Common Contract Terms You Should Know Before Buying a Home

23 January 2026

Buying a home is one of the biggest financial decisions you'll ever make. Between the thrill of finding your dream home and the stress of securing a mortgage, there's a lot to juggle. But before you sign on the dotted line, it's crucial to understand the contract terms that come with it.

Real estate contracts can be a jungle of legal jargon, and if you’re not careful, you might agree to something you don’t fully understand. That’s why we’re breaking down the most common terms you’ll come across when buying a home—without all the confusing legal talk.

1. Purchase Agreement

Let’s start with the big one—the Purchase Agreement. This is the official contract between the buyer and the seller that lays out all the terms of the sale. Think of this as the blueprint for your home-buying transaction. It includes:

- The agreed-upon price
- Closing date
- Earnest money deposit amount
- Contingencies (which we’ll cover in a minute)
- Any appliances or features included in the sale

This document is legally binding once both parties sign it, so read it carefully!

2. Earnest Money Deposit (EMD)

Ever heard the phrase, "Put your money where your mouth is"? That’s pretty much what an Earnest Money Deposit (EMD) does.

It’s a good-faith deposit you provide to show the seller you’re serious about buying the home. Typically, this amount ranges from 1% to 3% of the home’s purchase price. If everything goes smoothly, this money is later applied to your down payment or closing costs.

However, if you back out of the deal for reasons not covered under a contingency, you could lose this deposit.

3. Contingencies

Contingencies are lifesavers in real estate contracts. They allow buyers to back out of the deal under specific conditions without losing their earnest money. Here are the most common ones:

Home Inspection Contingency

This allows you to have a professional inspect the home for serious issues (like structural damage or mold). If problems arise, you can negotiate repairs with the seller or even walk away from the deal.

Financing Contingency

If your mortgage falls through, this contingency protects you from being forced to buy the home without a loan.

Appraisal Contingency

If the home is appraised for less than the agreed price, this lets you renegotiate the cost or walk away without penalty.

Sale Contingency

This is useful if you’re selling your current home before buying a new one. It allows you to back out if you can’t sell your property in time.

4. Closing Costs

Closing costs are the final fees you’ll pay before officially getting the keys to your new home. These typically add up to 2% to 5% of the home's purchase price and cover things like:

- Loan origination fees
- Title insurance
- Appraisal fees
- Legal fees
- Property taxes for the first few months

Make sure to budget for these!

5. Title and Title Insurance

The title is a legal document proving you own the property. But what if someone else claims they have rights to your home?

That’s where title insurance comes in. It protects you from any legal disputes over property ownership, so you don’t end up fighting a surprise lawsuit for your house.

6. Escrow

No, escrow isn’t some fancy real estate secret—it’s just a middleman system to keep things fair.

During the home-buying process, an escrow account is set up to securely hold the earnest money and closing funds. Once everything checks out (inspections, financing, etc.), the escrow company releases the money, and the deal officially closes.

Even after you buy the house, your mortgage lender might use an escrow account to collect and pay your property taxes and homeowners insurance. This way, you’re never caught off guard by a huge tax bill.

7. Mortgage Terms to Know

You’ll see a LOT of finance-related terms during the home-buying journey. Here are the key ones:

Principal vs. Interest

Your principal is the actual loan amount you borrowed. Your interest is the extra money the bank charges for lending you that money.

Fixed-Rate vs. Adjustable-Rate Mortgage (ARM)

A fixed-rate mortgage has a steady interest rate that stays the same over the life of the loan. An adjustable-rate mortgage (ARM) has a lower initial rate that can increase (or decrease) over time.

Loan-to-Value Ratio (LTV)

This is the ratio of your loan amount to the home’s value. The lower your LTV, the better deal you’ll likely get from lenders.

Private Mortgage Insurance (PMI)

If your down payment is less than 20%, your lender will probably require PMI—a monthly insurance fee that protects them if you default on the loan.

8. Deed vs. Title

People often confuse a title with a deed, but they’re different.

- The title is your legal right to own the home.
- The deed is the physical document that transfers ownership when the home is sold.

Think of it this way: The title is the ownership status, and the deed is the proof of transfer.

9. Closing Disclosure

Before your closing day, your lender must provide a Closing Disclosure—a document that breaks down your final loan terms, monthly payments, interest rates, and closing costs.

Review this carefully to confirm everything matches what you agreed to earlier in the process.

10. HOA Rules & Fees

If you’re buying a home in a Homeowners Association (HOA) community, there are extra rules and fees to be aware of.

HOAs maintain neighborhood standards, covering things like landscaping, exterior home aesthetics, and common areas. But in return, homeowners must pay HOA fees, which can vary widely depending on the community.

Before purchasing, read through the HOA agreement carefully. You don’t want any surprises after moving in!

Final Thoughts

Buying a home is exciting, but the contract process can feel overwhelming—especially if you don’t understand the terminology. Hopefully, this guide makes things a little clearer!

The best advice? Never sign anything without understanding it fully. If you ever feel lost, don’t hesitate to ask your real estate agent or attorney for clarity.

Now that you know these common real estate contract terms, you’re one step closer to confidently navigating the home-buying journey!