Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Allison in NJ: Hi Brian, Jargon, jargon, everywhere. I’m a nurse and I understand how easy it is for people familiar with an industry to fall into the habit of using jargon and acronyms without even realizing it. Last week is the first time that I started getting serious about buying my first home. I’ve been looking at house descriptions online, I read a couple of articles about getting a mortgage, and even an article for first-time buyers. I only understand about half of what I’m reading. What’s the difference between the appraised price and the asking price? What in the world is an LTV? Can you help me out with some of the common jargon that I’m coming across?
Answer: Hello, Allison. Great question and I’m sure that I’m guilty of using jargon that I assume others know but they really don’t. Someone should probably write a translation dictionary for the real estate industry. Until a book is written, I’ll try to help out with some of the common phrases that first-time buyers are likely to need to understand but this list isn’t comprehensive.
Asking price. This is the price for the house that the seller wants to get. It’s typically based on reliable and up-to-date information provided by a real estate agent knowledgeable about the local market. The agent’s suggested price comes from what is known as a “market analysis.” This is only a beginning point and seldom the final price that the house sells for. There is usually some strategy that goes into setting the asking price. An asking price at the low end of the market can indicate that the seller wants to sell fast or that they want a lot of people to look at the house. An asking price at the high end of the market is used for mostly the opposite reasons. The seller wants to get the highest price possible even if it means that the house won’t sell right away or that they only want serious buyers looking at the house instead of a bunch of lookie-loos. There are more exotic strategies such as trying to start a bidding war in today’s hot market. Most asking prices are set near the middle of the market and are the starting point for negotiating a final sale’s price.
Appraised price. Calculating this price is required by the buyer’s mortgage lender. It requires a professional appraiser that is an uninterested third party without a financial interest in the purchase (the appraiser does not represent the buyer, seller, or mortgage company). This is intended to be an unbiased fair market assessment of the house’s current value. The appraisal is usually done after the seller and buyer have agreed to the purchase price. The mortgage lender uses the appraised value to be sure the house has enough value so that the lender will not lose money in the event of a foreclosure. Allison, there is more involved with the appraisal but that description should be a good starting point for a first-time buyer.
LTV stands for Loan to Value. This has a lot to do with the appraised price. It also has a lot to do with the down payment. LTV states the amount of the loan as a percentage of the house value. You hear a lot about 20% down payments. That means the bank will loan 80% of the value of the house and the buyer needs to pay cash for the other 20%. In this case, the loan to value is 80%. Of course, there are many FHA loans out there with a down payment of 3.5%. This means the LTV is 96.5%. The higher the LTV, the more risk the lender is taking with the mortgage.
Seller’s market. This is what is happening with almost all markets right now. It means that there are more people looking to buy a house than people trying to sell a house. When there are more buyers than there are sellers, it means that the power falls to the sellers and therefore allows them to raise the asking price on their property. However, all real estate markets are very local. In an extreme seller’s market, it leads to multiple buyers interested in a single property, resulting in bidding wars.
Buyer’s market. This is the opposite of a seller’s market. It means that there are more people trying to sell houses than people looking to buy houses. In a general sense, it gives the buyer more power to negotiate a lower sales price and ask for more contingencies.
Months of inventory. This is a method that the industry uses to explain if it is a seller’s market or buyer’s market. It estimates how many months it would take to sell all of the houses currently available for sale. Six months of inventory is generally considered to be a balanced market that doesn’t favor the seller or the buyer. Anything less than four months is considered a strong seller’s market and anything above six months is considered a buyer’s market.
Contingencies and contingency offers. A buyer can make a contingent offer that means they will pay a specific price but only if certain conditions are met. The contingencies are clauses in a sales contract that typically fall under three major categories: appraisal, home inspection, and mortgage approval. The appraisal contingency means the appraised price has to be for at least as much as the sales price. A home inspection contingency means that no unknown major problems are found with the house. If something is wrong, a contingent offer allows the buyer to request that it be fixed and/or to renegotiate the price, or back out of the sale. A mortgage contingency means the buyer’s lender will agree to a mortgage on a specific house for a specific amount of money. The buyer has a specified amount of time to obtain a loan that will cover the mortgage after the offer is accepted.
There are many other types of contingencies. For instance, the seller has to replace the furnace. Another might be that the seller vacates the house on a specific date or that the buyer is allowed to rent until the sale is completed (closes). Each house sale can have unique contingencies.
Home inspection. Similar to the appraisal, a professional third party that does not have a financial interest in the sale of the house conducts a home inspection. It’s an objective visual examination of the physical structure and systems of a house, from the roof to the foundation. A house does not pass or fail a home inspection. The home inspection is a report on the condition of the home. It’s provided to the buyer with explanations of any problems found. The report is intended to help the buyer understand the full cost of ownership. If major problems are found, buyers may wish to negotiate with the seller to make repairs or cover the repair costs. The buyer should be aware that the inspection report is not part of the appraisal and does not determine the home's market value. It is also does not verify local code compliance.
Closing costs. Allison, unfortunately, after sweating to save the down payment, closing costs can come as an unpleasant surprise. Most closing costs are in the paperwork nightmare required to qualify for a mortgage. These include the variety of fees for the services and expenses required to finalize a mortgage. The seller will also have closing costs but most are the responsibility of the buyer. Average closing costs for the buyer run between about 2% and 5% of the loan amount. That means, on a $250,000 home purchase, you would pay from $5,000 to $12,500 in closing costs. Typical costs include the home inspection, appraisal fee, loan application fee, loan origination fee, prepaid interest, mortgage insurance application fee, upfront mortgage insurance fee, homeowner’s insurance, and title fees. There can and will almost certainly be additional fees that are due at closing. The most important thing you can do is fully understand which fees you’ll be paying at closing and which fees are being moved into the mortgage loan.
Allison, there is a lot more jargon in the real estate industry. I hope this gives you some confidence to move forward with buying your first home.
Please contribute your comments about real estate jargon, slang, and abbreviations.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].