If you’re starting your home search or even close to submitting an offer, you may want to learn the lingo of real estate contracts. Familiarizing yourself with these terms can help you feel reassured and comfortable about the contract.
Every state has its own real estate laws and local real estate boards can use different standard forms, so be sure to ask a REALTOR® if they can give you a copy of a standard contract to review.
Here are some real estate contract terms explained:
Basic Terms in the Main Body of the Contract
Closing Costs
Closing costs are typically about 2% to 7% of the purchase price of your home. This can vary depending on the lender you choose, the loan type, and property & transfer taxes. Some buyers may need help with closing costs from the seller.
Whatever number you ask for in closing cost assistance is deducted from the net proceeds to the seller. If you do not need assistance, it’s best to not ask for assistance anyways in a competitive situation.
Earnest Money Deposit
When you write an offer, you’ll submit an earnest money deposit that will be held in escrow by the real estate brokerage or settlement company. It will remain in escrow until settlement, at which time it is credited back to you to go towards your closing costs or down payment.
Settlement Date
Depending on the needs of the buyer or seller, settlement dates are typically anywhere from 30-60 days from the contract date to closing. If a property is vacant, the seller will typically want to settle as soon as possible.
Home Warranty
Buyers have the option of asking the sellers to provide a home warranty. Buyers usually make this request if the property is older or if they are afraid an appliance or major system won’t last much longer. Either the buyer or seller is able to pay for this warranty.
Standard Contingencies and Terms
Contingencies are things that buyers can include in addition to the main body of the contract. Contingencies can be negotiated between the buyer and seller just like any other term of the real estate contract.
Some of the most common contingencies are:
Home Inspection Contingency
This allows buyers to void the contract or negotiate for repairs if the home inspection reveals issues with the property.
Appraisal Contingency
This allows buyers to void the contract or negotiate the sale price if the appraised value is lower than the negotiated sale price.
Financing Contingency
This allows the buyer to void the contract if they are rejected for their loan.
Other Contingencies, Clauses, or Amendments
Buyer’s Home Sale Contingency
This contingency is used when a buyer has to sell their home in order to qualify for the purchase of their next home. The buyers would have a certain number of days to put their home on the market (if it isn’t already), and get a contract on their home with the home inspection contingency removed.
The buyer would also need to indicate how many days they will have to put their home on the market and what price they are listing it at. Sellers want to see the buyer’s home listed within a week or so. If the buyer’s house does not sell, the buyer and seller can agree to extend the timeline or the contract will become void.
This contingency can be difficult to negotiate and typically does not work well in multiple offer situations. It is more likely to work with homes that are in higher price points or homes that have been on the market for a while.
Home of Choice Contingency
A home of choice contingency allows the seller to accept a buyer’s contract, but it is contingent on the seller finding another home to purchase. If the seller doesn’t find another home within the designated time period, the sellers can void the contract.
Escalation Clause
In a situation where there are multiple buyers competing against each other, buyers may consider an escalation clause. This automatically increases your offer over a competing offer with a price equal to or higher than yours.
Post or Pre-Settlement Contingency
Depending on when the buyer or seller needs to move, a post or pre-settlement occupancy may be necessary. A post-settlement occupancy is often referred to as a “rent-back” when the seller stays in the home after settlement. They rent the home from the buyer for an agreed upon time frame. However, the maximum time lenders allow for this is 60 days.
A post-settlement occupancy is much more common than a pre-settlement occupancy, where the buyer moves into a house prior to settlement. This can cause some muddy waters if something breaks or goes wrong with the home before settlement.
Work With a REALTOR®
Find a local real estate agent that is experienced in the area or neighborhood that you’re interested in. A REALTOR® will be able to answer questions and guide you through each step of the process.
Team Melton is ready to help you with the home buying experience. Our team of professionals has over 50 combined years of real estate experience to assist you through every step of the process.
Contact us today to get started on your search for homes for sale in Evansville or homes for sale in Newburgh!