Buying a Home in Today’s Market? Here Are the Real Estate Terms You Need to Know
The current real estate market is a little like a theme park ride: It’s unpredictable with twists and surprises at every turn. If you’re a buyer who’s been in it for a minute (read: the better half of the past two years), you’re used to the heart-wrenching process of making an offer on a house, being outbid, and having to bid adieu to the home you thought was The One.
Truthfully, there’s no silver bullet for making your offer on a home stick (except, of course, having Jeff Bezos levels of cash on hand). But knowledge is power, and buyers who understand certain crucial real estate terms can navigate their homebuying journey strategically.
So buckle up and familiarize yourself with the following real estate terms. Adding this real estate lingo to your playbook can help you get ahead of the competition.
1. Appraisal contingency
Having an appraisal contingency in your purchase agreement means you will buy the home only if the home appraisal is equal to or above the sales price. This is important because it gives you the option to negotiate a lower sale price or walk.
But if you’re confident the home appraisal will not change the asking price of the house or your ability to buy the house, you may decide to waive the appraisal contingency to make your offer more appealing to the seller.
2. Best and final offer
When a seller’s broker is hoping to avoid a bidding war (it sounds strange, but it does happen), the broker might ask interested buyers to submit their best and final offer. The seller then selects the most favorable terms and works with that buyer.
“Each bidder is given a fair chance—and only one shot—to give their best and final offer. There won’t be any further negotiating at this point,” says Jane Katz, real estate broker for Coldwell Banker Warburg. “A good buyer’s broker will try to find out intel and what will make their offer the winning one.”
3. Escalation clause
You can also try to beat out the competition by including an escalation clause in your best and final offer. An escalation clause will indicate how much you’re willing to pay over the highest verified offer.
4. Bridge loan
A bridge loan is a short-term loan that allows borrowers to buy a new property by using their current home as collateral. This type of loan is a good option for borrowers who need a lot of cash on hand. They’re commonly used for people who want to buy and sell a home simultaneously.
“A bridge loan can help cover the cost of purchasing the new home,” says Mihal Gartenberg, licensed real estate salesperson for Coldwell Banker Warburg. “Once the old one sells, the buyer can start to pay the bridge loan back.”
5. Debt-to-income ratio
Also known as DTI, the debt-to-income ratio is an equation that compares how much money you owe with the money you make. DTI is the amount of money being used toward debts and real estate costs (such as taxes and maintenance) in relation to a person’s income.
It is extremely important for buyers to know their DTI because it affects whether they can qualify for a mortgage.
“Banks have various DTI requirements, but I always recommend that my buyers try not to spend more than a third of their income,” says Gartenberg. “Many New York City co-ops only allow a DTI of 25% to 30% or less.”
6. Earnest money deposit
The earnest money deposit, or good-faith deposit, shows sellers you’re serious about wanting to buy their house. It’s a sum of money paid by buyers when they sign the real estate purchase agreement but before closing. The earnest money funds go toward the down payment and closing costs.
Typically, buyers can expect to hand over 1% to 3% of the total home purchase price. In a seller’s market, the closer you can get to 3%, the better.
7. Highest and best offer
Not to be confused with best and final, highest and best is similar in that it comes into play when there’s a hot property with multiple offers.
“Highest and best offers are used to trigger bidding wars where buyers can be played off each other, whereas best and final offers are supposed to be the buyer’s final offer—one and done,” says Katz.
If you find yourself in a highest and best offer situation, cash will be king. But you can also ask your real estate agent to find out which terms will be most favorable for the seller and tailor your offer accordingly. For example, will the seller be requiring a rent-back agreement after closing? Does the seller need to unload the home quickly and want an offer with a quick closing of 30 days or less?
If you’re pre-approved for a home, a lender has guaranteed to give you a mortgage.
A pre-approval letter lets you see just how much money you can borrow—and all serious buyers need to have it at the ready. To a seller, the pre-approval letter shows a buyer’s financial qualifications and is proof the buyer can close.
“This is important to have while home shopping, so that the buyer can include it with their offer that they may need to make quickly,” says Katz.
9. Private mortgage insurance
Today’s astronomical home prices make it really challenging to make a down payment, but most lenders are leery of backing a buyer who can’t put down a sizable chunk of change. That’s why lenders typically require private mortgage insurance, or PMI, of homebuyers if they put down less than 20% of the home’s value. Should you default on your loan, PMI will protect your lender.
Expect your PMI payment to range from about 0.3% to 1.15% of your home loan.