Let’s be real- if you’re unfamiliar with real estate terminology, the home buying process can be complicated and confusing. Contingency? Earnest Money? Escrow? What do these mean and how do they apply to you?! Don’t fret; we’ve got you covered. Today we’re going over 5 Real Estate Terms You May Not Know!
Disclaimer: There is a LOT more to learn about buying a home beyond these terms! Join us for our monthly Home Buyer Bus Tour to get answers to all your questions and more! Contact us for the date and time of the next workshop!
Term 1: Contingency
A contingency defines a condition or action that must be met in order for a real estate contract to become binding. If a buyer or seller is unable to satisfy a contingency, then the offer on a home may become void.
Contingencies usually include time frames in which a buyer can get their earnest money (we’ll cover this next) back if the contingency isn’t fulfilled before the deadline.
For example, if a buyer schedules an inspection within the time specified in their contract and decides that the house is in need of too many repairs, they can rescind their offer and get their earnest money back.
Term 2: Earnest Money
The earnest money deposit 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 shows the seller that you’re a committed buyer, and it helps fund your down payment.
Earnest money is money you pay 1-3 days after the seller has accepted your offer.
The more earnest money you put down, the stronger your offer looks to the seller, as you have more skin in the game. In Washington state, typical earnest money is anywhere from $1,000 to 10% of the purchase price.
Your earnest money will be deposited into an escrow account (coming up next). Once the sale of the home has been completed, the earnest money you paid will be applied toward your down payment. If you back out of the sale due to a failed contingency, you can recover your earnest money in full.
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 earnest money if you need to back out of the sale.
Term 3: Escrow
In a real estate transaction, escrow means putting something, such as a deed or money, in the custody of a neutral third party until certain conditions are met.
Title and Escrow companies facilitate a real estate transaction, from the initial earnest money deposit to final funding, to ensure a smooth process. Once the transaction is complete, a lender may set up an escrow account on your behalf in which a portion of your monthly payment is deposited for property taxes and insurance.
Term 4: 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 or liens 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
Closing costs are fees paid at the closing of a real estate transaction. Closing costs cover fees associated with the sale of the home, like title and settlement services, title insurance, appraisal, lender fees, and other services carried out during closing.
Closing costs are typically 2–5% of the home’s price. The buyer’s down payment must also be paid at closing but is listed separately from the closing costs.
Thanks for reading another Theory Thursday!
If you have any questions about the home buying process, feel free to shoot us a message anytime!
