30 terms every homebuyer needs to know

For most families, buying a home is one of the most significant investments they’ll ever make, and it’s not something most people do every day. It’s natural to have questions along the way. In fact, a 2025 survey by the National Association of Realtors found that many renters and homeowners want more clarity around homeownership, mortgage rates and closing costs, highlighting the value of clear, reliable information. 

We created this guide to help you build confidence as you navigate the homebuying process. It contains the terminology you’ll use as you talk with your banker and real estate agent. The greater your understanding of the mortgage process, the more you’ll become a confident homebuyer.

Mortgage basics that shape your monthly payment

While looking for a home and negotiating on the price are a top priority for any homebuyer, you should also pay close attention to each loan’s terms. These determine the full cost of a loan and what you can afford. Understanding these terms can help you compare your loan options confidently. 

1. Mortgage: A loan that’s granted by a lending institution (such as a bank) that allows you to purchase a home.  

2. Interest rate: The percentage that a lender charges for your loan, which is applied to the principal balance, the unpaid portion of your loan.   

3. Annual Percentage Rate (APR): The interest rate of your mortgage, plus certain lender fees and costs, expressed as an annual rate charged by your lender. The APR provides a broader measure of the total cost of financing your mortgage than the interest rate alone.  

4. Fixed-rate mortgage: A mortgage where the interest rate is set at your closing date and does not change for the life of the loan. 

5. Adjustable-rate mortgage (ARM): The interest rate starts with a lower introductory rate than a fixed-rate mortgage and could be set for a fixed period of a few months to a few years. After that introductory period, the ARM will fluctuate according to market conditions. 

6. Loan term: The length of time to repay the mortgage, with 30-year and 15-year terms being the most common. Longer terms result in lower monthly payments but higher total interest costs over the life of the loan. 

7. Principal: The original amount of money borrowed, not including interest. 

8. Down payment: The amount you pay out-of-pocket to buy a home, with the rest of the balance provided by your lender. A down payment of 3% to 5% is typically required for conventional mortgages, although loans backed by the Department of Veterans Affairs or the U.S. Department of Agriculture can be obtained with no down payment. 

9. Private Mortgage Insurance (PMI): Required on conventional mortgages when the down payment is less than 20 percent of the purchase price. PMI protects the lender against loss if the borrower defaults on the loan, but it does not protect the borrower or prevent foreclosure. PMI is usually charged as a monthly fee added to the mortgage payment. 

Getting approved: what lenders evaluate

Applying for a mortgage involves several steps as lenders review financial information to ensure the loan is the right fit for both the buyer and the bank. While income is an important factor, lenders also review documentation and overall financial stability. Understanding these terms can help you feel more prepared. 

10. Pre-approval: A written statement from a lender estimating how much you may be able to borrow based on a preliminary review of your finances. Preapprovals typically expire after 30 to 60 days. While not a loan guarantee, a preapproval signals to sellers that you are a serious buyer with verified financial information. Sellers and real estate agents often require a preapproval before accepting an offer or scheduling a showing. 

11. Credit score: A numerical rating that reflects your creditworthiness. Scores can range from 300 to 850. A score of 620 is commonly required for a conventional mortgage, while FHA loans may allow scores as low as 580 with a 3.5 percent down payment, or 500 with a 10 percent down payment. VA and USDA loans often require scores between 620 and 640, depending on the lender. You can obtain a free credit report weekly at AnnualCreditReport.com. Review each report carefully and dispute any inaccuracies with the reporting bureau. 

12. Debt-to-income ratio (DTI): All your regular monthly debt payments divided by your gross monthly income. The higher your DTI, the harder it will be for you to obtain a mortgage. 

13. Loan estimate: A three-page form that you receive after applying for a mortgage and contains important details about your loan, such as your estimated interest rate, monthly payment, closing costs, insurance and property taxes.  

14. Underwriting: The process in which a lender verifies the information in your application and decides whether to approve your mortgage. 

15. Clear to close: When a lender approves your mortgage and confirms the final terms, interest rate, closing costs and projected monthly payments, allowing you to move forward with closing. 

Property value, offers & contract risk

These terms are especially important in competitive or changing housing markets, where a home’s price and its appraised value may differ. When an appraisal comes in below the agreed upon purchase price, buyers and sellers have options to work through next steps so both parties can find a suitable solution. upon purchase price, buyers and sellers have options to work through next steps. 

16. Appraisal: A professional valuation of a property completed by a licensed appraiser hired by your lender. 

17. Appraised value: The appraiser’s assessment of what a property is worth. 

18. Appraisal gap: The difference between a property’s appraised value and its sale price. If the appraised value is less than the sale price, you may have to renegotiate with the seller or increase your down payment to cover the difference. 

19. Comparable sales (comps): The recent sales of similar homes in your area that an appraiser uses to determine a property’s value. 

20. Contingency: A clause within a purchase contract that buyers add as a way of rejecting a deal if certain conditions aren’t met. Typical contingencies include: 

• Home inspection: Gives the buyer the right to cancel a purchase or renegotiate if specified issues appear during a home inspection.  

• Mortgage contingency: If the buyer can’t obtain a mortgage. 

• Appraisal contingency: In the lender’s appraisal is less than the contracted purchase price. 

• Home sale contingency: A clause that allows a buyer to cancel the purchase, or  extend timelines, if their current home does not sell by an agreed-upon date. 

Money due at closing 

The closing process brings together several final details needed to complete a home purchase. While it includes multiple costs that are often grouped together, these amounts are outlined in advance and finalized before closing. Understanding these terms can help you know what to expect and approach closing day feeling prepared and informed. 

21. Closing costs: Fees added to the cost of buying a home that are required to complete the transaction. These may include an origination fee, appraisal fees, title searches, title insurance, surveys and deed recording fees. Lenders are required to disclose closing costs at least three business days before closing. 

22. Escrow: An account set up by an escrow agent to hold your money until the sale process is complete. It typically holds your down payment, property taxes, homeowner’s insurance, closing costs and earnest money (a deposit from the buyer after signing a sale contract). 

23. Earnest money: The amount a home buyer pays when signing a sale contract. It’s usually 1% to 2% of the sale price, is held in escrow and is applied to the buyer’s down payment and closing costs. 

24. Cash to close: The total amount the buyer must bring to closing. This includes your down payment plus closing costs and any additional fees. This is typically paid by a cashier’s check, a certified check or a wire transfer. The cash to close usually differs from the loan estimate because it contains updated and final costs for your property taxes, homeowner’s insurance and other fees. 

25. Closing disclosure: A five-page form that outlines the final details of your mortgage, such as its terms, your projected monthly payments, fees and closing costs. Lenders must give you this form at least three business days before your closing date.

Ownership, protection & ongoing costs

Of course, there’s more to buying a home than negotiating a price and applying for a loan. The following terms are about long-term ownership, as they offer financial and legal protection to a homebuyer. They do come at a cost, which you’ll be responsible for after closing. It’s important to factor these in when figuring out what you can afford and in estimating your monthly payments. 

26. Title insurance: A one-time fee paid at closing that protects the buyer and lender against pre-existing issues with a property’s ownership. It’s typically 0.5% to 1% and insures against issues such as forged deeds, undiscovered heirs and liens (unpaid taxes or contractor debts). 

27. Home inspection: As mentioned above, a home inspection is often included as a contingency on a sale contract. A certified home inspector looks for hidden issues with a home, such as its foundation, roof, HVAC, plumbing, structural damage, electrical system, mold and pests.  

28. Seller concessions: Costs the seller agrees to cover on behalf of the buyer, such as appraisal fees, inspection fees or real estate taxes. Any concessions must be included in the purchase contract. 

29. Property taxes: Sellers are responsible for paying their own property taxes, with buyers covering all property tax bills after the closing date. A lender may require a buyer to place future tax bill payments into an escrow account. These details will be spelled out in the sale contract. 

30. Homeowners insurance: Covers a property against risks such as fire, theft and vandalism. It does not cover damage from floods or earthquakes. Lenders require homeowners’ insurance to obtain a mortgage and may require flood insurance.  

Start your homebuying journey off right 

Understanding common homebuying terms can help the process move forward smoothly and set clear expectations along the way. Working with a knowledgeable lender who understands the local housing market can make these concepts easier to understand and apply. Asking questions early and often helps ensure you have the information you need before moving ahead.

Articles contained in our news section are not intended to provide recommendations or specific advice. Consult with a professional when making financial decisions. Once published, articles are not updated; information may be outdated.