Real Estate Terminology
When you’re buying or selling a house, getting familiar with real estate jargon can be a job in itself. Terms like “curb appeal” are pretty self-explanatory, but you can find yourself at a real disadvantage if you don't understand more technical words, terms that describe complex legal, financial, and market processes. We’ve analyzed dozens of key real estate phrases and have come up with a list of 10 that you really need to know in order to negotiate like a pro.
Prequalified vs. Preapproved
Getting prequalified is the first step in securing a home loan and can typically be completed online or even over the phone. Preapproval, however, requires a more comprehensive analysis of your finances and is advisable for any serious home buyer. Once you are preapproved, you will receive a letter that can be used as leverage in the buying process. As Aly J. Yale, a home buying expert for The Balance, writes, “Sellers are often more confident in a bid when they see that a buyer is preapproved. In some cases, it may even help you win out over other buyers.”
DTI (Debt-to-Income Ratio)
Essentially, this comparison of your debt to your income (your debt-to-income ratio, or DTI) determines how big a monthly mortgage you can handle. Mortgage lenders calculate DTI by dividing your monthly debts by your monthly pretax income. A healthy DTI is around 36 percent or less. But don’t rely on your DTI ratio to tell you if you can afford a house or not. Beth Buczynski, mortgages and homeownership editor at Nerdwallet, explains why: “Since DTIs don’t take into account expenses such as food, health insurance, utilities, gas, and entertainment, you’ll want to budget beyond what your DTI labels as ‘affordable’ for you. Aiming below the 36 percent back-end target is ideal.”
ARM (Adjustable-Rate Mortgate)
The difference between a fixed and adjustable-rate mortgage (ARM) comes down to interest rates. ARM interest rates go up and down over the life of a loan, whereas a fixed mortgage locks down your interest rate from the beginning. Which should you choose? According to Hal M. Bundrick, CFP, and Beth Buczynski of Nerdwallet, ultimately, the decision comes down to you. “ARMs have some appeal, especially for homeowners who want lower initial payments or relocation flexibility…. Fixed-rate mortgages may be a better choice for those who plan to stay put or need reliable mortgage payments that never change.”
Most folks need a loan in order to purchase a home. FHA loans are backed by the Federal Housing Administration and have a low down payment, which can be appealing. Thinking of buying a fixer-upper? Check out the FHA 203(k) rehab loan. In a Realtor.com article about things she wishes she had known before getting an FHA loan, journalist Nicole Slaughter Graham notes that “the FHA has a few more hoops to jump through than conventional loans.”
VA loans are backed by the U.S. Department of Veterans Affairs. According to Tim Lucas, editor of The Mortgage Reports, “VA loans are designed to help active-duty military personnel, veterans, and certain other groups become homeowners at an affordable cost. The VA loan asks for no down payment, requires no mortgage insurance, and has lenient rules about qualifying, among many other advantages.” If you’ve served our country, this may be your path to homeownership.
Think of escrow as an egg (made up of money and documents) that you place in a neutral third-party nest (typically an escrow account), for future use (for things like home insurance and property taxes). Janet Wickell, a former real estate agency owner who writes for The Balance, warns that your lender may also require an escrow cushion, which “usually amounts to two months of escrow payments.” This excess balance can be used “to cover unanticipated increases in the following year's tax and insurance bills. The cushion cannot be more than one-sixth of the total amount paid out of the account each year.”
When you buy a home, two agents are usually involved: the agent who represents you (known as the buyer’s agent) and the person who represents the seller (the listing agent). According to the real estate team at 21st Century Action, Inc., “Dual agency is when there is only one agent representing both sides of the transaction, and it is something you want to avoid at all costs.” Talk about a conflict of interests!
CMA (Comparative Market Analysis)
A comparative market analysis (CMA) examines the prices of comparable properties in an area to determine the list price of a seller’s home. James Kimmons, author of "70 Things First-Time Home Buyers Need to Know," notes that numbers aren’t everything: “A CMA isn't just comparative math…. [Y]ou must learn all about your local market.” Which is why hiring the right agent is so important: You want someone who has deep knowledge of the location you are considering.
MLS (Multiple Listing Service)
The Multiple Listing Service (MLS) is “the very lifeblood of the real estate business,” writes journalist Cathie Ericson on Realtor.com. The term, which was coined in 1907, describes what has grown to be a broad national database containing more than 700 regional databases of real estate listings. Websites like Realtor.com, Zillow, Trulia, Apartments.com, Rent.com, LoopNet, and more have access to information from the national MLS.
No, an iBuyer is not a new kind of cellular device. iBuyers are “companies that purchase homes outright, directly from the owner. The seller doesn’t have to pay an agent, list the home, stage it, market it, or even show it to potential buyers,” shares Aly J. Yale of The Balance. The key players in the field are Opendoor, Knock, Offerpad, Zillow’s “Instant Offers” program, and RedfinNow. If you’re considering selling, iBuying may be a service to explore.
Real Estate Terms 101
No need to grab the dictionary, now you know what the meaning of these real estate terms.
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