Buying a home for the first time is confusing and daunting enough, and then everyone starts using real estate jargon and expects you to keep up. This is the first episode covering real estate terms, language, and definitions from A-Z…and we got all the way to, well, just A in this episode. And what are we going to focus on in this episode? Before actually going to letter A, we will be providing more information on number-related terms like 203B, 203K loans, and more! So join us as we provide different information on words starting with A and several related words that you should be aware of, especially when buying your first home!
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First Time Home Buyer Terms And Definitions From A-Z…Well, Just A Actually
Definitions And Explanations Of Real Estate Terms And Language
Welcome to the real estate terms definitions from A to Z. This will be our first installment. It’s going to be a multi-part series to help you walk, talk, and think like a pro. The colleges are getting ready to throw out your SAT and ACT scores but when you are buying a home, understanding the vocabulary is essential. We are going to do a big vocab for you, even though you are not doing SATs and ACTs because I have to tell you when you are buying a home, your extracurriculars don’t count for squat. Grab your number two pencils. Get ready for vocab. It’s time for first-time home buying from A to Z.
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Now I’m doing vocabulary. I’m with you with some classroom lessons to help you act like you know what you are doing when you are trying to buy a house. I understand there are a lot, and you don’t need to know it all but you do need to have a resource. You can read it, and then you can keep it for reference. When someone asks you something or they say something to you that you don’t understand, and you are sitting there nodding knowingly like you comprehend what they are saying or if you want to ask what’s going on and you say, “It’s my first time. That word. What does that mean?”
Before I make a decision worth hundreds of thousands of dollars, that can seriously count on one hand how many times I have seen a check with even more than four digits. This is a big deal, and I need to figure it out. What does that word mean? You don’t have to do that. Thanks to all these definitions. A lot of these definitions you might know some of them, you could google to get the definition but what’s the fun in that? Besides, I’m going to go way deeper than the generic Webster’s definition that you are going to find online. You are going to get the real real and figure out the what-what.
These are the insider definitions, plus it’s going to be a warning to you guys about the internet research for home buying education. What you find online is not only not the entire story. Remember, I have said that to you over and over again in previous episodes but I also want to tell you that most of the things that you find online are from lenders trying to sell you.
Doing my favorite thing, trying to capture you so they can get paid. They know the realtor suck, and they had done a putrid job and educating first-time home buyers. They see a huge opening and go after it. They see that void. That gives you a couple of definitions in preparation tips to advise you to become a pre-qualified first-time home buyer because they know you are searching for it, and there are no realtors out there giving you the information.
This is their hope that they can entrap you because you are looking for that information, and then eventually, you will become their customer. That’s the real deal. I don’t care if it sounds harsh, and I’m ragging on these people who are putting out educational information. They are but I want you to understand who’s marketing to you and why? What’s their real mission?
Is it to educate you about the best possible purchase for you or just to lure you in since no realtors stepping up and giving you this information? They then get you approved or deny you because they get your information and give you no long-term goals, strategies, or planning to figure out what to do with that information to find out what’s best for you.
If you don’t know my story, you can go back to the early episodes and read that but my How to Buy homies know realtors missed the boat and suck at educating or caring about you, the first time home buyer. I’m here to fill in the gaps, give you pure straight education with no sales pitch, and I’m going to do it alphabetically.
One of my big hacks that I have for all my How to Buy homies is to ignore the internet. I probably broke some of your brains now because you have been relying on the internet your entire life, and you would think that I’m selling something to you, lying, or trying to cover something up. Go back and read the lister testimonial episodes of the show, and you will find out how this works.
This entire show is one big secret tip, and it’s a proven technique. Find your realtor first, get a realtor recommendation to help you find a mortgage pro, and then you go through the application process, and then you buy a house. This gives you a huge upper hand. You get a full team to work as your advocates.
That’s the secret sauce. That’s my special insider hack. Why the big monologue about all that? I told you not to trust the internet on this one because if you do, you are going to research it on your own. You are going to find some good information and lots of people out there selling you. Know the motivation behind the source.
One of the big hacks to buy a home is to ignore the internet.
The other thing is I did this all for you. I went out and looked at everybody’s A to Z list of definitions online on the internet. When I googled it, I saw lots of top sites, and their goal wasn’t to educate you. To give you the definitions, their goal was to pre-qualify you so they could turn you into a paycheck. It’s their little way of getting their thing by giving you a little bit.
Here is the how to buy a home from A to Z, from me defined and interpreted but interpreted with you. You in mind. This has been painstakingly translated into Layman’s terms because of the boring definitions online I couldn’t even handle. I stuck it into regular people’s talk. Interpreted for you and your specific needs. What do all these terms mean to you, the first-time homebuyer?
We are going to start with the letter A. Numbers come before letters alphabetically. We are going to start with numbers. The first definition is 203(b). What the hell is that? It sounds like something from a tax code, 203(b), is the number designation given for an FHA loan. It’s a number you might hear if you are using an FHA loan. The government regulator loans are used to finance and purchase new or existing 1 to 4. You can buy a duplex, triplex or fourplex, also known as a quadplex, also known as a fantastic four. I made that last one, though. No one calls them that.
A lot of times, these 203(b) loans are characterized by low down payments, flexible qualifying guidelines, and a limit on the maximum loan amounts. A lot of times, an FHA loan, which is technically these 203(b) loans, and most people are going to call them an FHA loan, get confused with a first-time buyer loan.
Let’s start with a real estate scoop on first-time buyer loans. In reality, most lenders are not offering a special deal for first-time homebuyers who have I crushed. Everybody calls me and says, “I’m a first-time buyer. I get that special loan, right?” “No. You get an FHA loan that anybody else can use to.” There are some very specific loans that are for first-time home buyers and specific loan programs but don’t expect some crazy discount. This is a loan option.
It’s a loan program to help you, and everybody uses different loan programs, 1st-time buyers, 2nd-time buyers, and 12th-time buyers. A lot of these first-time loan programs that first-time buyers end up using. A lot of times, they are helpful if your credit challenge, you had a bankruptcy, a short sale, a foreclosure in your past or you want to explore a non-20 % down payment.
That’s the reason why so many people are talking about these loans, and they call them first-time buyer loans. Depending on you and your numbers and the current market conditions, you might qualify for what is a regular conventional loan. I’m jumping ahead. That’s from the Cs but a conventional loan is a standard loan. Regular old loan with a down payment but it’s not a 20% down payment. You can get a conventional loan at the same rate as the FHA loans. Why all the hype that you learn about FHA loans? Why are you hearing about that all the time? It’s because it does help people with imperfect credit who are having trouble saving up the full 20%.
Here’s the thing about it, if you are credit challenged and you don’t have to put down 20%, of course, there’s going to be a trade-off. You are going to have higher rates and higher fees but the boots on the ground, real information, the real-real on FHA loans, they are here to help you. If you can’t save 20%, they are going to cost you a little more money but in the long run, I have seen that it’s going to cost you way less rent than you would pay. Not to mention the potential appreciation that you could miss out on then trying to save up for a conventional loan.
Don’t be afraid of an FHA loan. It’s like buying a car. You can wait to save up for a 20%, 30% or 40% down payment on a car or you can buy it with a low down payment. An FHA loans, only 3.5% down but in that metaphor that I did about the car, think of it this way. You have to pay a car payment anyway. Are you going to pay a little bit extra for the privilege of being able to use a low down payment, not having to save up for a fatty, huge down payment?
In this metaphor now, you have to pay anyway, plus that car is going to appreciate in value every day that you don’t buy it. Sometimes looking at these options that do cost a little bit more is better for you in the long run because it means you can get in, own that thing, and start making appreciation on it. “That was good. Do you like that? It was good talking, David. Own that thing.” Make a T-shirt, everybody.
For some of you, and in fact, for many of the hundreds of first-time homebuyers that I have worked within the hottest markets and also in the best buyer’s markets. When that happens because real estate sucks and all they care about is the sellers. They are going to call that the coldest market, which is funny. In the hottest markets or the coldest markets, I had a ton of buyers that an FHA loan was the best fit for them.
Some of them use 3.5% down, and some of them use an FHA loan to put 5%, 10%, 20% or even 50% down. It is simply a loan product. A 203(b) loan is an FHA loan. It’s a loan product. You can determine if it’s right for you when it gets a unicorn team and you start working on your plan. What are we, 10, 12 minutes in and not even to the age yet? We are still not going.
I got one more number for you. This is one a lot of first-time buyers are asking you about. It’s called the 203(k) loan. I have a ton of homies that asked me about this one. I got a DM about this. This is a form of a down payment assistance program, which I get asked about quite often. All kinds of down payment assistance.
This is a 203(k) loan, and this down payment assistance is often called a fixer-upper loan. This combines the mortgage loan with more of a loan on top of that to help pay for structural repairs or updates, thus fixer-upper. You can’t use it to put in luxury cosmetics, swimming pool or anything but you can look at a shabby home and maybe use this loan to fix it up.
Truth bomb. They exist. They are out there but I’m going to crush your dreams. You are going to hear a lot of people marketing to you about this. Many experienced realtors think buyers who ask about this are too much work, so you are not going to hear it from them. In 2022, there are a ton of brand new agents and newbies getting into the game, and they are flooding social media with all the information about programs for down payment assistance. They are looking to get people excited because the market is hard. You might’ve heard about these 203(k) loans and thought this would be a great way to afford a fixer-upper without having to have the cash on hand for all the rehab and the reconstruction. It sounds awesome.
Right off the bat, I’m going to crush your dreams one more time. The real story behind all the down payment assistance program grants, the government assistance, and any purchase that requires somebody else to pay for your down payment, part of your down payment or an extra loan. These are a million to one shot in the 2022 market. I wish I had better news but that’s the truth.
That doesn’t mean if you need one of these you should shut the show off. Things change all the time. If you do need one of these down payment assistance programs, and that’s what you need to buy a home, you should be digging into the show even more than the other people because you need to get started on a financial plan for yourself.
The plan that you are doing is way more important than the final execution. The right plan gives you options a 403(k) loan is an option. It’s not a viable option in 2022. It means you don’t have enough extra money to show the seller that you can compete but they are even bigger sticking points than that. You have to get three contractors to bid on the repairs for the home, and then you have to get the FHA lenders to agree on the bids. You have to get an appraisal that evaluates the home at the new cost. That’s the purchase plight price plus the bid repair that they have accepted, and that takes a lot of time.
At a very minimum, this is going to take 45 days but it’s likely going to be 60 days or longer for you to close on the home. Now you are going to be competing against 30-day closes or if it’s me or a unicorn out there, who’s working with a unicorn lender, maybe 15 or 20 days because giving the seller what they want is the only way to get a home in 2022. The seller wants the money, and they get the money when the home closes. Short contracts are far more enticing.
When the market changes, we will discuss 203(b)s again, but for now, know that this type of loan puts you at the bottom of the pile in a hyper-competitive market. I told you, real-real. Nothing but love for you. There are a billion more numbers but I’m not going to deal with any of them now. Those are the big ones for first-time buyers.
The plan is more crucial than the final execution.
Let’s go to the A’s, my first A, an Absentee owner. Now I’m going in alphabetical order but this is a perfect one to start for all of you because an absentee owner is your landlord. Horrible news flash. You may not be buying your dream home, your lovely little place with the picket fence, from a family who wants to sell the home to you. You could be buying a home that is a rental, and you could be buying from a landlord the person that you are trying to flee.
The definition of an absentee owner is anybody who owns a home but is absent from living there. Anybody who legally owns a particular property without occupying it is an absentee owner. Why do you care about that? It’s because if you are buying a home with an absentee owner, the seller disclosures, where the seller tells you everything they know about the house, are going to be blank.
If you buy from an absentee, you can’t ask all those little questions about the funky light switch that doesn’t do anything or you can ask them about, “How cool is this neighborhood? How festive are they during the holiday time? Do they get into it?” You’ve got no one to ask because you don’t talk to the renters, and the owner is absentee.
The next A is called an Adjustable-rate mortgage. This is also known as an ARM, and if you are not careful, it might cost you an arm and a leg down the line. Dad joke. An ARM is a type of loan with an interest rate that varies depending on how the market rates move. When you sign up for an ARM or an Adjustable-Rate Mortgage, you first get a short period of fixed interest but it’s going to be lower than the traditional 30-year fixed loan.
Eventually, it’s going to end because that’s an introductory period of the loan that can last for up to ten years but when that introductory period expires, your interest rate is going to follow market interest rates based on the rate index that the ARM is tied to. You are going to have a base, and then it’s going to be tied to these things called the LIBOR or COFI. Fancy financial terms, and here’s what it means. This is not fixed.
They do have caps in place, so it can’t go nuts but it could still jump in the thousands of dollars per month for your payment. Are they evil? Only if you don’t know what you are doing. Most people, especially since the market crashed in 2008, 2009, and 2010, are all going fixed. It can be a good option for you if you understand and know everything about it before you are going to even think about using this.
The reason for that is some people figure out that they want to use the lower rate before the monthly adjustment, and that’s assuming that you are well aware of the value of the home and the where the home values are going to go and is going to go up or down. For most of you, an adjustable-rate mortgage, unless you understand it, is something to avoid.
The next A is an Agent. It’s weird. Why would I explain what an agent is? It’s a real estate agent. This is the big one. I’m going to do some simple definition breakdowns for you because the entire real estate agent thing, a broker and all that, it’s confusing and getting another reason why I want to start the revolution and change this whole damn industry.
Here’s what we’ve got. You’ve got licensees, you have real estate agents, realtors, brokers, and then real estate brokerages, which is the company. The licensees, those are the people that have a real estate license that is not affiliated with the National Association of Realtors. Believe it or not, the licensees, they are considered to be an agent but there are a million and a half of those, and then there are a million and a half that are agents that are realtors because they pay their dues and are part of the National Association of Realtors union.
The licensees are either part-timers, lawyers or investors who’ve got a license or they are too cheap to pay their union dues and don’t want to deal with having to be held to the higher standards that the realtor designation denotes. Some of them call themselves the agents, and technically they are. They can act as an agent for you to buy or sell a home. Most full-time agents are going to be introduced himself as real estate agents or some of them might say they are a realtor. That’s the one and a half million people who are agents, and they work with a broker.
The broker, that’s the company name that they work for that you are probably all aware of like RE/MAX, Keller Williams, eXp, COMPASS, Coldwell Banker or Century 21. The majority of good full-time agents are going to work for one of those companies. You are not hiring the company. You are hiring the agent. There are some great agents that are brokers themselves but even some of them who are brokers themselves might still work under another brokerage or one of those big companies.
Are you confused yet? Here’s what you need to know about who I am working with, an agent, a broker or a licensee. In my humble opinion when it comes to buyers, the agent or the realtor matter a billion times more than the company that they work for. We are all independent contractors, and now with the internet ruling the buying process, there isn’t nothing that a brokerage or a real estate company that they are going to do, anything extra that an agent won’t do no matter who they work for.
The real estate agent, the realtor, is an independent contractor and simply hangs their license to work for one of those big broker companies. That’s what I’m talking about like RE/MAX, Coldwell Banker or eXp. Don’t stress about the name of the company. You want to find a good realtor or real estate agent that has a great reputation.
I have been doing this for many years. I have been with three different brokers to change for the needs for what I wanted to do. The only thing that matters to my clients, as well as to the other realtors that I’m going to be working with when I’m representing my clients. The only thing that matters to them is not the company that I work for. It’s my individual experience and reputation.
Your agents are independent, even if they work for a broker, one of those companies. In the scheme of things, if your agent realtor has a great track record, that’s going to be way more important than if they work for the biggest real estate brokerage or company in town. Lots of them can work for a tiny brokerage or they can run a small boutique mom-and-pop brokerage or your agent could be a top producer at a top brokerage. It could be a well-trained buyer specialist who works with one of those top producing agents. When they work with the buyers, remember they are independent from the broker in the company, and what they are bringing is their particular set of skills and experience to you. Not the company.
Going to the next A, it’s Amenities. Amenities are the extra little things in the home that benefit the buyer or something cool about the home that you may or may not even care about. Everything from location to nature, to air conditioner or any other physical attributes on the home. The next A is Amortization. It’s a big and fancy finance word. Amortization means paying off a loan with regular payments over time. The amount that you owe decreases with each payment.
Most home loans are amortized. Mortgage loans don’t fully amortize but for now you are probably going to be looking at a fully amortizing loan unless you are well-versed in all these aspects of lending. It’s the process of how the payments are spread out over time. You’ve got a monthly payment, when you make a monthly payment and your mortgage, some of it goes towards your interest, and some of it goes towards your principal. In the beginning here alone, your principal is high but most of your payment goes towards the interest. That’s because the banks are trying to get all their money upfront but however, if you chip away at your principal over time, you are going to pay less and less than the interest.
Truth bomb coming. For some of you, it’s going to shock you to know that when you finance anything. If you are paying anything with an interest rate on it, you are going to pay a buttload more than the sticker price the longer that you finance it. I know you didn’t know this. Here’s a fun fact. For a $400,000 home and a 5% interest rate.
If you pay regular monthly payments on time every month for 30 years, a $400,000 home will cost you a grand total of $373,000 in interest for a total of $733,023.14. That $400,000 home costs you $733,000. If you freaked out on that, then I don’t even want to tell you how much you are paying for your car loan that you have had for five years.
“Crushing dreams and having fun.” I want you to be informed and educated. This doesn’t scare me because debt is not a terrible thing, contrary to what Dave Ramsey says, as long as you understand it. Things have changed. You need to get educated, and you need to realize there are so many forces out there working against you with high rents, inflation, and a ten-year booming housing and stock market.
Anybody who legally owns a particular property without actually occupying it is an absentee owner.
It sounds like something we should be excited about, except it’s in a rearview mirror. The economy is changing, and it’s going to change more. You are getting forced into going into debt but you can manage it into good debt. That’s the only way they are going to be able to live that perfect life balance that you are seeking since you are going to pay rent anyway.
Our next A is the Amount financed. It means the amount of money you are borrowing from your lender minus the upfront fees that the lender is charging you. This is the size of your loan, and it should terrify and excites you all at the same time. The next one is Annual income. This is what annual income is. It’s like that dude in the gym that goes up to you and says, “How much you bench?” It’s like that, except for money terms.
“How much you make a year?” It’s the money that you receive over the course of the year. Pre-tax whether it’s from wage or salary for a part-time job or full-time job, whether it’s some self-employment from tips, commissions, overtime, bonuses, or a number of other sources. Your annual income can include other things like child support, rental payments, and investments.
For most of us, our annual income is pretty easy. It’s how much you make a year. For all things, home loans remember this, forget the gross number. Forget what that big annual number is when you add everything up because the only number that counts is when you add that up and divide by twelve. That’s the biggest thing you need to learn. If you can’t divide things by twelve, learn fast.
A lender is going to use this information about your annual income but then they are going to put it in monthly numbers to determine your existing monthly debts against that, and then they are going to figure out if you have the ability to repay the loan. That means you need to be able to show this income source will continue.
That’s a big one. It’s got to be able to continue either through a contract from your company saying that you’ve got a job, a W-2 history or if you are an independent contractor, you own your own business. Most of the time, it’s through your tax returns. The rule of thumb is that you need 2 years of tax returns or 2 years on the job showing consistent and steady payment because there’s figuring out, “Can you repay this loan moving forward?” There are some exceptions. If you’ve got a funky work history and you still want to see if you qualify for a loan, take one guess at what I’m going to recommend. Stop googling this thing and get a pro to get you a plan.
Our next A. It’s the Annual percentage rate AKA APR. I’m talking about the term called the Annual Percentage Rate, and it’s also known by the acronym APR. Not to be confused with an anachronism which is historically inaccurate something. It’s a thing belonging or appropriate to another period than the one that it exists.
If you see something out of place in a movie like if all the teenagers in Grease had iPhones, that’s an anachronism. You could get real mad about it and say that the actual kids from Grease, Glee or a million other teenage movies and TV shows who were 30 years old playing 16, that’s an anachronism in itself. That’s what I think. That’s why the most accurate depiction of teenage life in America of all time is Saved by the Bell.
When the show started, Screech was 12, and the rest were 15. If Screech, AKA Dustin Diamond, had understood APR, perhaps he could have purchased real estate with his TV money when he was 13 or 14 years old. It would have been a nice and safe investment from it. It would have shielded him from having to do celebrity boxing in some bad porno when he was in his 30s.
APR is simple. It is the cost of a loan or other financing as one big annual rate. It’s not your interest rate but the APR is adding everything altogether included. It’s calculated by using a standard formula to show the total cost of the loan. It’s expressed at a different higher rate than your interest rate. It’s the true overall cost of the loan. It includes your interest, your mortgage insurance, and other fees and charges that you have to pay associated with the loan.
Side note. If you want to get advanced and get all fancy pants, the APR will also include your buy-down points if you are going to use that technique when you are getting your loan. The next day is an application. Let me quote The Mandalorian. The actor who plays a Mandalorian, José Pedro Balmaceda Pascal, he’s an Orange County High School of the Arts graduate in 1993. Thank you very much. I knew him as Pedro Balmaceda back then, and he was a musical theater-loving kid. I loved that he made a name for himself with his Chilean heritage. Rock on Pedro.
If you are new to the show, please forgive me for all things holy and or Star Wars related, which is the same thing to me but the first step in buying a home is Apply. This A. Game over. The end. You can, you should, and I’m telling you do it. Apply for a loan even a year out from when you intend to buy a home. The longer that you have this information, the longer you know what you need to know, the longer you have to work on it, and the longer you can fix, improve and do things with your credit and your debt and have more options. Get ahead of the game. Mando would approve.
Don’t even try telling me that you are working on your credit and you don’t want to do an application because you don’t want the ding on your credit. I have gone into details on this in several episodes, and don’t tell me you don’t want the ding on your credit. I can tell you this. I have never, ever seen an early hard credit poll ever.
I have never seen it hurt someone, so they couldn’t get the best rate or term and stop someone from getting a loan approval later on down the line. I have seen a late hard credit poll. I have seen multiple times where a buyer is either ignorant, which is not a dirty word. It means someone who doesn’t know the facts. I have seen uninformed people dead set on not pulling their credit and doing a full application until they are “ready to buy.” I have seen it cost dearly because they didn’t know exactly everything that was in their credit until it was too late to correct it because they waited to the last minute.
I have seen people miss the best rates or terms by a matter of 1 or 2 points, which could have easily been corrected if they had done a full application and worked a plan well ahead of time. Don’t even start if you are going to try and tell me the fact that you are going to wait until you are 90 days out because you’ve done the research.
Not to flex but I guarantee you I have gone through this with actual first time home buyers, thousands of times more than you have, and the one little piece of research that you did. I’m telling you this out of love. I see more people regret that decision. They want to beat the system and wait for 90 days because that’s how long their loan approval is but I have seen it hurt people way more and I have never seen it hurt anybody.
What’s the guy on SportCenter say? “Our research is better than yours.” Again, I’m not flexing but I’m sure that I have more data. It’s just because this is what I do, and I have seen real people who thought like you. They thought they understood all of the ways it worked. They thought they figured out all the ramifications of doing a credit poll but often, what they fail to realize if you are so on top of your credit and you know what’s going on, you would know that the one thing you need to fix credit is time. The more time that you have to fix it, the better. Why not pull your credit 4, 6 or 12 months out? You are so on top of your credit, just do it six months before you are going to buy a house, and you will be able to watch it go.
If anything major does happen, you are going to see it. You are going to have the time to correct anything. You will have the time to make up for that tiny little ding. Remember, it’s not going to hurt you if your credit score is over 760. 785, 795, and 810 are the same loan products. I have seen people miss out on their dream home because they knew they had all their ducks in a row and decided to do it all on their own and not apply early fully with a lender.
They had a prequalification, not a pre-approval which is different, and that pre-approval includes a credit poll. When it’s a go time, some little extremely avoidable item with which they had time to fix forces them to lose the home, and they have to start over. Apply. This is the way. Application fee. The fee that a mortgage lender or a broker charges you to apply for a mortgage to cover your processing cost.
Your loan is going to having a fee it’s called an origination fee. When you are shopping for loans, you are going to be shopping not only the rates and the terms you are also going to be shopping the origination fee. Most of them should be pretty much the same. Most importantly, when you are shopping that application fee, you should be the shopping service of your lender. That’s an S. I jumped ahead. Let’s get back to A’s. Appreciation. The increase in value of your home over time. That’s the value of your home going up from the purchase price from the housing market improving or from your own renovations. Get all DIY on it.
The economy is changing and it’s going to change more.
The next A word is Appraisal. In 2022, it’s a big buzzword. If you are brand new or this is 2028, you are wearing a future suit now, let me explain to you what an appraisal is. Simply put, it is a rough estimate of how much your home is worth based on comparable sold homes versus the home that you are looking to put an offer on or under contract with.
Mortgage lenders require that you get an appraisal before you sign and finish a home loan. It’s done by an independent third party, and it’s that 1 dude or 1 lady’s opinion, and it’s pretty much as subjective as, “Beauty is in the eye of the beholder.” Welcome to the unfair world of real estate. “Crushing dreams and heaven and fun.” Necessary evils because the appraisal assures a lender that they aren’t loaning more money than what the home is worth.
In case you decide to jump off your roof for your house warming party, and you miss the pool, and then you die. Now you are dead, and the bank owns the house. What if the banks, “Go ahead and buy it?” We will give you a loan for $450,000, and the home is only worth $400,000. Now you are a disgusting pile of bones and flesh on the patio.
Not only does the bank have to clean up your gross, disgusting mess that you made but for them to recoup their money, they are going to put the house on the market and have got a mortgage at $450,000 but the home is only worth $400,000. The appraisal’s purchase is the lender making sure they don’t overload on a property.
This is a hot topic in 2022, so let me give you a few more definitions, so you fully comprehend what an appraisal is. An appraisal is an informed estimate of a home’s value generally done by an independent professional licensed appraiser, and typically required an ordered by the lender in conjunction with the mortgage application.
That last definition is why when I decided to go A to Z because you are going to learn that the in conjunction with the mortgage application, and you are going to think that means that you get an appraisal when you apply for the loan before you go out shopping but that’s not right. Some of these definitions don’t make a lot of sense.
They are going to tell you that at your mortgage application, you are also going to do the appraisal. That’s not right. It’s because mortgage application, it’s like the word Aloha if you ever go to Hawaii. They say Aloha for everything. One word has 37 different definitions. You do have a mortgage application and approval but then you will suddenly be under contract and you are going to hear everybody in the real estate transaction talking about how they are waiting for your application for approval.
You‘ve got told you have an application and approval, and now you can go out and buy homes, and then when you are under contract, they say, “Aloha.” There are pre-offer application and pre-approval, and then there’s an under contract application of the loan that now has a subject property and now a new approval process, and that part of that process is the appraisal. “Scrambling brains and having fun.”
I’m doing all this work, so you don’t have to. Here are two more appraisal definitions. An appraisal is required to gather the estimated value of a piece of real estate to. I can’t even do it. There were two more to read. Forget it. You know what an appraisal is, and if you don’t, go to HowToBuyAHome.com and ask me.
Moving on. Appraisal contingency, it’s a clause that allows the buyer to dissolve a purchase agreement if the home’s appraised value is less than the sales price. Technically and contractually is what I meant to say. In most states, you have due diligence, condition or a contingency period. You’ve got that timeframe. That buyer beware period.
Sometimes due diligence, condition or contingency. It’s a time for you to be able to inspections to read the seller’s disclosures and the HOA disclosures and get an appraisal before you commit yourself all into the deal. Most of the time, if you find something you don’t like during that condition and contingency period, that’s when you renegotiate with the seller, as long as you are still within the timelines of your contract.
If that doesn’t go well, then you can break, dissolve or bail on the contract, and then you get your earnest money back. If the appraisal condition or contingency is in place and you get a low appraisal before you have removed your contingency or your condition, that means usually you are going to have three options at that time.
The seller is going to demand you pay the extra money. That’s extra cash on top of everything else you’ve agreed to since you agreed on that price. The seller will accept the appraised value and lower the price of the appraised value or the seller and buyer work out some deal in the middle. I could go on for hours about the appraisal contingency and its affects on the different markets for buyers or sellers but I was supposed to do definitions A to Z, and I’m not even to be yet. Hopefully, you can go back and read that. It will make sense to you.
Next, A is an Appraiser. Guess who that is. That’s the dude or dudette that does the appraisal. The appraisal fee, that’s the cost of the home appraisal. Why am I throwing this in? It’s because this is 1 of 2 out-of-pocket expenses in most real estate transactions. You are going to pay for the inspection and appraisal that is not included in your earnest money, your down payment or your closing cost. Extra fee.
The next A word is Arbitration. This is a fancy word for keep the damn lawyers out of it. Many contracts give all the parties the option to resolve disputes this way through arbitration. You can refer them to a fair and neutral third party. That’s the arbitrator. “I’m the arbiter. I know the score.” 1980s musical called Chess.
You have to forgive me. How boring is all the crap that I’m telling you? I don’t know. You have to give that to me. By the way, when I saw it, Carmine Ragusa was the arbiter when I saw Chess in Long Beach. If you don’t know who Carmine Ragusa is, once again, that’s why you are reading this. It’s because a 22-year-old hasn’t sold thousands of homes. They have sold one. The disputing parties agreed in advance to agree with the decision of the arbiter.
There is a hearing where both parties have an opportunity to be heard after which the arbiter makes a decision there. That was supposed to clear things up for you but if you come back to this later on and look up arbiter either on the website or listen to that, you are going to be more confused. The next A word is Assets. Insert your Jessica Rabbit joke here. An asset is anything that you own that has a cash value.
That’s your checking and savings account, 401(k) accounts, IRAs, CDs, stocks, bonds or mutual funds. By the time you know this, maybe crypto is going to be considered an asset but in 2022, check with your lender, it’s not quite there yet. They want to verify your assets to ensure that you have enough money in savings and investments to cover your mortgage in case you run into a financial emergency. If you do run into a financial emergency, the bank is checking your assets.
As-is, this is a buzzword in 2022. It could seem savage but a seller can sell their home however they want to. You should absolutely use a buyer, not expect any repairs. This is even when we get to a cool market or a buyer’s market. I have to explain it to people all the time. You never know the situation of the seller. What buyers don’t realize is most contracts in most states, it’s an as-is contracts, and you don’t have any rights.
You have standard practices to happen. You have the right to inspect it and then walk away if you don’t like it. In a slower market, the sellers are going to be more apt to possibly negotiate. Do some repairs for you or give you a credit but keep in mind that nothing is anything they have to do. The sellers are under no obligation to do repairs and anything that is a state mandate.
There are some really great agents that are brokers themselves.
In California, we have a small state mandate. They have to install smoke detectors and carbon monoxide detectors, and because we have earthquakes here, they have to strap the water heater down but that’s it. A buyer can choose to buy a home that the seller is willing to sell without anything being up to code. That’s the way sales work.
Home sales are as-is, and it’s up to the buyer and the seller to come to an agreement, depending on the market, the seller might be more flexible and do things for you but don’t think things have to be up to code or how you have some legal rights when you are purchasing a home. That’s totally up to the seller. An assessment is a value assigned to real property, your house, and your land.
Why do you need to know about its assessment? It’s because that’s what you use to pay your taxes. When you see the word assessment, know that’s how they figure out your property tax. What’s an assessor? Seriously, I’m not going to do that. It’s the dude who figures out your taxes. An assumable loan is something that you are going to hear about, and it’s an old school thing, and we don’t seem to often anymore.
If you are getting into one of these, basically you have to have a mortgage pro, a unicorn, a realtor or someone in the area who does them. It means that you assume the loan of the seller, so they don’t sell the house. You buy the house, and you buy the loan for them. They are tricky. They don’t happen a lot. Don’t think that it happens everywhere, and know what’s going on in your area.
The next A is Asbestos. Legally, I’m not going to say a damn thing about that because I don’t want to get in trouble but google it. Moving on to the A’s. Let’s see what else we got. We have got assessed values. That’s the value that they put on the home when they assesses it for your taxes. We have got the assignment of a mortgage. That’s a document evidencing the transfer of ownership of the mortgage from one person to another. That’s something else that could happen.
Considering that the A definitions took me 45 minutes, it looks like I’m going to be doing these alphabet episodes way into 2024 but that’s the job I made for myself. Nobody said starting a revolution was going to be a quick endeavor. You deserve better and use their clarity and comprehension. I’m doing this as a resource for you.
If you are enjoying the fact that you can come here and figure all this stuff out and get the real answers and not the Google answers. You liking your new knowledge and your empowerment that you are getting in your earholes or your eye holes. If you are enjoying all this stuff, write a comment, leave a review or share this stuff with others.
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Take a minuscule action for me and leave a comment, a review, or go to TikTok, @HowToBuyAHome or go to the YouTube at How to Buy a Home podcast or the Instagram, which is @David Sidoni. That’s me. Review and share. More information is coming your way. We are going to be getting more into letters later.
Speaking of letters, remember the three Ps of 2022 housing market, Patience, Persistence, and Perseverance. A shout out to Tinley, who reached out to me for help HowToBuyAHome.com, and I told her about the three Ps, and she added three more Pizza, Pandas, and Pride. I love that. You do you, Tinley. You use your three Ps, and then you find your own Ps, and I will bring you more letters coming soon because you can do this.
Important Links
- National Association of Realtors
- RE/MAX
- Keller Williams
- How to Buy a Home podcast – YouTube
- eXp
- COMPASS
- Coldwell Banker
- Century 21
- @HowToBuyAHome – TikTok
- @David Sidoni – Instagram
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