Let's be real — the first time most people sit down with a real estate contract or a mortgage disclosure, it can feel like reading a foreign language. Amortization. Encumbrance. Subordination clause. What does any of that mean, and why does it matter to you?
Here's the thing: it matters a lot. Every word in those documents carries legal and financial weight, and the buyers who take a little time to learn the vocabulary before they start shopping tend to come out of the process far better than those who don't. Less confusion, fewer surprises, and a lot more confidence when it's time to make a move.
What's even better, there are fewer surprises down the road and way less buyer's remorse.
Mike Oddo, CEO of HouseJet, has seen it play out hundreds of times. "The buyers who do their homework on what these terms mean before they're sitting in front of a contract are the ones who feel in control of the process," he says. "Real estate has its own language, and once you speak it, the whole thing becomes less intimidating. You stop feeling like things are happening to you and start feeling like you're the one calling the shots. That shift alone can save people from making decisions they'll regret."
So let's walk through the terms that actually matter — the ones you'll run into whether you're buying a starter home or a forever home.
Pre-Approval vs. Pre-Qualification
These two get used all the time interchangeably, but they are not the same thing.
A pre-qualification is informal. You tell a lender your income, your debts, your assets — and they give you a rough estimate of what you might be able to borrow. No documents checked, no credit pulled. It's essentially a ballpark. Note: In that it's just a rough estimate, it does not carry the weight of a true pre-approval.
A pre-approval is the real deal. The lender actually verifies your finances — tax returns, pay stubs, bank statements, the works — and issues you a conditional commitment for a specific loan amount. When sellers are choosing between multiple offers, a pre-approval letter carries way more weight. Again, a pre-qualification letter? Much less firm (and much less effective).
If you're serious about buying, get pre-approved before you start touring homes.
Earnest Money Deposit
Once a seller accepts your offer, you'll put down an earnest money deposit — a good-faith payment that says "I'm serious about this." It typically runs between 1% and 3% of the purchase price, though it varies by market.
This money goes into an escrow account and gets applied toward your down payment or closing costs when the deal closes. If the deal falls apart because of a contingency — more on those in a moment — you'll usually get it back. If you decide to back out for a reason not covered in your contract, you may lose it. Understand exactly what the agreement says before you hand over that check.
Contingencies
A contingency is a condition written into your purchase agreement that protects you if something specific goes wrong. The three you'll see most often are:
The financing contingency lets you walk away without penalty if your mortgage falls through. The inspection contingency gives you the right to renegotiate or back out if the home inspection turns up serious problems. The appraisal contingency protects you if the home appraises for less than the price you agreed to pay.
In competitive markets, some buyers waive contingencies to make their offer stand out. That strategy can work — but it also means giving up protections that could save you a lot of money if something goes sideways. Know exactly what you're agreeing to before you waive anything.
The Appraisal
Your lender won't just take your word for it that the home is worth what you're paying. Before they fund the loan, they'll send out an independent appraiser to assess the property's market value.
If the appraised value comes in lower than your purchase price, you've got an appraisal gap. At that point, you'll need to make up the difference in cash, renegotiate the price with the seller, or — if you have the contingency in place — walk away. This is one of those moments where having that appraisal contingency really pays off.
Loan-to-Value Ratio (LTV)
Your loan-to-value ratio is the percentage of the home's value that you're financing. If the home is worth $400,000 and you're borrowing $320,000, your LTV is 80%.
Lenders pay close attention to this number because it represents their exposure. The higher your LTV, the more risk they're taking on. Cross the 80% threshold on a conventional loan and you'll likely be on the hook for private mortgage insurance.
Private Mortgage Insurance (PMI)
PMI is one of those things that catches buyers off guard when they see it on their monthly statement. If you put down less than 20% on a conventional loan, your lender will typically require you to carry private mortgage insurance. It protects them — not you — if you stop making payments.
The cost usually runs between 0.5% and 1.5% of your loan amount per year. On a $350,000 loan, that could be $145 to $435 a month tacked onto your payment. It's not permanent, though. Once you've built 20% equity in the home, you can typically request to have it removed.
Debt-to-Income Ratio (DTI)
Before approving your loan, lenders will calculate your debt-to-income ratio — the percentage of your gross monthly income that goes toward paying debts. They'll add up your future mortgage payment plus your existing monthly obligations (car payments, student loans, credit card minimums) and divide that by your gross monthly income.
Most conventional lenders want to see that number at 43% or below. The lower it is, the more loan options you'll have and the better rate you're likely to get.
Escrow — Two Different Things
Escrow is one of those words that shows up in two totally different contexts, which confuses a lot of buyers.
During the transaction, your earnest money and any other funds sit in an escrow account managed by a neutral third party — usually a title company or attorney — until closing.
After closing, your lender may set up a separate escrow account to collect monthly payments for property taxes and homeowners insurance. Instead of you remembering to pay a large insurance bill once a year or a tax bill twice a year, your lender collects a portion of those costs with every mortgage payment and pays them on your behalf when they come due.
Title and Title Insurance
The title is the legal record that shows who owns a property. Before closing, a title company will do a title search — digging through public records to make sure there are no liens, unpaid judgments, boundary disputes, or other claims that could cloud your ownership.
Title insurance is what protects you if something slips through. Maybe there's an old lien that didn't show up in the search. Maybe a previous owner's signature was forged on a deed. Title insurance means those issues don't become your financial problem. You pay for it once at closing and it covers you for as long as you own the home.
Closing Costs
Closing costs are the collection of fees and expenses that come due at the end of the transaction, separate from your down payment. They typically run between 2% and 5% of the loan amount and include things like lender origination fees, title insurance, recording fees, prepaid homeowners insurance, and prepaid property taxes.
Your lender is required by law to give you a Loan Estimate within three business days of receiving your application. Read it carefully. It breaks down what you can expect to pay at closing so nothing catches you off guard.
Discount Points
When you're locking in a mortgage rate, your lender may give you the option to buy down your rate by paying discount points upfront. One point equals 1% of the loan amount and typically lowers your rate by about 0.25%, though this varies by lender and market conditions.
Whether it makes sense to pay points comes down to how long you plan to stay in the home. If you're planning to sell in three years, buying points probably doesn't pay off. If you're there for the long haul, it can save you a meaningful amount of interest over time.
Fixed-Rate vs. Adjustable-Rate Mortgage
A fixed-rate mortgage locks your interest rate in for the life of the loan. Your principal and interest payment stays the same whether it's year one or year twenty-nine. Predictable and simple.
An adjustable-rate mortgage (ARM) offers a fixed rate for an initial period — typically five, seven, or ten years — and then adjusts periodically based on a market index. ARMs often start with lower rates than fixed loans, which can be attractive depending on where rates are and how long you plan to own the home. But they carry uncertainty, and that's worth factoring into your decision.
A Straight-Up Warning From HouseJet
The team at HouseJet wants to say this as plainly as possible: do not sign a contract, a disclosure, a mortgage application, or any other document related to your home purchase unless you fully understand every single term that applies to you.
This isn't about being paranoid — it's about protecting yourself in a transaction that may be the largest one of your life. If a term is unclear, ask. Ask your agent. Ask your lender. Ask an attorney if you need to. No question is a dumb question when tens or hundreds of thousands of dollars are on the line, and anyone who makes you feel otherwise isn't looking out for your interests.
A good real estate agent and a good lender will welcome your questions. They'll slow down, explain things in plain language, and make sure you're comfortable before you put your name on anything. That's what the right team does.
Take the time to learn the language, ask the questions, and only move forward when you're genuinely clear on what you're agreeing to. Your future self will thank you for it.
