Simple Definitions of Common Real Estate Terms

Question: Can you explain the difference between settlement and ratification?

 

Is there another metro area with more “industry languages” than D.C.? Between consultants, lawyers, and politicians, you can sit next to somebody at a quiet bar, who’s speaking perfectly clear English, and not understand a word. Realtors are just as guilty of rattling off terms and acronyms in the course of conversation, so here’s a quick glossary of common terms that I’m frequently asked to define.

 

1. Ratification: Occurs when both parties (buyer and seller) have agreed to the deal and the contract has been signed/initialed by both parties without any additional changes.
   
   
2. Settlement: This is the date that the home is actually purchased by the buyer. Also known as “closing.”
   
   
3. Underwriting: The final approval process for a loan. The underwriter reviews the entire loan application package and issues an approval or notifies the buyer of any conditions that must be met in order to secure a loan.
   
   
4. EMD: Earnest Money Deposit. A negotiable sum of money deposited by the buyer into an escrow account after the contract is finalized, usually within 3-5 days and 2-3% of the sales price. If the buyer walks away from the deal outside of legal means/contingencies, the seller can keep the entire sum of money as damages.
   
   
5. Contingency: A term within a sales contract that gives the buyer or seller the right to void a contract, without penalty, if certain criteria are/are not met. A common contingency is a Home Inspection. The buyer is given the right to an inspection and if the buyer and seller cannot agree on corrective action requested by the buyer, the buyer has the right to void the contract, within a pre-determined period of time (usually 5-10 days after ratification).
   
   
6. FSBO: For Sale By Owner. When a homeowner decides to do something crazy and sell his/her home without an agent :)
   
   
7. ARM: Adjustable Rate Mortgage. A loan with a fixed interest rate for a specific period of time (usually 5, 7, or 10 years) that can adjust to a different rate, based on market rates when the fixed period ends. It’s well established that these loans led to the housing crash 10 years ago, which led to the Great Recession, and ARMs got a very bad name in the process. However, they can be a great product for many buyers because they offer lower rates than a 30-year fixed (most common loan product) and most homeowners will sell their home before the time the rate can adjust.
   
   
8. PITI: Principal, Interest, Taxes, and Insurance. The total monthly fixed payments for a homeowner. PITI is commonly used to determine the daily rent-back rate for a Post-Settlement Occupancy Agreement (seller remains in the home for a specified period of time after settlement).
   
   
9. 1031: A 1031 Exchange allows a homeowner to defer capital gains tax charges from a home sale by using the proceeds of the sale towards the purchase of another home. You must meet certain requirements like identifying the home to purchase within 45 days and settling within 180 days, from the date of the previous home sale. As with all tax-related transactions, it’s advisable to consultant an accountant beforehand.

Let me know if there are any other terms you’ve heard thrown around by agents that you aren’t clear on. I’m happy to write a second column with more terms.