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Housing market glossary: 20+ real estate terms you should know, from FICO to escrow



The U.S. housing market has gone from scorching to cooling within months as the momentum is also slowly shifting from a seller’s market to one more favorable to buyers.

But some might be unfamiliar with the most commonly used terms in the industry.

“The more you know before you jump into either buying or selling a house, the easier it will be,” said Kristina O’Donnell, a real estate agent with Realty One in the Philadelphia area.

Here’s what to know:

What does months of inventory mean?

Months of inventory reflects the number of months it would take to sell all homes currently on the market. You can calculate months of inventory by dividing the total number of homes for sale over the number of homes sold in one month.

What is a buyer’s market?

In a buyer’s market, there are more homes for sale than there are buyers in the market, so the housing market is favorable to buyers. This is reflected in the willingness of sellers to negotiate and the concessions they are willing to offer.

Generally, a buyer’s market has six months or more of supply.

What is a seller’s market?

A seller’s market is characterized by tight inventory and multiple bids on homes. Buyers often have no room for negotiation and there’s often three months or fewer of supply of homes

What is a pending sale?

A pending sale means that a seller has accepted a buyer’s offer. Unlike a contingent status, which means the seller has accepted an offer but must still meet some requirements, pending usually signifies that the contingencies have been worked out, the contract has been signed, according to Rocket Mortgage.

However, even though the sale is almost complete, the house hasn’t officially sold yet.

What is a starter home?

Entry-level homes or starter homes are defined as homes that are 1,400 square feet or less and cost less than $250,000, according to Freddie Mac and other housing experts.

What is a housing bubble?

A housing bubble is a period marked by an unusual spike in housing prices fueled by high demand and low supply, speculation by investors and exuberant spending.

These bubbles are caused by a variety of factors, including rising economic prosperity, low interest rates, more mortgage product offerings and easy-to-access credit.

The low supply of homes is largely a result of underbuilding, experts say.

An analysis by housing giant Freddie Mac suggests that the housing shortage has increased 52% from 2.5 million in 2018 to 3.8 million in 2020.

“While even two months ago rates above 7% may have seemed unthinkable, at the current pace, we can expect rates to surpass that level in the next three months,” George Ratiu, manager of economic research for, recently wrote.

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How does a housing market bubble burst or end?

It ends when demand decreases or stagnates – because of higher mortgage rates or inflation eating into savings – while at the same time supply realigns with demand (when construction catches up). And that can result in a sharp drop in prices, popping the bubble.

In the past month, mortgage rates have been rising in the face of rapidly rising inflation and high mortgage rates have severely limited the buyers’ purchasing power.

What does contingency mean?

A contingency is a clause in a purchase agreement that a specific action or requirement must be met for the contract to become legally binding, according to

Both the buyer and seller must agree to the terms of each contingency and sign the contract before it becomes binding, the site said.

In other words, an offer has been made and accepted on a home, but before the sale is a done deal, some conditions, or contingencies, still need to be met, O’Donnell said.

“It gives the parties an opt-out or a way to back out of the deal,” O’Donnell said.

Some common contingencies include mortgage contingency, appraisal contingency, and inspection contingency.

A mortgage contingency gives the buyer a specific period of time to secure financing. If the buyer doesn’t secure a loan by the deadline, the buyer can back out, sometimes without forfeiting the deposit , and the seller can put the home back on the market.

An appraisal contingency can protect a buyer by stipulating that the property must appraise at the suggested sales price, at minimum, or the contract can be voided. This contingency can also let the seller opt to reduce the price to the appraised value or less, O’Donnell said.

An inspection contingency allows the buyers to have the property inspected by a professional and request certain repairs or a lower sales price.

These fix-its can either stall, complete, or end a sale.

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What are closing costs?

Closing costs are fees homebuyers pay for items including an appraisal, title and other fees charged by lenders for creating the loan, called home ‘origination’ fees. Sellers also pay closing costs, though usually a lower amount.

The specific closing costs a buyer will have to pay will depend on the type of loan they have and also where they live, O’Donnell said.

Closing costs can be between 3% to 6% of the loan amount, Rocket Mortgage said.

A buyer, however, can negotiate with a seller to either help cover or pay the entire closing costs. These are called seller concessions, O’Donnell said.

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What is earnest money?

Earnest money is a deposit you put down to show your good faith and intention to purchase the property. Depending on the circumstances, you may not be able to get this money back if you decide not to complete the purchase.

What is escrow and how does it work?

Escrow is money placed with a third party, often the lender, for “safekeeping.” During a real estate purchase, the buyer is typically required to place a portion of their down payment in an escrow account where it is held until the closing. After the home is purchased, a portion of each mortgage payment is typically held in an “escrow” account to pay for the property’s taxes and insurance.

What is debt-to-income ratio?

Your debt-to-income ratio is a widely used measure of your creditworthiness. You compute your debt-to-income ratio by dividing your monthly minimum debt payments, including your rent or mortgage, by your monthly take-home pay. A lower debt-to-income ratio is typically considered better by lenders.

What is private mortgage insurance?

Private mortgage insurance is a type of insurance that a borrower might be required to buy as a condition of a conventional mortgage loan. Most lenders require the insurance when a homebuyer makes a down payment of less than 20% of the home’s purchase.

What is a balanced market?

A healthy market is one that favors neither buyers nor sellers and has typically six months of inventory available. To determine available inventory, take the number of homes currently for sale and divide it by sales in the past 30 days.

What is a housing foreclosure?

A foreclosure is the reclaiming of a property by the lender when a homeowner cannot make the required mortgage payments.

The lender can to sell the home to another buyer , experts say.

“You want to avoid foreclosure, period,” O’Donnell said. “If a homeowner, for whatever reason, is having problems paying their mortgage, they need to contact their lender immediately to try to work something out.”

Do you know your FICO score?

A FICO score is a three-digit number that indicates creditworthiness based on the information contained in someone’s credit reports.

The higher the score, the better, said Anthony Graziano, CEO of Florida-based Integra Realty Resources. “Having a strong FICO score can help you get the best rates and terms,” Graziano said.

A good FICO score ranges from 670 and above, according to the online site

The score helps lenders determine how likely a person is to repay a loan, said. The score also determines how much someone can borrow, the length of months they have to repay the loan, and how much their interest rate will be.

What’s a fixed-rate mortgage?

A fixed-rate mortgage is a home loan option with a specific interest rate for the entire term of the loan, according to Rocket Mortgage.

This means that the interest rate on the mortgage will not change over the duration of the loan. Also, the borrower’s interest and principal payments remain the same each month.

A 30-year fixed-rate mortgage is America’s most popular mortgage option, Rocket Mortgage said.

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What is an adjustable-rate mortgage?

An adjustable-rate mortgage is a home loan with an interest rate that adjusts based on the market, according to Rocket Mortgage.

Adjustable-rate mortgages typically offer a lower introductory interest rate than fixed-rate mortgages but after the initial period, your monthly payment can change.

“If interest rates go down, (adjustable-rate mortgages) can become less expensive,” Rocket Mortgage said. “However, (adjustable-rate mortgages) can also become more expensive if rates go up.”

When should you get prequalified?

If you’re in the beginning stages of your homebuying journey, and just want to determine your budget, getting prequalified will give you a purchase price estimate.

When should you get preapproved?

If you’re further along in the process and plan to purchase a home in the next few months, getting preapproved is recommended. Once you complete the preapproval process, you’ll receive a preapproval letter from your lender, which is usually good for 30 to 90 days.

Housing market predictions

Investment bank Morgan Stanley expects U.S. home prices to end 2022 down 11% compared to 2021 and to fall by another 7% by the end of 2023. The declines are in part due to the surging mortgage rates and that unforeseen home price growth.

“We do think that sales are going to fall steeper than we thought,” Jim Egan, Morgan Stanley’s co-head of U.S. Securitized Products Research, said on the bank’s “Thoughts on the Market” podcast. “We think that starts are going to fall steeper than we thought, and that next year single unit starts are going to be lower in 2023 than they were in 2022.”

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Reporter Terry Collins contributed to this report.

This article originally appeared on USA TODAY: Housing market: 15+ real estate terms home sellers, buyers should know

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