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Common Real Estate Terms
Sometimes, I get a lot of questions asking what certain terms mean such as contingent and escalation clause. Below I have complied a list of common real estate terms to help you understand the realtor jargon. If you have questions, never hesitate to ask your realtor for an explanation. Our #1 job is to help you navigate the home buying or selling transaction by providing the best and most comprehensive advice.
| Addendum | If a buyer or seller wants to change an existing contract, they might add an addendum outlining the specific part of the contract they’d like to adjust and the parameters of that change. The rest of the contract stays the same, regardless of the addendum.
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| Adjustable-rate mortgage (ARM) | The interest rate for an adjustable-rate mortgage changes periodically. You might start with lower monthly payments than you would with a fixed-rate mortgage, but fluctuating interest rates will likely make those monthly payments rise in the future.
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| Amortization | Amortization is the schedule of your mortgage payments spread out over time. In real estate, a buyer’s amortization schedule is usually one monthly payment scheduled over a 15- or 30-year period of time.
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| Annual percentage rate (APR) | The annual percentage rate (APR) is the amount of interest charged on your loan every year. |
| Appraisal | An appraisal on your home is an unbiased estimate of how much a home is worth. When buying a home, the lender requires an appraisal by a third party (the appraiser) to make sure the loan amount requested is accurate. If the home’s appraised value is below what the buyer has offered, the lender may request the buyer pay the difference in cost.
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| Appreciation | Appreciation is the amount a home increases in value over time. To calculate home’s likely appreciation rate, add one to the annual appreciation rate, raise this to a power equal to the number of years you’d like to estimate, then multiply that by the current value of the property.
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| Assessed value | An assessment is used to determine how much in taxes the owner of a property will pay. An assessor calculates the assessment of a home’s value by looking at comparable homes in your area and reviewing an inspection of the home in question.
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| Balloon mortgage | Instead of a traditional fixed-rate mortgage in which the owner pays on the loan in installments, a balloon mortgage is paid in one lump sum (e.g., the balloon payment). It’s usually associated with investment or construction projects that are issued for the short term and don’t require collateral.
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| Bridge loan | A bridge loan is a short-term loan a homeowner takes out against their property to finance the purchase of another property. It’s usually taken out for a period of a few weeks to up to three years.
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| Certificate of eligibility | During the VA loan process, lenders require veterans to show proof they’ve met the minimum service requirement to qualify for a VA loan.
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| Certificate of reasonable value | A certificate of reasonable value (CRV) is issued by the Department of Veterans Affairs and is required for veterans to receive a VA loan. It establishes the maximum value of the property and therefore the maximum size of the loan.
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| Clear title | Also known as a “just title,” “good title,” or a “free and clear title” — a clear title doesn’t have any kind of lien or levy from creditors. It means there’s no question of legal ownership of the property such as building code violations or bad surveys.
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| Closing | Closing is the final stage of the real estate transaction. The date is agreed upon when both the buyer and seller go under contract on the home. On the closing date, the property is legally transferred from seller to buyer.
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| Closing costs | Closing costs are usually comprised of between 2-5% of the total purchase price of the home. According to a recent survey by Zillow, the average homebuyer pays approximately $3,700 in closing costs. These fees are paid on or by the closing date.
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| Co-borrower | If a buyer is having trouble getting approved for a loan, they can elicit the help of a co-borrower. This person is usually a family member or friend who’s added to the mortgage and guarantees the loan. They’re listed on the title, have ownership interest, sign loan documents, and are obligated to pay monthly mortgage payments if the buyer is unable to.
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| Commission | Real estate commission is generally 5-6% of the home’s sale price. That commission is usually split between the buyer’s and seller’s agents and is paid by the seller at the time of closing.
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| Common area assessments | If you pay a monthly fee towards a Homeowners Association (HOA), part of that fee likely goes toward a common area assessment to maintain an area open to the community.
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| Comparable sales | Comparable sales are used by an appraiser to establish how much a home is worth based on what other similar homes in the area have sold for recently. Only homes that have legally closed count as a comp — and most lenders and insurance providers require appraisers to use at least three closed sales.
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| Construction loan | A construction loan — or self-build loan — is a short-term loan used to finance the construction of a home or real estate project. This type of loan covers project costs before long-term funding can be financed.
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| Contingency | If a property is contingent, or the contract contains a contingency, certain events must transpire or the contract can be considered null. A contingency might be that the home must past an appraisal or receive a clean inspection.
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| Contingent | When a seller accepts an offer from a buyer, that offer is contingent upon the buyer’s ability to meet certain conditions before finalization of the sale. Contingencies might include the buyer selling their home, receiving mortgage approval, or reaching an agreement with the seller on the home inspection.
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| Conventional mortgage | A conventional mortgage is a loan not guaranteed or insured by the federal government. These borrowers usually make larger down payments (at least 20%), don’t require mortgage insurance, and are at a lower risk of defaulting on their home loan payment.
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| Discount points | Discount points are also known as mortgage points. They’re fees homebuyers pay directly to the lender at the time of closing in exchange for reduced interest rates which can lower monthly mortgage payments.
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| Down payment | The down payment is the amount of cash a homebuyer pays at the time of closing. Typical home loans require a 20% down payment. Some conforming loans will accept a 5% down payment, and FHA loans will accept a 3.5% down payment. VA Loans and USDA loans require a 0% down payment but have the same property inspection requirements as FHA.
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| Easement | An easement grants someone else the legal right to use another person’s land or property while leaving the title in the owner’s name.
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| Equity | Home equity is the part of your property you actually own. While you do “own” your home, your mortgage lender has interest in the property until it’s paid off.
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| Escalation Clause | When a buyer offers to pay a pre-determined increment amount up to a max over the highest bidder. I associate it with the Ebay format.
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| Escrow | Escrow is part of the homebuying process. It happens when a third party holds something of value during the transaction. Most often, the “value” the third party holds onto is the buyer’s earnest money check. When the transaction is complete (usually at closing), the third party will release those funds to the seller.
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| FHA Mortgage | Federal Housing Administration (FHA) loans have been around since 1934 and are meant to help first-time homebuyers. The FHA insures the loan, making it easier for lenders to offer the homebuyer a better deal, including a lower down payment (as low as 3.5% of the purchase price), low closing costs, and easier credit qualifying.
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| Fixed Rate Mortgage | A fixed-rate mortgage is one of the most common types of loans. It comes with an interest rate that stays the same for the lifetime of the loan, and provides the borrower with more stability and predictability over the lifetime of their loan.
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| For Sale By Owner (FSBO) or Fizz-Bo | Homes listed as for sales by owner (FSBO) are being sold without the help of a real estate agent. The biggest benefit to the seller is they avoid paying commission fees — but there are few benefits to the buyer.
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| Foreclosure | If a homeowner doesn’t make a mortgage payment (usually, for more than 90 days), foreclosure is a legal process during which the owner forfeits all property rights.
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| Handmoney | Handmoney is a colloquial term in the Western PA market only. Everywhere else in the country it is called earnest money deposit. Earnest money is a deposit (usually 1-2% of the home’s total purchase price) made by a homebuyer at the time they enter into a contract with a seller. Earnest money demonstrates the buyer’s interest in the property and is deducted from your closing costs.
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| Home equity line of credit | A home equity line of credit (HELOC)provides a revolving credit line that can be helpful in paying for large expenses or consolidating higher-interest rate debt on loans — like credit cards.
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| Home inspection | A home inspection is carried out by an objective third party to establish the condition of a property during a real estate transaction. An inspector will report on such things as a home’s heating system, the stability of the foundation, and the condition of the roof. The inspection is meant to identify major issues that might affect the value of the home and the stability of your and your lender’s investment and return.
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| Homeowner’s association | A homeowner’s association (HOA) is usually found when you purchase a condominium, townhome, or other development property. To purchase the home, you must also join the HOA and pay monthly or yearly HOA fees.
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| Homeowner’s insurance | When you purchase a home, it’s also necessary to purchase homeowner’s insurance to cover any losses or damages you might incur, such as natural disaster, theft, or damage.
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| Lender | In real estate, the lender refers to the individual, financial institution, or private group lending money to a buyer to purchase property with the expectation the loan will be repaid with interest, in agreed upon increments, by a certain date.
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| Lien | A property lien is unpaid debt on a piece of property. It’s a legal notice and denotes legal action taken by a lender to recover the debt they are owed. It can come from unpaid taxes, a court judgement, or unpaid bills and can slow down the homebuying process when unattended.
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| Loan officer | Residential loan officers, or mortgage loan officers, assist the homebuyer with purchasing or refinancing a home. Loan officers are often employed by larger financial institutions and help borrowers choose the right type of loan, compile their loan application, and communicate with appraisers.
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| Loan origination | Loan origination is the process during which a borrower submits a loan application and a financial institution or lender processes the application. There is usually an origination fee associated with this process.
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| Loan-to-value | The loan-to-value (LTV) ratio is the mortgage loan balance divided by the home’s value. It shows how much you’re borrowing from a lender as a percentage of your home’s appraised value.
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| Mortgage | A mortgage is the agreement between a borrower and a lender giving the lender the right to the borrower’s property if the borrower is unable to make loan payments (with interest) within an agreed upon timeline.
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| Pre-approval | Before submitting an offer on a home (or even engaging with a real estate agent) you’ll likely be required to get pre-approved. This means a lender has checked your credit, verified your information, and approved you for up to a specific loan amount for a period of up to 90 days.
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| Pre-qualification | Unlike pre-approval, pre-qualification is more of an estimate of how much you can afford to spend on a home.
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| Private Mortgage Insurance | If a homebuyer makes a down payment of less than 20% of the purchase price of a home or is the recipient of an FHA or USDA loan, they’ll usually be required to pay mortgage insurance. It lowers the risk of a lender giving you a loan, but it also increases the cost of the loan.
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| Purchase agreement | A purchase agreement demonstrates a buyer’s intent to purchase a piece of property and a seller’s intent to sell that property. The document outlines the terms and conditions of a sale and holds each party legally accountable to meeting their agreement.
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| Rate lock | A rate lock allows borrowers to lock in an advantageous interest rate before a real estate transaction closes. A rate lock allows the borrower to lock in that interest rate for a specific period of time protecting them from market fluctuations.
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| Real estate agent | A real estate agent is licensed to negotiate and coordinate the buying and selling of real estate transactions. Most real estate agents must work for a realtor or broker with additional training and certification.
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| Real estate owned | Real estate owned (REO) refers to property owned by a bank, government agency, or other lender. Homes typically become real estate owned after an unsuccessful foreclosure auction or short sale.
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| Real Estate Settlement Procedures Act | The Real Estate Settlement Procedures Act (RESPA) requires lenders to provide disclosures to borrowers informing them of real estate transactions, settlement services, and relevant consumer protection laws.
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| Short sale | A short sale occurs when a homeowner sells their property for less than what’s owed on the mortgage. A short sale allows the lender to recoup some of the loan that’s owed to them but must be approved by the lender before the seller moves forward.
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| Title | A home’s title represents the rights to the property. Those rights are transferred from the seller to the buyer during a real estate transaction and give the buyer legal rights to the property upon closing.
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| Transfer tax | In Pennsylvania, both the buyer and seller is responsible for paying real estate transfer tax, unless otherwise agreed upon during the transaction. Typically, it is 1% of the sale price of the home unless you are within city limits of Pittsburgh. Then the transfer tax is higher. Ask you agent for further details in buying within Pittsburgh City limits.
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| Under contract | A home is “under contract” when a seller has accepted an offer from a buyer but the transaction has not yet closed. These are typically cash buyers and they are just waiting for a clear title.
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| VA mortgage | Service members, veterans, and eligible surviving spouses can receive home loan guarantees provided by private lenders. The Department of Veteran’s Affairs guarantees a portion of the loan, which leads to more favorable terms for the borrower.
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