Real Estate Vocabulary, Volume 1: Common Terms
When searching for the perfect house to buy or listing your home with a real estate agent, you may have heard a word or two that gave you pause. “ARM?” “MLS?” Or you may even be wondering what the difference is between words, such as “Appraisal” and “Assessment.”
The real estate industry, like any other, has a plethora of specialized vocabulary. It can be a challenge keeping up with all of the terms dedicated to identifying every aspect of the home buying and selling process. The following are just a few of the more common words to look out for.
Adjustable Rate Mortgage (ARM) = According to the Washington Post, this is “a mortgage loan with a fluctuating interest rate.”
Amortization = According to RealEstateABC.com, amortization is when: “The loan payment consists of a portion which will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time.”
Appraisal = “An estimate of the market value of a property based on comparable recent sales of homes nearby. It is done by a licensed appraiser for a lender.” (Washington Post)
Appreciation = “The increase in the value of a property due to changes in market conditions, inflation, or other causes.” (RealEstateABC.com)
Arms-Length Transaction = “Both parties to a transaction are acting in their own self-interest. Neither party is pressured by or acts in connection with the other to assure the fair market value of the property.” (Washington Post)
Assessment = “The placing of a value on property for the purpose of taxation.” (RealEstateABC.com)
Assessed Value = “The valuation placed on property by a public tax assessor for purposes of taxation.” (RealEstateABC.com)
Broker = Dictionary.com defines a broker as: “1) an agent who buys or sells for a principal on a commission basis without having title to the property. 2) a person who functions as an intermediary between two or more parties in negotiating agreements, bargains, or the like.” In the real estate industry, most REALTORS® or sales associates are real estate agents licensed to work under a broker.
Closing Costs = “Closing costs are separated into what are called ‘non-recurring closing costs’ and ‘pre-paid items.’ Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. ‘Pre-paids’ are items which recur over time, such as property taxes and homeowners insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which they must issue to the borrower within three days of receiving a home loan application.” (RealEstateABC.com)
Closing Disclosure = “A final statement of loan terms and closing costs. The buyer must receive it three business days before closing. Replaced the old HUD-1 form.” (Washington Post)
Commission = “Most salespeople earn commissions for the work that they do and there are many sales professionals involved in each transaction, including REALTORS®, loan officers, title representatives, attorneys, escrow representatives, and representatives for pest companies, home warranty companies, home inspection companies, insurance agents, and more. The commissions are paid out of the charges paid by the seller or buyer in the purchase transaction.” (RealEstateABC.com)
Deed = “The legal document conveying title to a property.” (RealEstateABC.com)
Depreciation = The opposite of appreciate, this is when the value of the property declines for a variety of reasons. According to RealEstateABC.com, “Depreciation is also an accounting term which shows the declining monetary value of an asset and is used as an expense to reduce taxable income. Since this is not a true expense where money is actually paid, lenders will add back depreciation expense for self-employed borrowers and count it as income.”
Down Payment = The amount a buyer pays in cash at closing for a home. Generally, it’s recommended that a down payment be 20% of the purchase price, but there are programs that enable buyers to purchase a home with a smaller down payment.
Earnest Money Deposit = “A partial payment by a buyer when submitting a contract that demonstrates the buyer’s commitment to the deal. The money, which is held in an escrow account, goes toward closing costs.” (Washington Post)
Equity = “A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.” (RealEstateABC.com)
Escalation Clause = “A tool used by buyers to outbid competitors for a property. In the contract offer submitted by the buyer to the seller, the buyer states he will increase his offer by a certain amount if the seller receives offers higher than his.” (Washington Post)
Escrow = “An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the earnest money deposit is put into escrow until delivered to the seller when the transaction is closed.” (RealEstateABC.com)
Fixed-Rate Mortgage = “A mortgage in which the interest rate does not change during the entire term of the loan.” (RealEstateABC.com)
Home Warranty = At Howard Hanna, our HSA Home Warranty is a renewable, one-year service contract that can help protect your budget against the high cost of unexpected, covered repairs or replacements of major components of your home’s systems and appliances. This warranty eliminates the daunting task of finding a service company. When a covered breakdown occurs, you simply contact HAS, and they refer you to a qualified, licensed service provider. For more information on our HSA Home Warranty, visit HowardHanna.com/HSA-Home-Warranty.
Listing = This can be used as a noun or a verb; 1) the act of putting a property for sale on the market; 2) a property that is for sale and can be purchased. Listings are posted to the MLS. If the listing is exclusive, then it is not visible to the public. The only way to know the property is available for sale is to have been informed directly by the seller or the seller’s agent.
Multiple Listing Service (MLS) = an organization that collects and distributes local and regional listing information to its members, who are real estate agents and brokers, via an online platform. Membership in the MLS is exclusive and geographically based; there are hundreds of MLS databases covering the country. Websites such as HowardHanna.com pull information from the MLS to make listings readily available to the public.
Principal = “The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.” (RealEstateABC.com)
Pre-approved = “A buyer completes an application, pays a fee and supplies the necessary documentation to the lender who performs an extensive financial background check. The lender will issue a conditional commitment in writing for an exact loan amount. Preapproval does not guarantee a loan.” (Washington Post)
Pre-qualified = “An informal estimate of how much a buyer can afford to borrow for a mortgage. It does not include an analysis of a buyer’s credit report or an in-depth look at his ability to purchase a home.” (Washington Post)
Real Estate Agent = According to the Merriam-Webster Dictionary, “A real estate agent, working on behalf of a licensed real estate broker, is a licensed professional who works on behalf of the buyer and seller of real estate during a sales transaction.” Buyers and sellers typically each have a different real estate agent, and in the industry, they are often referred to as the “buyer’s agent” and the “seller’s agent” to differentiate the two. Sometimes, agents act on behalf of both the buyer and seller, handling the entire sales transaction. Real estate agents must take a state exam to become licensed, and each state has different requirements and minimums for their real estate exam.
REALTOR® = A word trademarked by the National Association of REALTORS® (NAR), it should always appears with the ® symbol after it. According to the NAR, this term has only one meaning: “REALTOR® is a federally registered collective membership mark which identifies a real estate professional who is member of the NATIONAL ASSOCIATION OF REALTORS® and subscribes to its strict Code of Ethics.” A real estate agent can be a licensed professional working on behalf of the buyer and seller without being a REALTOR®.
Title Insurance = “Compensates the buyer or lender if title defects, liens or competing claims of ownership on a property arise after closing.” (Washington Post)