If you’re unfamiliar with real estate terminology, the home buying process can feel overwhelming and confusing. Contingency? Earnest money? Escrow? What do these mean and how do they apply to you?! Let’s go over 5 real estate terms you may not know. Once you have a basic understanding of real estate terms like these, you can proudly showcase how much you know when communicating with industry professionals and bonding with friends who are also homeowners.
Disclaimer: There is a LOT more to learn about buying a home beyond these terms. Join us for our Home Buyer Bus Tour to get answers to all your questions and more!
Term 1: Contingency
The first real estate term you may not know is contingency. A contingency defines a condition that must be met in order for a contract to become binding. In the case of a real estate offer, a contingency may include something that could prevent the sale from closing.
Some buyers will make an offer contingent upon the sale of their own home. In this case, they can back out of the deal if their home goes on the market and doesn’t sell. Contingencies also usually include time frames that act as deadlines. For example, a buyer can make an offer contingent upon inspection. If the seller accepts their offer, they would then schedule an inspection within the time frame specified in their contract. If the inspection results indicate the house is in need of too many repairs, the buyer can back out of the deal.
Term 2: Earnest Money
The second real estate term you may not know is earnest money. Earnest money is an important part of the home-buying process. It’s essentially a deposit that shows the seller that you intend to purchase their property. It also shows that you’re a committed buyer, and it helps fund your down payment.
Typically, earnest money is paid 1-3 days after the seller has accepted your offer. The more earnest money you put down, the stronger your offer looks. This is because you have “more skin in the game.” In Washington state, typical earnest money is anywhere from $1,000 to 10% of the purchase price.
When you submit earnest money, the deposit goes into an escrow account. This money then applies toward your down payment once the sale of the home is complete. If you back out of the sale due to a failed contingency, you can recover your earnest money in full. However, if you back out of the sale for reasons NOT covered by contingencies, your earnest money will be forfeited. Before signing a purchase and sale agreement to buy a home, carefully review it with your real estate agent to understand how much earnest money you’ll pay, and how to successfully recover your money if you need to back out of the sale.
Term 3: Escrow
The third real estate term you may not know is escrow. In a real estate transaction, escrow is a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met. It protects both the buyer and the seller throughout the home buying process.
Title and Escrow companies facilitate a real estate transaction. From the initial earnest money deposit to final funding, they ensure it is a smooth process. Additionally, once the transaction is complete, a lender may set up an escrow account on your behalf, which will hold funds for taxes and homeowner’s insurance.
Term 4: Title
The fourth real estate term you may not know is title. When real estate professionals talk about “title,” they are referring to who has legal ownership and the right to use a piece of property. As a buyer, you will receive a copy of the preliminary title report from a title company within a week after reaching mutual acceptance.
The report identifies all parties with a legal claim to the property, what items need to be cleared from the title before you can take possession, and if there are any easements or encroachments on the property.
Ultimately, title companies protect you from purchasing a home that you would not be able to sell in the future. Once the transaction closes, you will receive a final title policy, recording your name as the new legal owner along with the principal loan amount.
Term 5: Closing Costs
The final real estate term you may not know is closing costs. Closing costs are fees that you pay at the closing of a real estate transaction. These fees cover items associated with the sale of the home, like title and settlement services, appraisal, lender fees, and other services carried out during closing.
Closing costs are typically 2–5% of the home’s price. However, you can negotiate who pays them! Depending on what type of market you find yourself in, the seller can pay for part or all of your closing costs. Sometimes, you can roll the closing costs into the price of the mortgage loan. But you often pay these fees outright at the completion of the sale of the property.
If you have any questions about the home buying process, feel free to shoot us a message anytime!