Real Estate Terms to Learn Before You Purchase

Posted by Lee and Katherine Keadle on Monday, April 16th, 2018 at 1:58pm.

real estate terms to learn before buying a home

When purchasing a home, you'll encounter plenty of jargon. In real estate, terms like ratification and earnest money are discussed before you even make an offer on a home. Plus, mortgage lenders have their own language to discuss how you'll be paying for the largest investment of your life. Although buying a home can be daunting, learning some of the most common terminology can help with each step of the process.

Earnest Money

When you make an offer to purchase, you'll need to include an earnest money deposit as part of your written agreement to show the sellers that you are "earnest" in your intent to buy their home. The amount is typically 1-3% of the purchase price, so on a $200,000 home you can expect to pay roughly $2,000. This deposit will go towards paying your closing costs unless you default on the offer for a reason other than your contingencies (see below). So, for example, if you change your mind and decide to not buy the home one week before closing, the sellers get to keep your earnest money as payment for the time and money they lost in taking their home off the market.


In a real estate contract, the buyer can add a contingency clause that gives him the right to back out of the contract due to a specific reason without losing his earnest money deposit. Common contingencies include financing (that the buyer has to be able to obtain a loan) or appraisal (that the home must appraise for at least the purchase price). These are such commonplace contingencies that most sellers will agree to them. However, sometimes we see sellers cross out contingencies from the contract if there get to be too many - or if they feel that the buyer is asking for too much. For example, in our strong sellers' market, some buyers want to be able to close on the sale of their current home before purchasing the new one. This contingency is usually viewed as too risky by the seller, so striking out a line like this in the offer to purchase means that the seller agrees to all other parts except for this.

Ratified Offer

Once the buyer and seller have agree to all sections of the contract (price, close date, amount of earnest money, and contingencies), the agreement is called a ratified offer or ratified contract. This means that neither party can cross out lines from the papers. In other words, all parties must adhere to the agreed upon terms.

Down Payment

Some buyers get this term confused with the earnest money deposit. Your lender will discuss with you different options for making a down payment on your home loan. Most buyers put down 3-5% of the purchase price on the day of closing to secure their mortgage. You might think of this as your first mortgage payment because it goes directly toward your loan amount. The more money you can put towards your down payment, the better (see why below).

Private Mortgage Insurance

Also called PMI, Private Mortgage Insurance is a fee you pay to make up for the risk your bank assumes in offering you a loan. If your down payment is less than 20% of the purchase price, the bank considers you at risk for defaulting on your mortgage. As a result, you'll have to either pay a one time fee as your PMI or get a monthly fee tacked on to every monthly payment until your home reaches 20% equity (see below). Talk with your lender to see which of these options will save you more money because this will depend on the amount of time you plan on staying in the home.


This inspection is required by almost all mortgage lenders because it shows signs of termite damage, wood infestation, rotten wood, or moisture under a home. The CL-100 report will either be cleared/passed, or it will show damage that needs to be repaired before the bank is willing to offer a loan on the property. Even when cash buyers purchase a home (and don't have such requirements from their bank), we generally recommend getting a CL-100 inspection for peace of mind.

Settlement Statement

A settlement statement is the primary document you sign on the day of your closing. Sometimes also called a HUD statement, it lists every fee/cost that both buyer and seller pay at closing. As you can imagine, it takes a lot of lines to account for a real estate transaction! Depending on how the attorney organizes the settlement statement, it can be made up of 1,000 or more itemized lines showing everything from prorated HOA fees (meaning that the seller only pays for the amount of time he lived in the home instead of the annual amount), attorney fees, Realtor fees, deed stamps, title insurance, courier fees, and more. Here, you'll also see that earnest money deposit credited to you on the buyer/borrower section.


The more equity you have in your home, the better! Equity can be defined as the value of your home minus the amount you owe on the mortgage. For example, if the current market value is $300,000 and you still owe $200,000 to the bank, then your equity is roughly $100,000 or 33%. The larger your down payment, the longer you spend making monthly mortgage payments, and the more your home value appreciates over the coming months and years, the more equity you'll accumulate. This term is important to understand because once you reach the 20% equity mark, you can contact your bank so that you can stop paying that monthly PMI fee! This process is something that you'll need to initiate - in other words, your bank isn't going to simply stop automatically including this in your payment each month. Also, know that you'll have some costs like an appraisal to ensure you've met that 20% mark. However, this trick can save you up to several hundred dollars a month!

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