Navigating the housing market, whether you’re a buyer or seller, can be overwhelming, especially when you don’t understand a lot of the terms used in the processes.
1. Appraisal Contingency
If you think that there’s a chance that the price of the property you’re looking at will change based off the appraisal, then having an appraisal contingency in your purchase agreement would be a good idea. This means you will buy the home only if the home appraisal is equal to or above the sales price.
2. Best and Final Offer
In the rare case that a seller is trying to avoid a bidding war, they will ask for a “best and final offer”, which gives potential buyers one chance to make, well, their best offer. Once they’ve all been submitted, the seller will choose one and that’s it!
3. Escalation Clause
If a buyer is set on winning the bid in a “best and final offer” case, they will include an escalation clause which will indicate how much you’re willing to pay over the highest offer submitted.
4. Bridge Loan
If you’re a buyer who needs a lot of cash on hand and are also in the process of selling your current home, then a bridge loan may be best for you. This is a short-term loan that allows borrowers to buy a new property by using their current home as collateral.
5. Debt-to-Income Ratio
Debt-to-Income (DTI) ratio is the amount of money being used toward debts (money you owe) and real estate costs (such as taxes and maintenance) in relation to a person’s income.
6. Earnest Money Deposit
Another name for this is a good-faith deposit, and it shows sellers that a buyer is serious about wanting to buy their house. These funds go toward the down payment and closing costs.
7. Highest and Best Offer
Not to be confused with best and final, the only real thing in common is that “highest & best” offers come into play when there is a hot property on the market.
These are actually used to trigger bidding, as a buyer, if you find yourself in this kind of situation, remember, cash is king! There are a few other factors you can have your realtor check on with the sellers, so you can be closest to meeting their needs with your bid, but ultimately, cash is the biggest factor.
To be pre-approved means that a lender has guaranteed to give you a specific amount of funds for a mortgage. To a seller, this is proof that you, as the buyer, can actually close on their home.
9. Private Mortgage Insurance
Many lenders are leery of backing a buyer who can’t come up with a decent size, so Private Mortgage Insurance, or PMI, is for when buyers are only capable of putting down less than 20% of the home’s value. If they default on their loan, PMI will protect the lender.