The Homebuying Process: Translating Confusing Terms

Owning a home is a significant goal for many people. It’s a big step–the biggest single investment most people will ever make. Understanding how to buy your first home will make you more comfortable with the process. It will also help you make the best decisions for you, your family, and your future.

As you go through the process of buying your first home, the terms real estate professionals use can often become confusing. This is why we’ve created a list of homebuying terms to help you throughout this process.

Common Homebuying Terms

Our list isn’t exhaustive—there are more terms to learn than the ones listed below. If you aren’t sure what a term means, just ask! Real estate professionals are happy to explain. After all, they want you to have the best homebuying experience possible. You can also consult a translator or your lawyer for help.

Legal Terms

• Deed: A document that transfers ownership of a property. When you buy a home, you receive the deed as proof of the sale.

• Deed restriction: A private agreement that limits how a property can be used. Common restrictions involve what you can build or renovate on the property, or what you’d need to do before selling it.

• Escrow: A savings account set up to pay taxes and insurance yearly on your behalf. Escrow accounts can also be used to hold money set aside at closing for improvements or changes to the home made post close that was agreed on in the purchase agreement. Your lender might use an escrow account.

• Lien: A financial claim against a property. If you get a mortgage, your lender will have a lien on your house until the mortgage is paid off.

• Title (certificate of title): A document that proves you own a property.

• Title insurance:

  An insurance policy that protects homeowners and lenders from potential mistakes or omissions in a property title. This means that no one else can try to claim that they own your home because of a title error.

Financial Terms

• Adjustable-rate mortgage (ARM): Most home loans have a fixed (the same) interest rate for the entire loan period. An ARM may start with low (or no) interest, but after a set number of years, the lender can increase the rate to reflect the current interest rate, which could be lower or higher.

• Affordability gap: In the housing market, this is the gap between the median household income in an area and the income required to buy a median-priced home in that area. A wide gap means that most prospective buyers can’t afford homes in that area.

• Annual Percentage Rate (APR): The yearly interest rate on your home loan, plus certain additional fees. An APR shows the total cost of borrowing money to buy your home.

• Closing costs: Fees associated with the purchase of your home listed on the closing disclosure and loan estimate documents you receive during the homebuying process. Closing costs typically include real estate agent fees and taxes. Prepare to pay around 3-6% of the home’s total price in closing costs.

• Conventional loan: Any type of home loan that isn’t insured by the U.S. Government. Most banks, credit unions, and private lenders offer conventional loans.

• Down payment: The portion of the sales price you must pay upfront to buy a home.

• Down payment assistance: a second loan or grant that makes up for money a homebuyer would otherwise have to pay to purchase the home

• Earnest money: A deposit you pay along with your offer to the seller to show you are serious. If you buy the home, the earnest money goes toward the purchase price or closing costs. If not, it may be returned to you.

• FHA loan: A type of home loan insured by the Federal Housing Administration. You might qualify for an FHA loan if you wouldn’t qualify for a conventional loan.

• Interest rate: The fee charged by a lender to make a home loan.

• Lender: A bank, credit union, government agency, or other entity that makes home loans.

• Long-term affordability: A financing model that ensures that housing remains affordable for low- and moderate-income households in many years time.

• Mortgage: A loan used to purchase a home.

• Mortgage covenants: Additional requirements within the mortgage that the buyer must accept. Often include financial and operational requirements.

• Pre-approval: A detailed financial process to help lenders decide if they will approve your home loan. Getting pre-approval (before you make an offer on a home) can speed up the process. 

• Pre-qualification: Similar to a pre-approval but only indicates if you are eligible for a loan. You will still need to be approved for the loan to move forward.

• Principal: The amount of money you still owe on your home after paying the down payment. This does not include any interest that you’ll need to pay for the length of the mortgage.

• Subsidy: Another term for down payment assistance loan that helps make housing more affordable for low-income individuals and families.

• VA loan: A type of loan insured by the Department of Veterans Affairs. Available for veterans, service members, and their survivors.

Real Estate Terms

• Appraisal: An estimate of a property's value, provided by a licensed appraiser. 

• Closing: The final step in the homebuying process, when money and ownership of the property are exchanged. Once you close on a home, it becomes yours.

• Contingency: A condition that must be met before a home sale is finalized. Common contingencies include home inspections and financial considerations.

• Equity: The portion of the home you actually own, which is calculated by taking the home’s current market value and subtracting the current balance of your mortgage. If the number is negative, that means you have no equity and are considered “underwater” on the loan.

• Home inspection: A professional evaluation of a home's condition.

• Offer: The bid you present to a seller, showing how much you’re willing to pay. This may lead to a negotiation.

• Primary residence: The legal term for your home, provided you live there for the majority of the year and can prove it.

• Real estate agent: A licensed professional who helps sellers and buyers make homebuying deals. Some specialize in working with first-time homebuyers. A Realtor® is a real estate agent who belongs to the National Association of REALTORS®.

We’re Here to Help

Buying your first home is exciting, but there is so much to learn before you get to that point. Twin Cities Habitat for Humanity offers a wide range of resources to help first-time homebuyers build their future.