Why These Terms Matter Before You Sign Anything
Buying a home exposes you to a dense layer of financial terminology — terms that appear in contracts, lender disclosures, and title documents, often without explanation. Misreading even one of them can cost hundreds or thousands of dollars, delay your closing, or cause you to forfeit funds you've already committed. This glossary covers the core financial terms you'll encounter from the moment you make an offer through the day you get your keys.
For a broader look at what ownership costs beyond the purchase price itself, see our companion piece on the true cost of buying a home. And if you're still weighing renting versus buying, renting basics is a useful starting point.
| Typical Earnest Money Range | 1–3% of purchase price (Common industry practice; varies by local market) |
| Typical Closing Cost Range | 2–5% of loan amount (Consumer Financial Protection Bureau general guidance) |
| Loan Estimate Deadline | Within 3 business days of application (Required by federal TRID rules (RESPA/TILA)) |
| Closing Disclosure Deadline | At least 3 business days before closing (Required by federal TRID rules (RESPA/TILA)) |
| PMI Cancellation Threshold | Typically at 20% equity (Homeowners Protection Act of 1998) |
Core Terms from Offer to Closing
The definitions below follow the rough chronological order in which you'll encounter them during a typical transaction.
Earnest Money
A good-faith deposit a buyer submits alongside — or shortly after — a purchase offer to signal serious intent. It is typically 1–3% of the purchase price, though local norms vary. If the sale closes, earnest money is applied toward the down payment or closing costs; if the buyer backs out without a contractually protected reason, the seller may keep it.
Escrow
A neutral third-party arrangement in which funds or documents are held until specific conditions are met. During a home purchase, an escrow account holds the earnest money deposit and later the full transaction funds until closing. Separately, lenders often require an ongoing escrow impound account after closing to collect monthly installments toward property taxes and homeowners insurance.
Closing Costs
Fees and charges due at settlement, in addition to the down payment. They typically range from 2–5% of the loan amount and cover services like loan origination, appraisal, title search, title insurance, and prepaid items such as homeowners insurance and property tax reserves.
Title Insurance
A one-time premium policy that protects against losses arising from defects in a property's title — such as undisclosed liens, ownership disputes, or recording errors — discovered after closing. Lenders typically require a lender's policy; buyers may also purchase a separate owner's policy for their own protection.
Loan Estimate
A standardized three-page form your lender must provide within three business days of receiving your loan application. It discloses the estimated interest rate, monthly payment, and projected closing costs, allowing you to compare offers from multiple lenders on equal footing.
Closing Disclosure
The final settlement document that itemizes all actual costs, credits, and terms of your loan. Lenders must deliver it at least three business days before closing, giving you time to review and raise questions before signing.
Contingency
A condition written into the purchase contract that must be satisfied — or formally waived — before the transaction can proceed to closing. Common contingencies cover financing approval, a satisfactory home inspection, and an appraisal at or above the purchase price. If a contingency is not met, the buyer can typically withdraw and recover their earnest money.
Down Payment
The portion of the purchase price paid directly by the buyer at closing, not financed by the mortgage. Common down payment thresholds include 3%, 5%, 10%, and 20%, though minimums vary by loan type. Putting down less than 20% on a conventional loan typically triggers a requirement to pay private mortgage insurance (PMI).
Private Mortgage Insurance (PMI)
Insurance required by most conventional lenders when the buyer's down payment is less than 20% of the purchase price. PMI protects the lender — not the buyer — in case of default. It is added to the monthly mortgage payment and can generally be canceled once the homeowner reaches 20% equity.
Prorations
Adjustments made at closing to fairly divide ongoing property expenses — such as property taxes and HOA dues — between the buyer and seller based on how many days each party owns the home during the billing period. You'll see these as credits or debits on your Closing Disclosure.
Understanding how these terms interact matters as much as knowing each definition individually. For example, your earnest money typically flows into escrow immediately after offer acceptance — meaning its fate is tied directly to the contingencies written into your purchase contract. For a deeper look at how those protections work, see our article on contingencies in a home purchase contract.
Earnest Money Is Not Automatically Forfeited
Many buyers worry they'll lose their deposit if the deal falls through, but properly written contingencies protect that money. If your financing falls apart, the appraisal comes in low, or the inspection reveals a major defect — and you have those contingencies in your contract — you can generally withdraw and receive your earnest money back. The risk of forfeiture arises primarily when a buyer backs out without a contractual basis for doing so. Always review contingency language carefully with a real estate attorney or your agent before signing.
Closing Costs: What's Actually on That Settlement Statement
Closing costs are often the biggest financial surprise for first-time buyers because they are separate from — and in addition to — the down payment. Lenders are required to provide a Loan Estimate within three business days of receiving your application, and a Closing Disclosure at least three business days before closing. Both documents itemize these charges so you can review and question them.
2–5%
Average closing cost as share of loan amount
The Consumer Financial Protection Bureau estimates most buyers pay between 2% and 5% of the loan in closing costs, separate from their down payment.
~$6,000
Median closing costs paid by U.S. homebuyers
Industry estimates vary, but buyers in many markets pay several thousand dollars in fees and prepaid items at settlement.
3 days
Minimum review period before closing
Federal law requires lenders to deliver the Closing Disclosure at least three business days before you sign final documents.
Common closing cost line items include origination fees, discount points, appraisal fees, title search and title insurance, attorney fees (in states where required), prepaid homeowners insurance, prepaid interest, and the initial deposit into your escrow impound account. Some of these are negotiable; others are set by third parties. Comparing the Loan Estimate from multiple lenders is one of the most straightforward ways to evaluate total borrowing costs — similar to how buyers compare APR figures on auto financing, as outlined in our auto loan terms glossary.
This article provides general educational information about real estate financial terms and is not legal or financial advice. Consult a licensed real estate attorney or financial professional for guidance specific to your situation.
The content on this site is for informational purposes only and is not a substitute for professional advice. Always consult a qualified professional for guidance specific to your situation.