Study these terms before or after solving the puzzle. Each definition includes a real-world US example.
PREAPPROVAL
Mortgage pre-approval is a lender's written commitment to loan a buyer a specified amount at certain terms, based on verification of income, assets, employment, and credit history. Pre-approval is stronger than pre-qualification (which is just an estimate) because the lender has actually reviewed documentation. A pre-approval letter shows sellers that financing is in place and gives buyers a clear budget. Pre-approvals typically last 60–90 days.
In the competitive 2021–2022 housing market, many sellers refused to even show homes to buyers without pre-approval letters. Buyers with pre-approval could make offers immediately when a desirable home listed; those without often lost homes before they could arrange financing. Pre-approval takes 1–3 business days and costs nothing at most lenders.
ESCROW
Escrow is a neutral third-party arrangement that holds funds or documents until all conditions of a transaction are met. In real estate, escrow serves two purposes: (1) During purchase, it holds the buyer's earnest money deposit and ensures both parties fulfill their obligations before funds are released. (2) In an ongoing mortgage, an escrow account held by the lender collects monthly property tax and insurance payments and pays them on the homeowner's behalf.
When you make an offer on a home and it's accepted, you typically deposit 1–3% of the purchase price as "earnest money" into escrow — demonstrating your serious intent. If the sale closes, this applies to your down payment. If the seller backs out, you typically get it back. If you back out without a valid contingency, you may lose the deposit.
CLOSING
Closing (or settlement) is the final step in the home purchase process where ownership officially transfers from seller to buyer. At closing, the buyer signs the loan documents, pays closing costs and the down payment balance, and receives the keys. Closing costs typically run 2–5% of the loan amount and include lender fees, title insurance, government recording fees, and prepaid expenses.
On a $400,000 home with 10% down ($40,000), a buyer might pay an additional $8,000–$20,000 in closing costs — meaning they need $48,000–$60,000 in total cash at closing. Many buyers are surprised by closing costs' magnitude. Sellers sometimes agree to "seller concessions" — paying some closing costs — to close the deal.
INSPECTION
A home inspection is a professional evaluation of a property's condition, typically conducted after an offer is accepted but before closing. A licensed inspector examines the structure, roof, electrical system, plumbing, HVAC, foundation, and other components. The buyer usually pays $300–$600 for this service. The inspection report may reveal defects that can be used to negotiate repairs, price reductions, or credits from the seller.
A home inspection that reveals a failing HVAC system ($8,000 replacement cost) gives the buyer negotiating leverage. Options include: asking the seller to repair it before closing, negotiating a $8,000 price reduction, or requesting an $8,000 credit at closing. In 2021's extreme seller's market, many buyers waived inspections — a risky gamble that sometimes revealed costly problems post-purchase.
TITLE
Title is the legal right of ownership to a property. Title insurance protects buyers and lenders against problems with the chain of ownership that might emerge after purchase — such as undisclosed liens, fraud, forgery in past deeds, boundary disputes, or missing heirs who claim ownership. Owner's title insurance is a one-time premium paid at closing; lender's title insurance is typically required. Owner's coverage lasts as long as you own the property.
A buyer purchases a home only to discover that the previous owner had an unpaid contractor lien of $25,000 — meaning a contractor can legally claim against the property. Without owner's title insurance, the new buyer is responsible for clearing this lien. With title insurance, the insurer defends and pays any covered claims — potentially saving tens of thousands of dollars.
CONTINGENCY
A contingency is a condition written into a purchase offer that must be satisfied for the sale to proceed. Common contingencies include: financing (the buyer must secure a mortgage), inspection (buyer can back out if major defects are found), appraisal (home must appraise at or above purchase price), and sale (buyer must sell their current home first). Contingencies protect buyers but can make offers less competitive in hot markets.
In 2021-2022, buyers in competitive markets routinely waived financing and inspection contingencies to win bidding wars. While this made offers more attractive to sellers, it exposed buyers to significant risk — being forced to close even if the home had hidden problems or if financing fell through. The 2023 market cooling allowed buyers to reinstate typical contingency protections.
APPRAISAL
A home appraisal is a professional assessment of a property's market value conducted by a licensed appraiser. Lenders require appraisals to confirm the home is worth at least as much as the purchase price before funding a mortgage. Appraisers use the "sales comparison approach" — analyzing recent sales of similar homes nearby (comparables or "comps") — as well as the income and cost approaches for investment properties.
In 2021-2022, rapidly rising home prices created widespread "appraisal gaps" — homes appraising below the accepted offer price. A buyer under contract for $550,000 that appraises at $520,000 faces a $30,000 gap the lender won't cover. Options: renegotiate price, pay the gap in cash, or walk away. Buyers who waived appraisal contingencies were stuck paying above appraised value.
DOWNPAYMENT
The down payment is the upfront cash a buyer pays toward a home purchase, with the remainder financed by a mortgage. Conventional loans typically require 3–20%; FHA loans require 3.5% for buyers with 620+ credit scores. Putting at least 20% down eliminates private mortgage insurance (PMI), which can cost $100–$200/month. Down payment assistance programs help first-time buyers with grants and low-interest second mortgages.
On a $400,000 home, a 20% down payment requires $80,000 in cash, while a 3% down payment requires only $12,000. The 3% buyer finances $388,000 vs the 20% buyer's $320,000 — paying about $300–$400 more per month (including PMI). Many first-time buyers choose low down payments to preserve cash for emergencies and invest the difference.
PMI
Private Mortgage Insurance (PMI) is required by conventional lenders when a buyer puts less than 20% down. PMI protects the lender (not the buyer) if the borrower defaults. It typically costs 0.5–1.5% of the loan amount annually — about $1,000–$3,000/year on a $300,000 loan. PMI can be canceled once equity reaches 20% of the original home value (requested by the borrower) or automatically at 22% equity.
A buyer who puts 5% down on a $400,000 home (borrowing $380,000) with a PMI rate of 0.8% pays $3,040/year ($253/month) in PMI. Once the mortgage balance drops to $320,000 (20% equity based on original price), they can request PMI cancellation and eliminate that expense. Home price appreciation can also help reach 20% equity faster.
EARNEST
Earnest money is a deposit made by a buyer when submitting a purchase offer to demonstrate serious intent and good faith. Typically 1–3% of the purchase price, earnest money is held in escrow and applied to the down payment or closing costs at settlement. If the buyer backs out without a valid contingency, the seller may keep the earnest money. If the seller backs out, the buyer typically receives it back plus potential damages.
On a $500,000 home, a typical earnest money deposit is $5,000–$15,000. In competitive markets, buyers sometimes offer larger earnest deposits ($25,000–$50,000) to signal stronger commitment and differentiate their offer. The earnest money goes into a neutral escrow account — neither the buyer nor seller can access it until the transaction closes or falls through.