Important Terms to Understand Homebuying

The process of getting ready to buy a home can be complicated — and wordy. Especially if it's your first time. Here, we've made it a little easier for you by defining some of the words and phrases you're likely to come across at the start of your home buying journey.

The big picture

Mortgage: an agreement between a homebuyer and lender that says if the borrower fails to pay off their loan plus interest, the lender can take possession of the property. Mortgage is also often used to refer to a home loan.
Mortgage rate: the percentage of interest on a home loan. Mortgage rates can change with overall economic conditions, but also depend on your credit score and financial circumstances.
Variable rate mortgage: This is a type of mortgage where the rate will go up and down as the economy changes.
Fixed rate mortgage: This kind of mortgage has a rate that will stay the same for the duration of the mortgage.
Appreciation: an increase in the value of a home due to changing market conditions, home improvements and/or other factors.
Depreciation: a decrease in the value of a home due to changing market conditions, wear and tear and/or other factors.
Equity: the difference between what you owe on your mortgage and what your home is currently worth.
Real estate agent: a professional who has completed training and passed a state examination to sell or rent real estate within a particular state. Real estate agents work under a real estate broker. A Realtor® is a real estate agent or broker who is a member of the National Association of Realtors®.

Payment and financing

Before looking at potential houses or meeting with a Realtor, it's important to make sure you're financially ready to buy a home. Mortgages almost always require a down payment, and saving for one is a major first step that can take years, depending on your financial situation. Assistance programs do exist that can help with your down payment, only require small down payments or don't require one at all. Knowing more about down payments and what type of loan you may qualify for will help you plan how much to save.

Down payment: the percentage or amount a buyer pays upfront when buying a home. The average down payment for first time buyers in 2023 was 8%, according to a study by the National Association of Realtors.
AMI (Area Median Income): the median (average) household income within a certain geographic area. AMI is calculated and published annually by the U.S. Department of Housing and Urban Development (HUD) and is a key factor for determining eligibility for many down payment assistance programs.
Assets: Broadly, assets are things of value. Some assets that may be used for mortgage qualification include bank accounts, property and retirement accounts.
DPA (Down payment assistance) programs: loan or grant programs offered by nonprofit organizations, employers or state or local government entities that help people purchase a home. These programs are generally for low- to moderate-income families or first-time homebuyers (FTHBs).
FHA loan: a government-backed loan available to low to moderate earners, including those with lower credit scores or other financial issues. FHA loans allow lower down payments than conventional loans.
Maximum housing expense: the greatest amount an individual or household can afford to spend on housing-related expenses. These include mortgage payments, property taxes and property insurance. A frequently cited rule of thumb is housing expenses should not exceed 28% of your gross monthly income.
VA loan: a home loan backed by the Department of Veteran Affairs for U.S. veterans. These loans have a low down payment or none at all — and nearly 90% of all VA-backed home loans are made without a down payment.

Credit

Working to improve your credit score is another step you can take toward preparing to buy a house. Understanding how credit scores work can help you improve your own. And they do matter: A strong credit score proves to lenders that you are likely to pay back their loan — and is often necessary to qualify for a home loan with optimal terms.

Credit score: a three-digit number that attempts to predict how likely a borrower is to default on a future loan. Companies like FICO and VantageScore calculate credit scores using information about a borrower's bill paying, borrowing and loan repayment history. They generally range from 300 to 850 — the higher your credit score, the better. A strong credit score makes it possible to qualify for more favorable loans.
Credit bureau: a company that collects and retains credit information and then provides that information — for a fee — in the form of a credit report to lenders or creditors. A credit bureau is also commonly referred to as a credit reporting agency. The three main credit bureaus are Equifax, Experian and TransUnion.
Credit repair companies: private, for-profit businesses that claim to help borrowers with debt or credit difficulties. Many companies that say they can “fix” credit problems fast are predatory. Credit repair companies are not the same as credit counseling organizations, which help borrowers safely rebuild their credit.
Credit report: a record of a borrower's credit history, including data from banks, credit card companies, collections agencies and more. This includes whether payments were made on time.The Fair and Accurate Credit Transactions (FACT) Act of 2003 requires all three major credit reporting agencies to provide credit reports to each consumer once a year upon request, free of charge. Consumers can request their report at annualcreditreport.com.
Default: failure to repay a loan according to terms agreed upon between the borrower and the lender. Generally, one goes into default when they completely stop making loan payments for a period of time. Defaulting hurts your credit score, but there are paths to building your credit back up after a default.
Delinquency: any late payment on a loan, credit card or other debt payment. Depending on how long the loan remains unpaid, your credit score could be affected.
DTI (Debt-to-Income ratio): monthly debt payments divided by gross monthly income equals your DTI. Lenders use this number to determine how much a borrower can afford to spend on monthly home loan payments.
Equal Credit Opportunity Act: enacted in 1974, it made it illegal for any creditor to discriminate against any applicant based on race, color, national origin, age, sex, marital status, receipt of income from public assistance programs or the applicant's good faith exercise of his or her rights under the Federal Consumer Credit Protection Act.
Non-traditional credit: If a potential buyer lacks an established credit history, they might assemble a non-traditional credit history which would involve proof of regular payments to entities other than a lender. These might include rent, utility or cell phone payments.

Getting serious

After you've built up your credit and saved for a down payment, the next step might be pre-qualification or pre-approval for a loan. In addition to showing sellers you're serious about buying, prequalification or preapproval will also give you a clearer idea of what you're able to afford.

Mortgage pre-qualification: an estimate from a bank or other lender of how much they would lend a borrower. This is based on information provided by the borrower.
Mortgage pre-approval: an offer from a lender to loan a certain amount, good for a given time frame. This is based on information verified by the lender including a credit check and is more formal than pre-qualification.