Confusing Real Estate Terms Easily Explained | Anderson Group

Real estate is one of the most successful industries of today. People will always buy and sell properties, so the entire business has a bright and secure future ahead. However, anyone who is a beginner in this complex game most definitely struggles with understanding the terminology behind the process. With so many legal and financial aspects, one has to be a professional to understand the language real estate agents speak. With that in mind, here are some of the most confusing real estate terms easily explained.

Becoming prequalified and preapproved

All home buyers have the same question in their mind when applying for a home loan; how to get prequalified and preapproved?

Prequalification is the process where the borrower provides his or her financial state to the lender. That includes income, assets, or any debts they might have. Once the lender reviews the financial file, they provide an estimate of how much money a borrower may get.

Preapproval is the letter a lender issues to the buyer. It is a sign that their financial information was reviewed, and the buyer is approved for a loan.

Types of mortgage rates

An adjustable-rate mortgage (ARM) is the type of mortgage where the interest rate changes over time. This happens on a monthly or yearly basis. As opposed to the ARM, there is a fixed rate as well. It means that the interest rate stays the same during the life of the loan.

Federal Housing Administration mortgage is a loan for first-time homebuyers. FHA makes sure that the lenders have better conditions, like lower rates, down payment, or closing costs, and this makes it easier to become prequalified.

A conventional mortgage is not insured or guaranteed by the government. The down payment is usually at least 20%, and there is a lower risk of defaulting a home loan. Defaulting is a process when the borrower cannot make payments on time, misses a payment, or completely stops making any payments.

Contingent and pending property

A property becomes contingent when the home seller accepts the offer, but not all contractual obligations are met. At this point, the property is still in the listings, and the offer can still be void. Once the state changes to pending, that means that all the requirements are met, and the property is taken off the listings. In this case, no other offers will be accepted.

As-is property

This term means that the property is sold as-is, meaning that the seller will not initiate or pay for any repairs that might be needed. The added benefit is that these properties are usually cheaper than the rest on the market.

It is vital to understand that the as-is condition is noted when the buyer puts in the offer. If anything happens to the property after the seller accepts the offer, the condition is no longer as-is. Consequently, the seller is obligated to return the property to the as-is state at their own cost before the deal closes. Otherwise, the buyer is released from the contractual obligation to purchase the property, and the earnest money is reimbursed.



Caption: Understanding the technical side of a real estate process is not easy for everyone.

Alt: A person explaining apartment plans shown on a laptop.

Understanding escrow

Escrow is when a third party, an escrow agent, is responsible for keeping the funds for a transaction during the process. It is a win-win situation both for sellers and buyers. First of all, it is a guarantee that the buyer has funds to purchase a property. Secondly, it protects the buyer because the money is transferred to the seller only after the title transaction is finalized. This way, a buyer will not have to be worried about working with a scammer who does not own the property they are selling.

Earnest money and escrow

When a buyer decides to go in on an offer, they deposit a sum of money to the escrow as a guarantee they are serious about the purchase of the property. The term for this is earnest money, and it is usually deposited in the early stage of the purchase process. Once the deal closes, this deposit is taken out of the escrow and moved towards the buyer's down payment.

Escrow vs. Escrow account

These two terms are not the same. The lender uses an escrow account. That is where they deposit money from homeowners for advance insurance payments and tax payments. When those payments are due, the lender uses the money from the escrow account to pay.

Debt-to-income ratio

The debt-to-income ratio is calculated by dividing monthly debt payments with gross monthly income. It is used by lenders to measure your financial ability to manage monthly debt payments. The desired numbers are:

• less than 28% on monthly housing expenses


• less than 36% on monthly debt payment

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