Key Terms Every Home Buyer Should Know
Buying a home is one of the biggest financial decisions you’ll ever make. Whether you’re a first-time buyer or an experienced homeowner, understanding key real estate terms will help you navigate the process with confidence. Below are some of the most important terms every homebuyer should know before signing on the dotted line.
1. Pre-Approval vs. Pre-Qualification
Before you start house hunting, it’s essential to understand the difference between pre-qualification and pre-approval.
A pre-qualification is an estimate of how much you might be able to borrow based on self-reported financial information.
A pre-approval, on the other hand, is a more formal process where a lender verifies your income, credit history, and assets to determine how much they are willing to lend you.
A pre-approval carries more weight with sellers and can give you an edge in a competitive market.
2. Mortgage
A mortgage is a loan used to purchase a home. There are several types of mortgages, including:
Fixed-Rate Mortgage – The interest rate stays the same throughout the loan term.
Adjustable-Rate Mortgage (ARM) – The interest rate changes periodically based on market conditions.
FHA Loan – A government-backed loan designed for first-time homebuyers or those with lower credit scores.
VA Loan – A loan option for eligible military service members and veterans, often requiring no down payment.
3. Down Payment
The down payment is the amount of money you pay upfront when purchasing a home.
Traditional lenders require 20% of the home’s purchase price, but many loan programs allow for lower down payments, sometimes as low as 3% to 5%.
Keep in mind that if you put down less than 20%, you may need to pay private mortgage insurance (PMI).
4. Closing Costs
Closing costs are fees and expenses beyond the purchase price of the home, typically ranging from 2% to 5% of the loan amount.
These costs may include lender fees, appraisal fees, title insurance, escrow fees, and more.
Be sure to review your Closing Disclosure, which outlines all the costs associated with finalizing your home purchase.
5. Escrow
Escrow is a third-party account that holds funds until a transaction is complete. During the home-buying process, your earnest money deposit (a good faith deposit showing the seller you’re serious) is often held in escrow.
After closing, your mortgage lender may set up an escrow account to cover property taxes and homeowners insurance.
6. Home Inspection vs. Home Appraisal
A home inspection is an evaluation of the home’s condition by a professional inspector. It helps identify potential issues like foundation problems, plumbing leaks, or roof damage.
An appraisal, on the other hand, determines the home’s market value. Lenders require an appraisal to ensure they’re not lending more than the home is worth.
7. Contingencies
Contingencies are conditions that must be met before a home sale is finalized. Common contingencies include:
Inspection Contingency – Allows the buyer to back out if significant issues are found.
Financing Contingency – Protects the buyer if their loan falls through.
Appraisal Contingency – Ensures the home appraises for at least the purchase price.
8. Title and Title Insurance
The title is the legal ownership record of the home. Title insurance protects buyers and lenders from potential ownership disputes, liens, or errors in the title history.
Your lender will require title insurance, but buyers can also purchase an owner’s policy for added protection.
9. Earnest Money
Earnest money is a deposit you make when submitting an offer to show you’re serious about buying the home. It’s typically 1% to 3% of the home’s purchase price and is applied toward your closing costs if the deal goes through.
10. Equity
Equity is the portion of the home you truly own, calculated as the home’s value minus any outstanding mortgage balance.
As you pay down your loan and your home appreciates in value, your equity increases.
The More You Know
Buying a home can feel overwhelming, but understanding these key terms will help you make informed decisions throughout the process.
By working with a trusted real estate agent and mortgage lender, you can confidently navigate the home-buying journey and find the perfect home for your needs.
