Cost and Real Estate Lingo

Buying made simple

Having a good real estate agent by your side that will educated you on the important facets of real estate is crucial. Being prepared before entering into a contract will put you into the position of being able to make cool, level-headed, decisions when it comes time to negotiate. Below I will introduce you to some of the most common real estate parlance that often surprises first-time buyers.

Pre-Approved vs Pre-Qualified

These two terms might sound similar, but can make a world of difference when it comes to getting your offer accepted on a property. When you’re searching for a home to buy, get pre-approved as soon as possible in the process. If you end up finding the home of your dreams sooner than later, you don’t want to risk missing out on it because you’re not pre-approved yet!

Getting Pre-Qualified

When you’re pre-qualified, this means that you’ve provided a lender with a summary of your finances, including your income, debt, and assets. The lender will use this basic information to make an estimate of how much money you’ll probably be able to borrow, which will in turn inform how much money you can spend on a home. At this point, the lender will provide you with a pre-qualification letter.

This preliminary step is helpful when you’re first starting the buying process—it can shed light on what type of home you should be looking for, how much you will likely be able to afford, and what you may need to work on financially to put yourself in a better position to buy the home you want.

I recommend getting this done before even looking at houses.

Getting Pre-Approved

Getting pre-approved is more serious and official. This process involves having a lender run a check on your credit, and you must provide a lender with official documentation of your financial situation. Your lender will then be able to pre-approve you for a mortgage for a specific dollar amount, and you’ll also know what your interest rate will be, since this is partially based on your credit score.

Obtaining loan pre-approval ASAP can save a lot of time, energy, and heartache in the end—beginning your home search with a clear picture of what is truly possible is crucial to a successful home buying process. Plus, you may be pleasantly surprised at what you can afford—many people overestimate what their credit score needs to be or how much of a down payment they need to have saved to get into the home of their dreams!

A seller will be far more receptive to accepting an offer that relies on financing if they know that the lender has thoroughly vetted the buyer.

Earnest Money

Earnest money can be one of the most misinterpreted subjects of a real estate transaction. Both buyers and sellers often misunderstand the purpose of earnest money, and many court battles have been waged over it. "Earnest money" means you're putting your own money on the line to show to the seller that you're serious about purchasing their property.

The first and most important quality of earnest money that needs defining is who owns it.

Earnest money is typically a deposit to escrow of good faith from the buyer that they will abide by contract terms while seeking to purchase a property from a seller. The deposit must be delivered immediately (within two days) to escrow or the buyer’s agent after mutual acceptance is created. Basically, its collateral that you, the buyer, puts down that you won't back out of the contract for non-continent reasons (e.i. "I got cold feet").

The seller will in turn remove the property from the market while the buyer works through the purchase process which may include inspections, seeking financing, appraisal, and so on. Earnest money remains the property of the buyer while in escrow, but the buyer could potentially lose it to the seller due to default on the purchase contract or when the purchase closes.

So what constitutes default of contract by the buyer?

Oftentimes, it’s clear and straightforward such as a buyer simply walking away from the transaction a day before closing. Other times it’s not so clear and lawyers often get involved. As a buyer, it’s important to remember that purchase contracts are very complicated with many detailed requirements and overlapping timelines. It is both the buyer’s and their agent’s responsibility to stay in compliance with the contract. Many of the contract's terms and contingencies have deadlines that must be met. They will otherwise be deemed waived or might put you in a position where you breach contract. The importance of picking a diligent and experienced buyer’s agent might seem all the more significant now.

We’ve discussed how to lose earnest money, but what happens if a buyer terminates the contract through the terms set forth within it? Does the buyer lose their earnest money?

The short answer is no, the money is refunded to the buyer. The long answer is still possibly if the buyer has previously defaulted on the contract and the seller still has rights to those funds after termination.

Complicated yet? If the buyer has not defaulted on any contract terms and terminates under one of their protected terms such as financing, inspection, appraisal or a contingent purchase, then the earnest money shall be refunded to them. But if a buyer has defaulted on the contract (and unless it is outlined that the contract must then terminate), the seller may often still pursue closing with that buyer and retain right to the earnest money in case of any other termination whether legitimate or not.

Lastly, what is an acceptable amount to offer and how can it be leveraged to create a competing offer?

Typically, sellers prefer to see earnest money amounts between 1 and 2% of the purchase price. The amount also depends on the price of the house. The more a buyer offers up, the more skin they have in the game. In turn, a buyer can increase the desirability of their contract by offering a higher earnest money amount. Higher earnest money amounts offer the seller more compensation if the buyer defaults and the property’s time spent removed from the market is lost. Higher earnest money amounts also indicate to the seller a higher devotion to the purchase.

Where does Earnest Money ultimately go?

Earnest money goes toward the purchase of the home. For instance, if you were buying a $500,000 house, and you offered 2% earnest money, this means a couple days after mutual acceptance you'd deposit $10,000 to escrow. Escrow would notify the seller that you've kept your side of the deal. This means you need to have the required earnest money (in this case $10,000) already available in your bank account! Once your earnest money is submitted to escrow, the remaining balance you need to pay by the closing date (usually 30 days when a lender is involved) is $490,000.

Non-refundable Earnest Money

In our current market, buyers have sometimes become so desperate for a home that they will offer "non-refundable earnest money." This basically means that when a buyer submits an offer with... let's say $50,000 non-refundable earnest money... that money immediately becomes property of the seller. So even if the buyer withdraws from the contract due to a valid contingency where they would normally get their earnest money back, this money is now forfeit to the seller! Nothing signals more to the seller how serious a buyer is than, "shut up and take my money!"

High Earnest Money Deposits

Sometimes houses appreciate faster than lenders would like. So when a lender sends an appraiser to appraise the house that you're in contract to buy, they might not agree that it's worth what you're willing to pay. For example, you offer to pay a seller $500,000 for a house. Seller agrees and you go into contract. The lender than sends an appraiser and the appraiser runs their numbers and determines the house is only worth $400,000. Now there is a $100,000 discrepancy of what you and the lender think the house is worth. Now what?

In a normal market you could use your appraisal contingency to either pull out of the contract or negotiate with the seller to lower the price. However, in this market, pre-emptively putting down a higher earnest money deposit (e.g. $100,000) shows you have funds available to close to the deal for the agreed upon price regardless of the lender's lower appraisal.

Down Payment

Simply put, this is the money that comes out of your pocket going towards the purchase of your home.

Usually, down payments amounts and percentages are decided between you and your lender. Most loan products have minimum down payment requirements (VA and USDA don't require a down payment). For example, if you're looking to apply for a FHA with a 3.5% down payment and you want to buy a $500,000 (assuming you qualify for that amount), you can quickly calculate how much you will have to squirrel away in your bank account to cover that amount ($500,000 x 3.5% = $17,500).

You can use your down payment funds towards your earnest money deposit.

The more you put towards your down payment, the less money you'll have to borrow, meaning that your interest payments will be less. If you put at least 20% down, you can avoid paying primate mortgage insurance (PMI). PMI is an additional fee each month you have to pay until you have 20% equity in your home.


Convential Loan

Product Features
      • Lowest fixed rates for eligible borrowers available in terms of 10, 15, 20 and 30 year loans
      • Adjustable-rate mortgages (ARMs) offered in 3/1, 5/1, 7/1 and 10/1 year terms
      • May be utilized for properties commonly restricted by government loans
      • Conventional loans require less documentation, so you may close sooner
      • Multiple down payment options starting at 3% down for qualified borrowers

Is a conventional loan right for you? 

Conventional loans are typically best suited for borrowers with strong credit scores and a solid down payment of at least 20% of the property’s purchase price. If you’re looking to finance a property that may be restricted when utilizing government loans, a conventional mortgage could be the right option. Refinancing into a conventional loan is also a good solution for borrowers who would like to remove their current mortgage insurance and lower their monthly payments.

Jumbo Loan

Product Features
      • Competitive rates and flexible down payment options for qualified borrowers
      • Higher loan limits than those allowed by conventional conforming and government loans
      • Fixed and adjustable-rate mortgages (ARMs) loan options available
      • Programs available for second homes, investment properties and refinances

Is a Jumbo loan right for you? 

Jumbo loans are typically suited for borrowers who possess strong credit scores and healthy assets looking to buy or refinance a high-priced property. Jumbo programs may also benefit borrowers with nontraditional employment statuses or sources of income, or those with complex financing scenarios.

If you live in a high-priced housing market or are considering the purchase of a luxury property, a Jumbo loan will probably suit your needs.


Product Features

    • Lower mortgage rates than most conventional products
    • No down payment required* and closing costs can be rolled into the loan
    • Specialized loans based on geographic location
    • Mortgage insurance is not necessary

    *Some restrictions apply

    Is a USDA loan right for you? 

    USDA loans are typically suited for borrowers with lower to moderate incomes whose desired property meet USDA requirements. This government-backed loan program offers flexible down payment and closing cost options, making it an excellent solution for many borrowers considering rural properties.

    A good mortgage consultant will be well-versed in a variety of government loans programs and their requirements. Speak to one in regards to any questions you may have, ensuring you choose the best loan program to meet your needs.

    Homes eligible for USDA financing are typically found in rural areas, but you may be surprised to learn these designated areas are extensive. Click the button below to learn more about eligible areas and income restrictions.

Hard Money Loans

This type of short-term loan is a potential loan option for those who may need a loan very quickly, or when a traditional lender won’t approve a loan. These loans have higher interest rates, and are popular options for investors who are flipping homes.

WA State Assistance

While not a facilitator of mortgage products, the Washington State Housing Finance Commission offers financial help for home buyers. These assistance programs are available directly through most lenders once you've been qualified.

Here are the steps to qualify for WSHFC assistance:

Step 1.
Attend a free Homebuyer Education Seminar

Step 2.
Contact a Commission-Trained Loan Officer

Step 3.
Know what you qualify for and look for a home!

I highly recommend everyone to check out to see if they qualify for this program. These are your tax dollars afterall. Once you've completed these steps these are awesome benefits you'll have access to:
    • Downpayment assistance programs
    • Special rate programs.

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