Feel confident in your search for a home by understanding these real estate terms:
Pre-Approval vs. Pre-Qualification
When you start your home buying journey it is important to know what your budget is. Some agents will want to see a letter of preapproval or pre-qualification from the lender when you begin looking at homes and many require them to be included when you make an offer. The main difference between a preapproval and a pre-qualification is that a pre-qualification is self reported and does not put a hard inquiry on your credit. A pre-approval is more involved and therefore more accurate and holds more weight with sellers. For a pre-approval you may have to submit copies of paystubs, credit check, bank account statements, down payment amount, W-2 statements from the last 2 years and other items required by the lender.
Fun Fact: Pre-approvals are good for 90 days.
Earnest money is used to show that a buyer is serious about purchasing a property. The buyer can choose any amount to put down as earnest money but it may be lost if the buyer decides to back out of the purchase. Earnest money is usually held by the Title/Escrow company.
The down payment is the amount of cash a buyer will pay during closing. Each loan type has different requirements for down payments and there are many programs available for buyers that may reduce the percentage required. Down payments can be a little as $0 with a VA loan or 20% of the purchase price with conventional financing. Private mortgage insurance is usually required for properties purchased with less than a 20% down payment so talk to your lender about the down payment your loan will require.
After an offer is accepted the property is considered under contract or in escrow. Escrow is a third party that holds the funds and facilities the closing and transfer of the property from the seller to the buyer. While the home is in escrow it is usually inspected, appraised and any other contract obligations are fulfilled.
After you get your offer accepted on a home the loan will go into underwriting. This stage is the final approval of the loan where the lender will look at the buyers credit score, assets, debt to income and any risk that may cause the buyer to default on the loan. This process is often automated and may take a few minutes or a few weeks depending on if there is a human involved. Mortgage underwriting typically takes one week or less.
A contingency is a condition that must be met in order to move forward with the transaction. Contingencies protect both the buyer and seller, if the condition is not met the transaction may be cancelled. Common real estate contingencies include; financing, inspection, sale of current home and appraisals. Other contingencies may be added into the contract at the buyers or sellers request. For example if the inspection uncovers a problem and the buyers no longer want to purchase the home, the inspection contingency will allow them to cancel the transaction with the earnest money being returned to the buyer. In a hot market buyers will often remove all contingencies to make their offer more appealing. This can be dangerous because the buyer will not have a way to get out of the purchase if they change their mind.
The purpose of the appraisal is to give an unbiased value of a home and is an important part of the home buying, selling and refinancing process. The appraiser will do an inspection of the property, analyze market trends and compare recent sold properties in the area to determine how much a property is worth. So what happens if the appraised value is less than the agreed upon price? Unfortunately both parities in the transaction must agree on a solution. The buyer may offer to pay the difference in cash or the seller may offer to lower the price. If the buyer and seller can not come to an agreement the transaction will be canceled.
Closing is the final step in the buying or selling process where the property title passes form one party to the other. The buyer and seller will receive a document called the settlement statement that has an itemized list of fees, taxes and other expenses. This process usually takes place at the Escrow/Title office and includes the escrow officer and real estate agents. Don’t forget to factor in closing costs when determining your budget.