All the Terms You Need to Know as a First-Time Home Buyer

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Purchasing a home is one of the biggest and most exciting decisions a person will ever make—but the process of getting the deal done can also be of the most intimidating. If you’re not in the real estate business, terms like comps and lock-in rates, and abbreviations like APR, LTV, HOI, and DTI can seem like a foreign language! In that case, consider us the Duolingo of real estate, because in addition to being the experts on home construction and design, we’re here to empower you through the home buying process. 

Below, we compiled a cheat sheet of all of the terms, abbreviations, and explanations that you need to know to feel confident and informed, whether you’re a first-time home buyer or just want to refresh your memory. From adjustable-rate mortgages to underwriting, we’ve broken down the list alphabetically so that you can quickly find what you’re looking for. Our advice? Bookmark this page so that you can easily refer back to it throughout your house-hunting and home-buying journey. Best of luck!

A – C

Adjustable-rate mortgage (ARM): A mortgage loan that has an interest rate that may change over time. 

Amortization: The process of paying off a loan over time through set installments at set intervals.

Appraisal: A professional evaluation of a home’s value. Appraisals by a licensed appraiser are typically required in order to secure a loan.

Closing costs: All of the extra fees associated with a home sale besides the actual cost of the home, including lender fees, title fees, applicable taxes, and more. 

Closing date: The date when property ownership will officially be transferred from the seller to the buyer. This is also typically when the seller receives payment.

Closing disclosure (CD): A written breakdown of all of the terms of the loan, including closing costs, monthly payment amounts, and repayment schedule, among other details.

Collateral: Lenders often require borrowers to guarantee a loan with another asset, which is called collateral. If the loan terms aren’t met, the lender has the right to take possession of the collateral asset.

Commitment letter: A formal written pledge from a lender to fund your home loan, spelling out the specific loan terms. 

Comparables (comps): Recent home sales in the same area with roughly the same specs. The sale prices for comps are used to help determine fair market value of the home for sale. 

Contingency: Conditions that must be satisfied before a home sale can close. Examples of contingencies can include inspections, financing requirements, and the seller closing on a new home.

Counteroffer: A seller’s response to a buyer when said buyer makes an offer on a home and the seller proposes different terms.

Credit score: A numerical rating that helps determine the level of risk associated with a potential buyer seeking out a home loan. Credit scores are based on a borrower’s credit history and monitored by certified third-parties like Experian, TransUnion, and Equifax.

D – G

Days on market (DOM): The number of days a home has been officially listed for sale. A longer DOM can signal an issue with the property or a seller who’s getting eager to make a deal. 

Debt-to-income ratio (DTI): The percentage of a borrower’s income that goes towards debt payments. 

Down payment: The money that a buyer pays a lender upfront. Down payments are typically at least 20% of the total home cost, but can be more or less.

Earnest money deposit: A good-faith deposit that a buyer offers the seller to demonstrate that they’re serious about the transaction. 

Escrow: When a real estate transaction happens, funds are temporarily held in a third-party account, known as an escrow account, until the deal is done.

Equity: The percentage of a home’s value that the homeowner has already paid off. If a borrower has paid 60% of the home value so far, for example, they have a 60% equity stake in the property.

Fixed-rate mortgage: A home loan that maintains the same interest rate throughout the duration of the loan.

Gross monthly income: A person’s total monthly earnings before accounting for taxes and other deductions. 

H – L

Home inspection: A professional, comprehensive assessment of a property’s structure done by a licensed third party prior to the final sale of a home to evaluate the property’s condition, which helps ensure transparency during the transaction.

Homeowners Association (HOA): An organization that decides on, and enforces, rules for the area or neighborhood. Homeowners pay into the HOA, which often goes towards maintenance, public spaces, and community upgrades.

Homeowners insurance (HOI): A type of property insurance that provides protection on a residence in the case of damage and/or loss, as well as liability coverage. Some lenders require a homeowner to purchase HOI as a condition of the loan.

Interest rate vs. annual percentage rate (APR): Your interest rate is the percentage a lender charges you for borrowing money, or how much you pay each year on your loan’s outstanding balance. Your APR is the true total cost of the loan over time, as it includes the interest rate as well as lender fees, broker fees, mortgage insurance, and other costs associated with the loan.

Lien: When a seller owes a debt, their lender can file a lien, which is a legal claim to be repaid before the sale can close.

Loan estimate: A standardized form from a lender that outlines the potential loan terms, interest rate, costs, and payment schedule.

Loan modification: A change to the terms of the mortgage. 

Loan origination fees: Lenders charge loan origination fees to cover the costs associated with creating and processing a mortgage loan. 

Loan-to-value ratio (LTV): The percentage of the home’s value being financed through the mortgage loan. For example, if a buyer makes a 20% down payment on a home, the LTV is 80%.

Lock-in rate: The agreed mortgage interest rate set by a lender that guarantees said interest rate will not change for a specified period of time.

M – P

Market value: The estimated value of a home at any point in time.

Multiple Listing Service (MLS): A comprehensive database used by real estate professionals to both list and search for properties on the market. MLS data includes relevant details like lot size, number of bedrooms and bathrooms, property history, and photos, among many other specs.

Mortgage rate: The interest rate on a home loan.

Net monthly income: A person’s gross (total) monthly income minus taxes and other paycheck deductions.

Offer: A formal, legally-binding proposal from a buyer outlining their preferred home price, terms and contingencies, and payment details to a seller.

Pre-approval: A conditional agreement from a lender stating how much money they’re willing to commit to lending to a potential buyer for a mortgage based on verified financial information such as debt, income, assets, and credit.

Pre-qualification: An initial, more preliminary step than pre-approval, where the lender makes an informed estimate on how much a potential buyer can afford to borrow based on unverified financial information (such as debt, income, and assets), and a basic credit assessment.

Principal: The original amount of the loan, excluding fees, interest, and any additional costs.

Private mortgage insurance (PMI): A type of mortgage insurance typically required by lenders if the buyer’s down payment is less than the standard 20% of the home price. A PMI protects the lender—not buyer—if the buyer should ever stop making payments on the loan.

Q – Z

Realtor vs. real estate agent: Realtors are real estate agents who are also members of the National Association of Realtors, providing an added level of education and a specific code of ethics. All Realtors are real estate agents, but not all real estate agents are Realtors.

Seller’s market vs. buyer’s market: Seller’s and buyer’s markets are determined by supply and demand. When the inventory of homes for sale is larger than the pool of buyers, it’s a buyer’s market. When buyers are competing for a limited number of available homes, it’s a seller’s market. 

Title: A document that proves ownership of a property (or car, or other tangible asset). 

Title insurance: A policy that protects both buyers and lenders from financial losses or legal disputes in the case of hidden errors in the title of a property, such as unpaid taxes, fraud, or document errors.

Underwriting: The process through which a lender assesses the risk of providing a loan to a particular borrower.

ABOUT THE AUTHOR

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Amy Gordon

Amy Gordon is a freelance writer and editor who splits her time between New York, NY and Vieques, PR. When she’s not at her desk, you’ll probably find her on a plane with her nose in a book, in the Caribbean snorkeling through coral reefs, or on the couch watching true crime TV. Learn more and read her work at www.amygordonmedia.com.

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