Real Estate Terms to Know When Buying a House
This is your offer to purchase the property and includes price, closing date, financing, inspections, etc., along with any other items that you want to propose. It is prepared with your real estate agent according to what you would like to offer. Once accepted, it is a legally binding contract. Please don’t hesitate to ask questions, because there are no stupid questions! It’s a big commitment financially, and it’s important that you understand the purchase agreement and its provisions.
When making an offer to purchase a property, it is expected that the buyer will provide earnest money. This money shows the sellers that the buyer is serious and there is good faith in the transaction. The amount of earnest money should be discussed with your real estate agent and is often relative to the amount the property is being sold for. The check is made payable to the real estate company listing the property and is cashed upon acceptance of an offer and held in a trust account. The trust account accrues interest, but the interest on the money is not kept by the holding company; it is deposited with the state of Iowa. The earnest money remains in the trust account until closing, where it is then credited back to the buyer. If the buyer fails to perform on the purchase contract after all contingencies have been released, the earnest money is forfeited to the seller.
This is the negotiating aspect of buying a house. If the seller does not agree with the terms proposed in the purchase agreement, they may complete a counter offer. Then, if the buyer does not agree with the terms of the seller’s counter offer, the buyer can create a counter offer. The counter offer can change one or many provisions of the purchase agreement. There may be a couple counter offers before an agreement may be reached.
This may also be referred to as an escape clause, which is a clause stating the term that is expected to be met on both sides. If one side is unable to complete the requirements by the specified date, an extension may be provided or else it is expected that the contingency will be released and all parties will continue with the contract. Typically, there are a few contingencies within a purchase agreement. Two standard contingencies are with inspections and financing. If a buyer finds one of the contingencies stated in the contract to have an unsatisfactory result prior to the contingency being released, the buyer can ask to be released from the purchase contract and have their earnest money refunded.
There are different types of inspections that can occur during the course of a real estate transaction. Some examples are a whole house inspection, pest inspection, and radon test. The buyer must select the inspections you prefer to have completed, and usually it is best to have them stated in the purchase agreement. These inspections need to be scheduled in a timely manner, usually within 10-14 days of an accepted offer. Once the inspection is complete, the buyer must decide if there are any major structural and safety concerns that need to be addressed; inspections are not designed to make the property perfect.
If major structural, mechanical, and safety items are identified during inspections that the buyer feels need to be addressed, a remedy request is prepared asking the seller to repair the pertinent items. The seller has the option of agreeing or not agreeing to repair the items, or may respond with only a few of the items that will be repaired. The seller may also offer the buyer a cash credit at closing in lieu of making the repair(s). The buyer can be released from the purchase contract if an agreement cannot be reached on the items.
In Iowa, abstracts are kept for each property. An abstract contains the history of a property for a minimum of 40 years, including owners of the property, property line changes, and any other items affecting the rights of ownership. The charges for updating an abstract apply to both the buyer and seller. The seller is expected to have the abstract updated to the date of closing, and the buyer is paying to have their information added to the abstract after closing. If the abstract is sent to you after closing on a property, consider taking it to a title company for storage and then keep the receipt they give you. It is very important to keep the receipt, so that you have evidence as to where the abstract was last located. If you lose your abstract, the cost can range from a $200 to more than $1000.
A title opinion is typically required by the lender financing the property. An attorney reviews the updated abstract prior to closing to ensure that the title is clear of liens and judgments. The attorney issues an opinion based on if there are any issues that would affect the buyer’s right to own and occupy the property. If the attorney finds any issues, releases or satisfactions may have to be prepared and recorded prior to closing.
An appraisal is an independent assessment of the property’s value. The appraiser is state certified and is required to use comparable properties sold in the area to determine value. Comparable properties must be similar in location, size, age, and condition. Most lenders require the property to appraise at or above the purchase price listed on the purchase agreement.
It is recommended that you get a quote for homeowner’s insurance immediately after negotiating an offer. The lender will often require that you pay one year of homeowner’s insurance at closing. It can delay closing if you don’t have insurance in place prior to closing, so it is important to do this promptly after the offer is accepted.
Closing costs are costs associated with closing the loan. These may include abstracting, title opinion, appraisal, closing fees, loan origination fees, credit report fee, insurance, etc. Ask your lender for a Good Faith Estimate, which will list all of the fees the lender expects to be part of your closing costs, so that you are aware of the approximate closing costs that will be due. A seller will sometimes pay all or some of the closing costs for a buyer as part of the negotiation of the purchase offer.
This is the date that you are expected to close on the property. This is not meant to be a date that will change; sellers rely on this date to make their next purchase and to arrange for payoff of their mortgage, etc. However, if both the buyer and seller agree and it is doable for the lender and closing company, the date can be changed.
This is also known as the final walkthrough. Prior to closing, the buyer should walk through the property to ensure the seller’s personal items have been removed and that the property has been left in the condition expected (the condition that the property was in when the purchase agreement was signed).
A Housing and Urban Development (HUD) Settlement Statement is generated at nearly every closing. This document details every expense and every credit on both the buyer and seller side of the transaction. When you close on a home, you will want to keep this document for tax purposes for a minimum of five years.
If you should need additional information or clarification on home buying terms or the home buying process, please contact us and we will answer any questions you may have.