Home buying glossary
The words you'll hear from your lender, agent, and title company — in plain English.
- Adjustable-rate mortgage (ARM)
- A mortgage whose interest rate is fixed for an initial period (e.g. 5, 7, or 10 years) and then adjusts periodically based on a market index. Often starts lower than a fixed rate but carries future-payment risk.
- Amortization
- The schedule by which a loan is paid off over time. Early payments are mostly interest; later payments are mostly principal, even though the total payment stays the same on a fixed-rate loan.
- Annual percentage rate (APR)
- The yearly cost of a loan including the interest rate plus most fees, expressed as a percentage. APR is usually higher than the note rate and lets you compare loan offers on a more apples-to-apples basis.
- Appraisal
- A licensed appraiser's independent estimate of a home's market value, ordered by the lender. If it comes in below the price, the lender will only lend against the lower value, creating an appraisal gap.
- Appraisal gap
- The difference when a home appraises for less than the agreed price. The buyer must cover the gap in cash, renegotiate, or walk away (if an appraisal contingency applies).
- Closing costs
- The fees to finalize a home purchase — lender fees, appraisal, title insurance, escrow/attorney fees, recording, and prepaid taxes and insurance. For buyers they typically total 2%–5% of the price, on top of the down payment.
- Closing Disclosure
- A standardized federal form itemizing your final loan terms and costs. Lenders must deliver it at least three business days before closing so you can review the numbers.
- Conforming loan limit
- The maximum loan amount that Fannie Mae and Freddie Mac will buy, set annually by the FHFA. Loans above it are 'jumbo' loans, which have stricter requirements.
- Contingency
- A condition in the purchase contract that must be met or the buyer can back out and keep their earnest money. Common ones cover financing, appraisal, home inspection, and the sale of a current home.
- Conventional loan
- A mortgage not backed by a government program (FHA/VA/USDA). Typically needs a 620+ credit score and as little as 3% down for first-time buyers; PMI is required under 20% down but can be removed later.
- Debt-to-income ratio (DTI)
- Your monthly debt payments divided by gross monthly income. Lenders use it to size your loan — a common guideline is housing ≤ 28% and total debt ≤ 43%, though conventional loans often allow more.
- Down payment
- The cash you pay upfront toward the price, with the rest financed. 20% avoids PMI, but it is not required — the median first-time buyer puts down roughly 8%–9%, and some loans allow 3%–3.5%.
- Earnest money
- A good-faith deposit (often 1%–3% of the price) submitted with your offer, held in escrow and applied to your down payment/closing costs at closing. You can lose it if you back out for a reason not protected by a contingency.
- Escrow
- A neutral third-party account. During the deal it holds earnest money; after closing, a mortgage escrow account collects part of your payment each month to pay property taxes and insurance when due.
- FHA loan
- A mortgage insured by the Federal Housing Administration, popular with first-time buyers. Allows 3.5% down with a 580+ score (or 10% down at 500–579) but requires mortgage insurance premiums (MIP).
- Fixed-rate mortgage
- A loan whose interest rate — and principal-and-interest payment — stays the same for the entire term (commonly 15 or 30 years). Predictable, and the most common choice for buyers.
- Home inspection
- A buyer-hired professional's review of a home's condition (roof, systems, structure). It's for your information and negotiating leverage, and is separate from the lender's appraisal.
- Homeowners association (HOA)
- An organization in some communities/condos that maintains shared areas and enforces rules, funded by mandatory monthly or annual dues that lenders count toward your DTI.
- Loan Estimate
- A standardized three-page form a lender must provide within three business days of your application, showing estimated rate, payment, and closing costs so you can shop lenders.
- Points (discount points)
- Optional upfront fees paid to the lender to lower your interest rate — one point costs 1% of the loan amount. Worth it only if you keep the loan long enough to recoup the cost.
- Pre-approval
- A lender's conditional commitment to lend up to a specific amount after reviewing your credit, income, and assets. Stronger than a pre-qualification and expected with a competitive offer.
- Pre-qualification
- A quick, informal estimate of what you might borrow based on self-reported numbers. Useful for early budgeting but carries little weight with sellers compared to a pre-approval.
- Principal, interest, taxes & insurance (PITI)
- The four parts of a typical escrowed mortgage payment. Lenders look at total PITI (not just principal and interest) when judging affordability.
- Private mortgage insurance (PMI)
- Insurance that protects the lender when a conventional-loan borrower puts down less than 20%. It's added to your payment and can be canceled once you reach ~20%–22% equity.
- Property tax
- An annual tax a local government charges based on your home's assessed value. Rates vary widely by state, county, and city; it's usually collected monthly through your escrow account.
- Rate lock
- A lender's guarantee to hold a quoted interest rate for a set window (e.g. 30–60 days) while your loan closes, protecting you if market rates rise in the meantime.
- Supplemental tax bill
- In a few states (notably California), a one-time property-tax bill sent after the home is reassessed at your purchase price. It arrives months after closing and is not paid through escrow, so budget for it.
- Title insurance
- A policy protecting against defects in the property's ownership history (liens, errors, fraud). Lenders require a lender's policy; an optional owner's policy protects your equity.
- Transfer tax
- A tax some states, counties, or cities levy when a property changes hands, based on the sale price. Who pays (buyer, seller, or split) is set by state custom and can be negotiated.
- Underwriting
- The lender's final, detailed verification of your income, assets, credit, and the property before approving the loan. Avoid new debt or big deposits during this stage.
- VA loan
- A mortgage guaranteed by the Department of Veterans Affairs for eligible service members and veterans. Often needs no down payment and no monthly mortgage insurance, but charges a one-time funding fee.
See these in context in the first-time home buyer guide.