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Whether you're a first-time buyer or moving up, understanding these essential terms can help you navigate the homebuying process with confidence.
1. Pre-Approval
When you’re preparing to buy a home, “pre-approval” is often one of the first terms you’ll encounter—and one of the most important. Getting pre-approved by a lender signals to sellers that you’re serious, financially prepared, and ready to make an offer.
Pre-approval is a formal process where a mortgage lender evaluates your creditworthiness and determines how much money they’re willing to lend you to buy a home. It’s different from a pre-qualification, which is more of an estimate based on self-reported financial information. When you’re pre-approved, the lender issues a pre-approval letter. This document states how much you're eligible to borrow, the loan type, and interest rate assumptions (which can fluctuate until you lock them in). Most pre-approval letters are valid for 60 to 90 days.
While pre-qualification is a good starting point, pre-approval carries more weight during home negotiations.
Lenders use pre-approval to assess risk. By reviewing your financials ahead of time—such as:
- Credit score
- Debt-to-income (DTI) ratio
- Income and employment history
- Bank statements
- Tax returns
—they can determine your borrowing power. This helps you avoid wasting time shopping for homes outside your budget and ensures you meet loan eligibility requirements upfront. For sellers, a pre-approval letter from a reputable lender gives peace of mind that the deal is more likely to close without financing delays.
When Should You Get Pre-Approved?
Ideally, you should get pre-approved before you start seriously browsing homes. This ensures you’re shopping within your actual price range and not wasting time or falling in love with a house you can’t afford.
You’ll also want to renew your pre-approval if:
- Your letter expires (typically after 60–90 days)
- Your financial situation changes (new job, debt, or large purchases)
💡 Pro Tip
If you're house hunting in a competitive market, getting pre-approved can be a game-changer. Some sellers won’t even consider offers from buyers who haven’t been pre-approved.
2. Down Payment
The term “down payment” is one of the most talked-about aspects of buying a home—and for good reason. It’s the initial cash investment you make toward the purchase price of your home, and it plays a major role in determining your loan type, interest rate, and monthly payment.
A down payment is the portion of the home’s purchase price that you pay upfront, out of pocket, rather than borrowing through a mortgage. For example, if you’re buying a $300,000 home and make a 10% down payment, you’ll pay $30,000 at closing and finance the remaining $270,000 through your mortgage.
This amount is typically due at the closing of the sale—when ownership is officially transferred to you.
Common Down Payment Amounts
While 20% is often cited as the gold standard, it’s not required—especially for first-time buyers. Making a larger down payment typically means:
- Lower monthly payments
- Less interest paid over the life of the loan
- No requirement for Private Mortgage Insurance (PMI) if you reach 20%
But for many buyers, especially first-timers, saving even 5%–10% can be a big hurdle.
Down Payment Assistance Programs
If you’re struggling to come up with a down payment, don’t worry—there are hundreds of down payment assistance (DPA) programs available across the U.S., often targeted to:
- First-time homebuyers
- Low- to moderate-income households
- Teachers, first responders, and veterans
Ask your lender or agent about local DPA options. Many states and municipalities maintain dedicated homebuyer assistance websites with eligibility requirements and applications.
How Your Down Payment Affects Your Loan
Your down payment directly impacts:
- Loan-to-Value (LTV) ratio: the higher the down payment, the lower your LTV, which lenders like.
- Interest rates: larger down payments often secure lower rates.
- PMI requirements: typically waived at 20% or more.
What about gift funds? Many lenders allow part of your down payment to come from a relative’s financial gift, but documentation is required. Check with your specific lender for rules.
🏆 Pro Tip
Even if you qualify for a loan with 0% down, consider putting something down if you can. It’ll reduce the amount of interest you pay and may help your offer stand out in a competitive market.
3. Closing Costs
You’ve found the right home, made your down payment, and you’re just about ready to close the deal—but there’s one more important term to understand: closing costs. These are the final fees and expenses you’ll need to pay before the keys are officially handed over to you.
Closing costs are a collection of service fees and administrative charges associated with processing and finalizing a real estate transaction. These costs typically range from 2% to 5% of the home’s purchase price.
Keep in mind, closing costs aren’t just one fee—they’re a combination of several line-item expenses. Common items include:
- Loan origination fee: Charged by your lender for processing the loan
- Appraisal fee: Covers the professional estimate of the home’s value
- Title search and title insurance: Confirms legal ownership and protects against title defects
- Home inspection fee (if not paid earlier)
- Attorney fees (South Carolina law requires a licensed attorney to handle the closing)
- Credit Report Fee – Covers the cost of pulling your credit.
- Recording fees: Paid to local governments to record the deed
- Prepaid items: Property taxes, homeowners insurance, and interest
Lenders are required by law to provide a Loan Estimate and a Closing Disclosure, which outline all these costs in detail.
In some cases, especially with government-backed loans, you can roll some closing costs into your mortgage, reducing upfront cash needed. But doing so increases your loan amount and total interest paid.
💡 Pro Tip
Since South Carolina law requires a licensed attorney to oversee all real estate closings, it’s smart to select your closing attorney early in the process. An experienced attorney can guide you through the paperwork, explain your final costs, and catch any unexpected fees before you sign.
4. Earnest Money
When you make an offer on a home, you’re not just saying you’re interested—you’re proving it. That’s where earnest money comes in. Think of it as a financial handshake—a deposit that shows the seller you're serious and committed to moving forward.
Earnest money is a good-faith deposit made by a buyer after the seller accepts their offer. This money is held in an escrow account and later applied toward your down payment or closing costs once the deal goes through. Amounts vary but typically range from 1% to 3% of the home’s purchase price. For a $400,000 home, that means putting down $4,000 to $12,000 in earnest money.
💡 Pro Tip
Be prepared to pay earnest money deposits when you sign your purchase agreement. This deposit demonstrates your commitment to the purchase.
5. Contingency
If buying a home is like a contract game of trust, then contingencies are your safety net. A contingency is a condition written into the purchase agreement that must be met for the sale to proceed. If it’s not met, you can legally walk away—often with your earnest money still intact.
Contingencies protect both buyers and sellers by allowing either party to back out of the contract under specific conditions—without penalty. Think of them as escape clauses that keep the deal fair and flexible while important steps unfold (like inspections or appraisals). The most common contingencies relate to financing, appraisal, inspections, and the sale of the buyer’s current home.
Types of Common Contingencies
Here are the ones you’re most likely to encounter:
- Inspection Contingency: This gives you the right to have the home professionally inspected—and to walk away or renegotiate if major issues are discovered.
- Financing Contingency: Also called a mortgage contingency, this ensures you’re not legally bound to buy the home if your loan falls through, despite reasonable effort to obtain it.
- Appraisal Contingency: Required by lenders, this ensures the home appraises at or above the agreed purchase price.
- Home Sale Contingency: This lets buyers make the purchase contingent on the sale of their current home. It’s helpful in slow markets but can make your offer less attractive in competitive areas.
- Title Contingency: Ensures the title is clean—free of liens, disputes, or ownership issues—before you take possession.
What Happens If a Contingency Fails?
Let’s say the appraisal comes in at $380,000, but the agreed price is $400,000. You’ve included an appraisal contingency, so you have options:
- Renegotiate the price
- Make up the $20,000 difference yourself
- Cancel the contract with no penalty
If you didn’t include that contingency, you’d either need to pay the difference or risk losing your earnest money.
💡 Pro Tip
Each contingency comes with a timeframe. Missing a deadline could mean you lose your protection. Work closely with your real estate agent and closing attorney to track key dates and ensure everything is completed on time.
6. Escrow
In the world of real estate, trust is everything. That’s why escrow plays such a central role in the homebuying process. It ensures that money and documents are handled securely and fairly between all parties involved—buyer, seller, lender, and title company.
Escrow is a neutral, third-party service that holds funds and important documents until all conditions of a real estate transaction are met. The escrow provider ensures that:
- The buyer’s funds are safe
- The seller’s property title is clear
- All contingencies are fulfilled
- The deal closes according to the contract
Think of escrow as the middleman that makes sure everything is in order before the home officially changes hands.
What Happens to Escrow After You Buy?
After closing, you might still hear the word “escrow”—especially when talking about your monthly mortgage payments.
Most lenders set up an escrow account for property taxes and homeowners insurance. Here’s how that works:
- Each month, a portion of your mortgage payment goes into the escrow account
- When your taxes or insurance premiums are due, your lender pays them on your behalf
This prevents surprises and ensures those major bills get paid on time.
💡 Pro Tip
After closing, review your escrow account statements regularly. Property taxes and insurance premiums can change from year to year, which may cause your monthly mortgage payment to adjust. Staying informed helps you budget accurately—and if there's an overage, you might even receive a refund.
7. Appraisal
Before a lender agrees to finance your home purchase, they need to know one key thing: Is the home worth the amount you're paying? That’s where an appraisal comes into play.
A home appraisal is an independent, professional estimate of a property's fair market value. Conducted by a licensed appraiser, this step helps confirm that the home's price aligns with its condition, location, and comparable properties in the area. Lenders typically require appraisals to protect themselves from financing more than the home is worth. If the sale price is higher than the appraised value, the lender may deny the loan or require the buyer to cover the difference.
The appraisal process begins with a visit from a licensed appraiser, who inspects the home both inside and out. During this visit, the appraiser takes measurements, photographs, and detailed notes about the home’s condition, layout, location, and any upgrades or unique features. Next, the appraiser conducts a comparable sales analysis, evaluating recently sold homes in the area that are similar in size, style, and condition. These "comps" help determine a fair market value for the property. Finally, the appraiser compiles their findings into a formal report, which is submitted to the lender. This report includes the estimated value of the home along with a detailed explanation of how that value was determined. Appraisals typically cost between $300 and $600, and this fee is usually paid by the buyer.
💡 Pro Tip
If the appraisal comes in lower than your offer, don’t panic—use it as a negotiation tool. You can request the seller to lower the price to match the appraised value or meet halfway to reduce your out-of-pocket expense. Your real estate agent and closing attorney can guide you through next steps, including disputing the appraisal if you believe it missed key features or comps.
8. Title Insurance
When buying a home, you're not just purchasing the structure—you’re also acquiring the legal rights to the property. That’s why protecting yourself with title insurance is critical. It shields you from unexpected legal claims or ownership disputes that could arise after closing.
Title insurance is a policy that protects you (and your lender) from financial loss if problems related to the home’s ownership history arise after the purchase. These problems might include:
- Undisclosed liens
- Forged documents
- Unknown heirs
- Boundary disputes
- Recording errors
- Unreleased mortgages
Unlike most insurance policies, which cover future risks, title insurance protects against past events that could threaten your legal ownership.
Despite a thorough title search conducted before closing, issues can still surface. Some reasons include:
- Clerical mistakes in public records
- Misfiled or misindexed documents
- Prior owner's unpaid taxes or contractor bills
- Hidden wills or claims from missing heirs
Without title insurance, resolving these problems can be expensive and time-consuming, potentially putting your investment at risk.
💡 Pro Tip
Shop around for title services. The cost of title insurance can vary by provider, even though the coverage is similar. You pay the premium once at closing—there are no monthly or annual fees. The policy remains in effect for as long as you (or your heirs) have a legal interest in the property.
9. Fixed-Rate vs. Adjustable-Rate Mortgage (ARM)
Choosing the right mortgage is one of the biggest decisions you’ll make during the homebuying process. The two most common loan types are fixed-rate mortgages and adjustable-rate mortgages (ARMs)—and knowing the difference can save you thousands over time.
A fixed-rate mortgage locks in your interest rate for the entire loan term, whether it’s 15, 20, or 30 years. Your monthly principal and interest payment never changes, which makes budgeting easy and predictable. This is best for buyers who plan to stay in the home long-term or value payment stability.
Benefits:
- Consistent monthly payments
- Protection from rising interest rates
- Easier long-term budgeting
Drawbacks:
- Higher starting interest rate than ARMs
- May cost more in the short term if rates fall
An adjustable-rate mortgage starts with a lower interest rate for a set initial period—typically 5, 7, or 10 years—after which the rate adjusts annually based on market conditions. For example, a 5/1 ARM has a fixed rate for five years, then adjusts once per year. This is best for buyers who expect to sell or refinance before the fixed period ends or want to take advantage of a lower starting rate.
Benefits:
- Lower initial interest rate
- Possible short-term savings
- Ideal for short-term homeownership
Drawbacks:
- Monthly payments can rise significantly
- More financial uncertainty
- Harder to budget long-term
ARM rates are tied to financial indexes plus a margin set by your lender. Most ARMs come with:
- Caps on how much the rate can increase annually
- Lifetime caps limiting how high the rate can ever go
Example: A 5/1 ARM might start at 4.25%, then have a 2% annual cap and a 5% lifetime cap. If rates rise sharply, your payment could increase dramatically—but it won’t exceed those limits.
🏆 Pro Tip
If you’re considering an ARM, ask:
- How often will the rate adjust?
- What’s the adjustment cap?
- What’s the lifetime maximum interest rate?
Compare APR, not just starting rates, to fully understand the long-term cost.
10. PMI (Private Mortgage Insurance)
If your down payment is less than 20%, chances are you’ll encounter Private Mortgage Insurance, or PMI. It’s one of those homebuyer terms that can sound intimidating but understanding how PMI works can help you plan smarter—and save money over time.
PMI is a type of insurance that protects the lender—not you—in case you default on your loan. It’s typically required when you put down less than 20% on a conventional mortgage. The reason? Smaller down payments mean higher risk for lenders. PMI helps offset that risk by covering part of their loss if you stop making payments. Most PMI premiums range from 0.3% to 1.5% of the original loan amount annually.
PMI isn’t one-size-fits-all. Costs vary based on:
- Loan amount
- Credit score
- Down payment size
- Loan type (fixed or ARM)
Private mortgage insurance (PMI) is typically required if you're using a conventional loan and making a down payment of less than 20%. It acts as protection for the lender in case you default on the loan. However, PMI is not usually required for most government-backed loans, such as FHA, VA, or USDA loans. Instead, those programs come with their own insurance-related fees or funding charges that serve a similar purpose.
Here’s the good news: PMI doesn’t last forever. You can request PMI cancellation when your loan reaches 80% loan-to-value (LTV)—either through regular payments or home appreciation. By law, your lender must automatically remove PMI when your LTV hits 78%, as long as your payments are current.
Other options include:
- Refinancing once your home value increases
- Making extra payments to reduce your principal faster
- Getting a new appraisal to show updated home value
💡 Pro Tip
If you’re close to 20% equity, ask your lender for an updated home valuation. You might be eligible for PMI cancellation sooner than you think—especially in a rising market.
Frequently Asked Questions (FAQs) About Homebuying Terminology
1. What’s the difference between pre-approval and pre-qualification?
Pre-qualification is an initial estimate of how much you might be able to borrow, based on self-reported information.
Pre-approval is more formal—it requires documentation and a credit check and gives you a lender-backed statement of what you can actually afford. Sellers take pre-approval more seriously during negotiations.
2. Can I buy a home without a down payment?
Yes, certain loan programs like VA loans (for veterans) and USDA loans (for rural areas) offer 0% down payment options. However, most conventional loans require at least 3% to 5% down unless you qualify for special assistance programs.
3. What if I can’t afford closing costs?
You may be eligible for closing cost assistance through local programs, grants, or lender credits. You can also negotiate with the seller to cover some of the closing costs, especially in a buyer’s market.
4. Is earnest money refundable?
Yes, but only under specific conditions. If you back out for a valid reason covered by a contingency—such as financing, appraisal, or inspection—you typically get your earnest money back. If you walk away without cause, the seller may keep it.
5. When can I stop paying PMI?
PMI can be removed when your loan-to-value (LTV) ratio drops to 80%, either through payments or home value appreciation. Most lenders will remove it automatically at 78% LTV, as long as you're current on your mortgage.
6. How do I choose between a fixed-rate and an adjustable-rate mortgage?
Choose a fixed-rate mortgage if you plan to stay in the home long-term and want predictable payments. Consider an ARM if you expect to move or refinance within a few years and want a lower initial interest rate.
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