16 key real estate terms you should know
You’ll want to brush up on your vocabulary skills before diving head first into an expensive and frenzied Sacramento real estate market.
Here are the top homebuying terms, according to Sacramento real estate agents:
1. Escrow
Escrow is a neutral third party that’s neither the buyer of the property nor the seller. The legal arrangement allows for the third party to hold onto the deposit until the buyer and seller come to an official agreement or the sale is canceled.
Sacramento Realtor John Campos said escrow makes sure that no money is released or transferred during any disputes between the seller and buyer, until all parties agree.
Once a buyer and seller agree to the purchasing terms, they will be “in escrow,” which Campos defined as a period of time where the buyer and seller complete contract duties but have not officially closed on the agreement.
The “close of escrow” is when the homebuying process is complete.
Campos said close of escrow occurs when the county you’re in officially records the sale of the property and you, as the buyer, officially become the new owner of the home.
2. Mortgage
A mortgage is the loan used to purchase a property.
Homebuyers with conventional loans who make a down payment of less than 20% of the purchase price of the home will likely be required to pay for private mortgage insurance, or PMI.
“It insures the lender that if that person gets foreclosed on that they’ll get their money,” said Mike Giancanelli, who has been a Realtor in Sacramento for more than 30 years.
Once the buyer achieves a 20% equity stake in the house — by paying down the mortgage principle, or seeing the value of the property go up — the monthly mortgage insurance fee can be removed.
Similar insurance is also required on loans backed by the Federal Housing Administration, the Veterans Administration and the U.S. Department of Agriculture, with varying guidelines.
3. Buyer’s and seller’s agent
Buyer’s agents are real estate agents that represent the homebuyer; seller’s agents represent the person selling the property.
4. Loan officer
Loan officers assess, authorize and recommend approval of loan applications, and usually work at commercial banks, mortgage companies and credit unions, according to the Bureau of Labor Statistics.
5. Mortgage rates
This is the rate of interest charged by a lender on the home loan. Those rates can be “fixed” or “adjustable.”
Fixed-rate mortgages have a set interest rate that does not change for the life of the loan, typically over 30 years.
Adjustable rate mortgages, or ARMs, have interest rates that will stay fixed for a specified term and then will reset periodically. Some buyers consider ARMs because the initial rate is lower than comparable fixed-rate mortgages. But it’s a gamble, Dean Wehrli, a principal with the John Burns Real Estate Consulting firm, previously told The Bee: You’re betting that you’ll be able to refinance at a better rate in those seven years, or that you’ll sell your home by then.
6. Refi
If mortgage interest rates drop, homeowners can “refinance” their home — essentially, get a new loan at a lower interest rate and use that loan money to pay off their existing loan. That lowers their monthly payment. Loans typically have a 30-year payback duration. The homeowner may also want to choose a “refi” loan of shorter duration to qualify for a lower rate.
7. Earnest money deposit
This is a “good-faith deposit” homebuyers must put down on a property, Giancanelli said. According to Chase Bank, providing an earnest money deposit shows your seriousness in purchasing the property.
Giancanelli said it’s traditionally 1% of the purchase price of the property but can vary.
Homebuyers can provide it when signing the purchase agreement, sales contract or offer. The EMD funds will then be used to offset the down payment or fees due at closing, according to the American Society of Home Inspectors.
How is earnest money different from a down payment? A down payment is the portion of the total sales price that the buyer pays upfront, typically 3% to 20% of the property price. The remainder of the money is borrowed.
“The earnest money is security for the seller, while your down payment is funds used to purchase the property other than what you will be mortgaging,” according to the American Society of Home Inspectors.
8. Contingencies
Contingencies are conditions that must be met by the buyer or seller. Examples include getting home inspections done and making sure the property is in a satisfactory condition before signing to buy the home.
With a contingency, if buyers find something they don’t like, they can renegotiate the contract or leave it without losing money, Giancanelli said.
“Effectively, it’s saying this has to happen before we can move forward,” Campos said.
9. Inspections
Inspectors can be hired by the buyer or the seller to closely examine the safety, health and working conditions of the property. Examples include home inspections, pest inspections, roof inspections and sewer inspections.
10. Supplemental property tax
When a house has a change in ownership or when new construction is completed, the property will be reassessed and the owner will receive a supplemental property tax, in addition to the yearly property tax, according to the California State Board of Equalization.
The tax amount is calculated by subtracting the previous market value and the current market value when the home was purchased. If the assessment shows a reduction in value, the county will issue a refund instead of a tax bill.
11. Closing disclosure
This is a five-page document that outlines the details of the mortgage you chose, including terms and estimated monthly payments.
12. Appraisal
As a protection for lenders, home purchases usually involve an independent appraiser who inspects the home and the surrounding neighborhood and comes up with an estimate of what that home’s value should be in the current market. This includes looking at the sale prices of nearby properties that are comparable to the one being purchased.
13. Comps
“Comps” is shorthand for “comparable sales.” A house’s appraised worth is measured in part on the recent sales prices of highly similar homes in the same neighborhood. Asking prices of as-yet unsold houses in the neighborhood are not considered comps.
14. Jumbo loan
A “jumbo loan,” or non-conforming loan, is one that is larger than federal programs are willing to back. In Sacramento and surrounding counties, that amount is $675,050 in 2022 (slightly higher than the $647,200 limit for most of the nation), according to the Federal Housing Finance Agency. Buyers seeking a jumbo loan face tougher qualifying standards than for conventional loans. But interest rates are similar to conventional loans.
15. Mello-Roos
California’s Mello-Roos law allows governments to impose localized taxes on property owners to help pay for community benefits, such as local school facility improvements, park improvements and streetlights. These “community facilities district” taxes can amount to several thousand dollars a year. They are delineated on each property owner’s property tax bill.
16. Points
When choosing a loan, buyers can get a lower interest rate if they are willing to pay an upfront fee to the lender. Those fees are called points, or discount points. One point usually costs 1% of the loan amount. Buyers can choose to buy points in increments, such as 1.25% or 1.5% of the loan amount. The buyer pays more up front but pays less in interest over the life of the loan. This can save buyers money if they hold the loan long enough.
This story was originally published June 22, 2022 at 6:30 AM.