifications and gives a more accurate estimate of what they will be qualified to borrow. Being preapproved still isn’t a guarantee but it is far more substantial than being prequalified.
Buyers are frequently guided to avoid PMI and not to forget about escrow. For people who don’t know what these things are, they don’t know if they are looking for some kind of wild animal or type of paint or landscaping issues. PMI is an acronym that stands for private mortgage insurance or lender’s mortgage insurance. The general idea is that if the buyer’s down payment is lower than a certain percentage of the appraised value of the home, typically 20% but this differs, they have to pay insurance for the lender to recover the difference in case of foreclosure. This affects buyers because it will be more money on top of the mortgage payment that does not go towards the principal or interest of the loan. Escrow is not a magical animal. Escrow is a financial instrument in which something of value, such as a deposit check, is given to an impartial third party to hold until certain conditions or pre-set criteria are met. There are some really good resources which explain both PMI and escrow to a much greater depth and specificity.
These are only a few of the terms first time buyers will run into through the process of buying a home. I hope that my clients feel comfortable enough with me as their agent to ask me to help them understand anything they find foreign or confusing. After all this is my expertise as a real estate agent so I’m fluent in the language and I want to be their first and best resource.
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