First-time home buyer? 10 crucial terms you need to know
First time home buyers have a huge learning curve. This post will be our first in a series of blog articles on critical information first time buyers should know before going into the home buying process.
Below are ten terms that are crucial to know before signing a real estate contract:
Earnest money is a sum put up by the buyer to show the buyer is serious about purchasing the home. It is normally held in an escrow or trust account until the time of closing but the check is cashed right away. There is no official defined amount for earnest money, but generally it runs about 1% to 2% of the purchase price. When the home purchase is complete, the earnest money is applied toward the purchase price. If the contract doesn’t go through, who will be awarded the earnest money is determined by what caused the contract to fail.
This is the date the last party signed or initialed any changes in the sales contract. This is often the date that starts the clock on the contract’s various deadlines (e.g., that a home inspection must happen within 10 days).
Contingencies are requirements that must be met before a real estate deal can close. The customary ones for the buyer are: property appraisal, financing, home inspection, disclosures, homeowner’s association disclosures, title report insurance, survey or Improvement Location Certificate. The specific contingencies and deadline dates are set and agreed upon by the buyer and seller in the contract.
You may have heard this term before – it is very important! The sales contract’s contingencies provide the buyer a period to conduct their due diligence, which essentially means doing your homework and research. If the buyer uncovers anything negative regarding the property during this time (for example, a sex offender living next door), he/she can cancel the contract and receive a refund of his/her earnest money.
Home sellers normally fill out a property disclosure for buyers that states everything they know about the home during the time they’ve owned it, whether it’s good (there’s a brand-new roof) or bad (the basement leaks during heavy rains). A seller who intentionally withholds information is committing fraud, and that can lead to legal consequences. It is a buyer’s right to know certain information about the house before they purchase it. In most cases, disclosures are filled out and are available upon request before a buyer even puts in an offer so you have some idea of what you are getting into.
A home inspection is meant to protect the buyer. A buyer has the right to hire professionals to do various inspections within a time frame that’s mutually agreed upon with the seller—typically within 7 to 14 days of an accepted offer. (Inspections may include: general home inspection, roof inspection, foundation inspection, radon testing, or well/septic inspections) After an inspection, the buyer can:
– Accept the property in the current condition and move forward to closing.
– Be released from the contract and have the earnest money returned.
– Ask the seller to repair issues discovered during inspection. If the seller counters with a lower sales price or changes or rejects the repair request, the buyer has the right to terminate the contract and keep their earnest money.
A title search basically confirms that the property is owned fair and square by the seller free of any problems and can be transferred to the buyer. Occasionally, a home’s title can be compromised by long-lost heirs or liens by contractors who did work on the property but never got paid. The good news is that you will get title insurance in case long-buried issues crop up down the road.
First Right of Refusal clause
If the buyer needs to sell a home in order to finance the purchase of a new home, the seller may decide to include a “First Right of Refusal clause” which allows the seller to continue to show the house and accept back-up offers. If the original buyer can’t sell the home by a certain date, then the seller can “kick out” that buyer – or allow them to drop that contingency – and go with a new offer, rather than waiting indefinitely to close the original deal.
If a buyer is getting a mortgage, the lender requires an appraisal which is usually paid for by the buyer. (The buyer and seller can also negotiate who pays for this.) An appraisal is where a third party comes in and estimates the value of the house, making sure a lender’s money isn’t going toward a lemon. (If a buyer is paying all cash, an appraisal is optional.)
The closing is the final step of your real estate transaction that involves bringing together the Realtors, buyers, sellers and closer at the closing table. At the closing, the buyers and sellers will sign a ton of documents and the buyers will provide the funds to purchase the home. It’s also when you get the keys to your new home—one of the most thrilling moments in life!