Real Estate 201 – Cram Course (Alabama Version)

Welcome to your cram course for selling real estate! We are happy you chose our team to help guide you through this process. We hope this helps answer some basic questions you may have. If you're not buying and selling houses every day, there are terms that will be used that will sound foreign to you. Keep this guide handy so you can refer back to definitions throughout your home sale! We will get more in depth in later posts. This is for you to have the basic understandings needed to start the home selling process.

Important Definitions

Anti-Flip Rule: FHA limits the frequency with which a house can be purchased and re-sold. FHA mortgage borrowers cannot purchase a home that the seller has owned for less than 90 days. A contract cannot be written until the 91st day from the last deed recording date.

Appraisal: an expert estimate of the value of something. There are different appraisers qualified for the various loan types. All are done “arm’s length” and are not controlled by the lender, agents, or owner. There may be exceptions for local banks with in-house appraisers. Arm's length is mainly related to FHA, VA, conforming Conventional, and USDA loans. Some appraisals require repairs to be completed before closing if the loan guidelines require certain specifications. YOU CANNOT USE YOUR OWN APPRAISAL IN PLACE OF A LOAN REQUIRED APPRAISAL. If you get an appraisal prior to listing, please note this cannot be used for someone obtaining a standard mortgage.

Comparative Marketing Analysis (CMA): Usually completed by real estate agents, this refers to taking comparable properties and estimating the value to obtain a listing price. This is not the same thing as an appraisal which is completed by a licensed appraiser.

Capital Gains Tax: If selling an investment property or one you have not lived in 2 out of the last 5 years, you may incur long term or short-term capital gains tax. This will be a percentage of the NET PROFIT you receive from the sale.

Caveat Emptor: "Buyer Beware" - principle that the buyer alone is responsible for checking the quality and suitability of the property before a purchase is made.

Closing Costs: All settlement or transaction charges (above and beyond the actual cost of the property) that home buyers (or sellers) need to pay at the close of escrow when the property is transferred. These typically include lender's fees, a prorated share of the property taxes, transfer taxes, credit check fees, homeowners' and title insurance premiums, deed filing fees, real estate agent commissions, inspection and appraisal fees, and attorney's fees.

Condition: This term is used to describe the items that need to be satisfied by the underwriters during the loan process. Clearing conditions is the main goal to reach a clear to close (CTC). This can relate to a number of different things and not just documents provided by the purchaser.

Contingency: A clause that buyers include when making an offer on a home that allows them to back out of buying the house if the terms of the clause aren't met.

Contract (aka Purchase Agreement): An agreement signed by both buyer and seller for the exchange of real property. This can be land, a site built home with land, or a mobile home with land. Without land attached to the sale with a mobile home, it is not a valid real estate sales contract.

Conventional: Type of loan program. Ranging from 3% down payment and up, a conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs). Conventional loans can be conforming or non-conforming.

Down Payment: This is the amount owed at closing based on which loan type you use. It is typically a percentage based on purchase price. This amount comes off of the loan amount directly. If you purchase a $200,000 home and make a down payment of $50,000, your loan amount basis is $150,000.

Earnest Money Deposit (EMD or EM): Earnest money is a deposit made to a seller that represents a buyer's good faith to buy a home. Once deposited, the funds are typically held in an escrow account until closing, at which time the deposit is applied to the buyer’s down payment and closing costs.

Escalation Clause: A stipulation that states that a buyer making an offer is willing to raise their offer on a home should the seller receive a higher competing offer, up to a certain amount.

Escrow: With more than one meaning, this is most commonly used in the term of escrow account. This is a non-interest bearing account in which funds are held securely by one or more parties in a bank account specified for the use of escrowed funds. Escrow is also used as a descriptive term such as "in escrow" relating to a transaction. Escrow accounts are used after closing for taxes and insurance collected by mortgage companies (if this applies to your circumstance). After selling, you may get a reimbursement from your mortgage company for the collected taxes and insurance if not included in the payoff.

FHA: Type of loan program. Federal Housing Agency (FHA) is a United States government agency that provides a financing system through insurance of mortgage loans and to stabilize the mortgage market. Down payments are typically 3.5% of the purchase price.

Home Inspection: This is NOT an appraisal and DOES NOT give value to the home (like an appraisal does). Instead, this is what buyers should have completed by a professional to ensure they are satisfied with the property before they purchase it. Once they purchase the property, it is theirs (all faults included!).

Home Inspection Requested Repairs: These are any repairs you would ask for after having the home inspected (either personally or by a professional). Most homes have at least one or more minor issues. No home, new construction or existing, is perfect. Homes are built with human hands and are bound to have an error here or there. Home inspections are important to discover any major defects not visible to the untrained eye. Keep this in mind. A wobbly cabinet door shouldn’t be a deal breaker for a house you love and plan to invest years of your life in.

Homestead Exemption: A discount on property taxes given on one residence that is considered a person's primary residence. You must file with the domicile county to get this exemption.

Home Warranty: There are many different companies that offer home warranties. The warranties are typically for a year (some builders offer 2-10 warranties), and can be renewed after that by the buyer. These usually cover items normal home insurance doesn’t. There is typically a small fee associated with making a claim.

Lender Required Repairs: Some loan types have certain requirements that must be met before a lender can lend on a home. Conventional is typically the most lenient. Example – Floor coverings are required for standard USDA/FHA/VA loans. If carpet has been torn out, it must be replaced before closing and verified by the appraiser.

Lender’s Title Insurance: Lender’s title insurance only protects the lender against problems with the title.

Mortgage/Financing: An agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you've borrowed plus interest. There are different requirements among all loan programs.

Offer: An agreement signed by a buyer that is not yet a contract. Terms are presented to a seller and once the seller agrees and signs, the offer becomes a contract.

Owner's Title Insurance: Owner’s title insurance provides protection to the homeowner if someone sues and says they have a claim against the home from before the homeowner purchased it.

Preapproval Letter: A more detailed review of finances, credit, employment documents, paystubs, etc. by a lender/underwriter to ensure a client's ability to obtain a mortgage. This is more in depth than a prequalification letter. This does not guarantee loan approval status.

Prepaid Items: Prepaids are expenses or items that the homebuyer pays at closing, before they are technically due. They are necessary to create an escrow account or to adjust the seller's existing escrow account. Prepaids can include taxes, hazard insurance, private mortgage insurance and special assessments. THIS IS NOT A DOWN PAYMENT.

Prequalification Letter: Provided by a lender after a basic overview and initial application. This is NOT a preapproval and does not guarantee loan approval status.

Taxes: In Alabama, taxes are paid in arrears and are due October 1st of every year. Payments after December 31st are considered late. Example: taxes owed on October 2024 are for the year October 2023–September 2024. If you do not pay your taxes, your home will be listed at the tax sale. Some qualify for no property taxes based on age and disability. Check with your local county office to see what their stipulations are. Taxes are prorated at closing based on ownership days during the time period.

Underwriting (aka Underwriters): Responsible for clearing conditions required throughout the loan process. They work independently of your loan officer and are responsible for verifying all documents and information you provide to your lender.

USDA: A USDA Home Loan from the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, is a mortgage loan offered to rural property owners by the United States Department of Agriculture. These are only available in certain areas for those that meet the income qualifications. It requires zero down payment (closing costs/prepaids are still owed at closing unless paid by seller).

VA: Type of loan program for active duty or honorably discharged veterans. The VA does not make loans, but rather sets the rules for who may qualify, arranges the terms under which mortgages may be offered, and guarantees any loan made under the program. They typically require zero down payment, but a VA funding fee may apply. Some may qualify for no VA funding fee.

WIR (Wood Infestation Report aka WDO): A Wood Infestation Report (WIR) is a report of visible infestation and damage caused by insects (e.g., termites and beetles) and decay in accessible areas of the structure, with the inspection for decay fungi limited to the portion of the structure below the level of the first main floor. It informs the lending institution and buyer of the results of an inspection by a Pest Control Operator. As a protective measure, banks and lending institutions require that homes be inspected for damage from termites and other wood-destroying organisms before they will loan money on the home. THIS IS NOT THE SAME AS A TERMITE BOND AND REQUIRES DIFFERENT PAPERWORK.

You're now ready to move on to Real Estate 202. Continue on if you're ready to keep learning, or keep an eye out for our next email!