The words on a purchase offer and sales contract carry real money and real deadlines. This glossary explains what each term means before you sign.
A first purchase offer comes with a vocabulary of its own, and the words are not optional reading. The purchase agreement sets the price, the deadlines and what happens if the deal falls apart, and it is not binding until both the buyer and the seller sign it. This glossary defines the terms you are most likely to see on the offer and the contract that follows, roughly in the order you will run into them.
Offer Terms: Price, Earnest Money and Deadlines
Offer. Your written proposal to buy a home at a specific price and on specific terms. It is not yet a contract, and it usually states how long the seller has to respond before it expires. For what to sort out before you write one, see our guide to making an offer on a house.
Purchase agreement. The contract between buyer and seller that contains all the rules of the sale. Other names for the same document include real estate sales contract, home purchase agreement and purchase contract. It lists the parties, the total purchase price, the details of how you plan to cover the cost of the home, the rules around title insurance and who pays for it, and any conditions each side must meet. Agents usually draft it from a standard template, filling in the details of your deal, and it becomes binding only when both sides sign.
Counter-offer. A response that changes the price or terms of an offer so negotiations can continue. Offers and counter-offers can go back and forth before either side signs, and as the buyer you are free to reject terms you consider unreasonable.
Earnest money (EMD). The deposit you pay when you make an offer to show the seller you are a serious buyer. It commonly runs from 1% to 3% of the purchase price, and the contract spells out exactly when that money can be returned.
Contingencies: Financing, Appraisal and Inspection
Contingency. A requirement written into the offer that has to be satisfied before the deal can move forward. Typical examples include a satisfactory home inspection or appraisal, and if a requirement falls through, the contract can be canceled.
Financing contingency. A clause that cancels the contract if the buyer cannot get a loan. Because so much rides on the loan coming through, many buyers work through mortgage pre-approval before they start making offers.
Appraisal contingency. A clause that lets you out of the contract if the home appraises for less than the price you agreed to pay. The appraisal itself is an independent assessment of the property’s value, developed in part from sales of similar homes.
Inspection contingency. A clause that cancels the contract if the inspection turns up significant defects. The inspection is an evaluation of the property’s condition intended to identify potential problems before you commit.
As-is. A sale in which the seller will not pay for any repairs, even if the home is not safe to live in. If a home is offered as-is, get a complete home inspection and do not buy it without one.
Option to terminate. A contract provision that allows the buyer to back out before a certain date. Note the date on your calendar as soon as the contract is signed.
Condition precedent. A step the seller agrees to take to make the property sellable. These are promises written into the contract, so read them closely and ask about any you do not understand.
Worth knowing
Mark every contingency deadline on a calendar the day you sign. Missing a deadline in your purchase agreement could cost you your earnest money deposit, your loan, or even the house.
Escrow and Earnest Money Disputes
Escrow. An account your lender or loan servicer manages, funded by your payments toward property taxes and homeowners insurance. After closing, many monthly mortgage payments include an escrow portion, and the amounts in it can change over time. Our explainer on how mortgage escrow accounts work covers what goes in and why payments shift.
Earnest money dispute. A disagreement over who keeps the deposit when a deal falls through. The purchase agreement tells you exactly when the earnest money can be returned, which is why the wording of the contingencies and deadlines matters so much. If a dispute comes up, start with the contract language, and read our guide to whether you get your earnest money back for how refunds typically work.
Title, Deed and Title Insurance
Title. Legal ownership of the home. Questions about who holds title and what is recorded against the property get resolved before the sale can close.
Deed. The legal document that transfers ownership, or title, of the property to you. You receive it when the sale is completed.
Title insurance. A policy tied to the home’s ownership history. The purchase agreement states whether title insurance is required and who pays for it, so check that line before you sign rather than at the closing table.
Settlement, Closing Date and Possession
Closing (settlement). The appointment at which the sale is finalized: you hand over your down payment, sign the loan and transfer documents, and receive title to the home. The purchase agreement sets the closing date and the rest of the timeline, and it also addresses when you take possession of the home, so read those dates together if you are coordinating a move.
Closing costs. The charges due on closing day, on top of the down payment. They can cover the appraisal, title insurance, recording the deed and other services, and they commonly run from 2% to 5% of the purchase price. The contract should say who pays what. For a full breakdown of the money due on closing day, see how much cash you need to close on a house.
Disclosures and Seller Concessions
Seller disclosure. What a seller must tell a buyer about the property’s condition depends on state law, and the requirements are not the same everywhere. If you have questions about what applies to the home you are buying, ask a real estate attorney or your state’s real estate commission.
Seller concession (seller credit). Money the seller agrees to contribute toward the buyer’s closing costs. Concessions are negotiated as part of the deal, and the contract should state exactly which closing costs each side pays. If a credit is promised verbally, get it written into the agreement before you sign.
Related guides
- Before You Make an Offer on a House: how to prepare your finances and your questions before you commit to a price.
- The Loan Estimate and Closing Disclosure, Line by Line: the two loan forms you will compare, and what each line covers.
- How Much Does a Home Appraisal Cost, and Who Pays?: what to expect from the appraisal behind your appraisal contingency.
The short version
- A purchase agreement becomes binding only when both the buyer and the seller sign it; until then, offers and counter-offers can go back and forth.
- Earnest money, the deposit that shows a seller you are a serious buyer, commonly runs from 1% to 3% of the purchase price.
- Financing, appraisal and inspection contingencies let the contract be canceled if the loan fails, the appraisal comes in low, or major problems turn up.
- Buyer closing costs commonly run from 2% to 5% of the purchase price, and the contract should say who pays what.
- Missing a deadline in the purchase agreement could cost you your earnest money deposit, your loan, or even the house.
Readers also ask
What is the difference between an offer and a purchase agreement?
The offer is your proposal to buy at a certain price and terms. The purchase agreement is the binding contract that results once the seller accepts or you both negotiate agreed terms and sign.
How much earnest money do I have to put down?
The deposit is commonly between 1% and 3% of the purchase price, though amounts vary by deal and local practice. The purchase agreement should state exactly when that money can be returned.
What happens if the appraisal comes in lower than my offer?
An appraisal contingency lets you cancel the contract if the home appraises for less than the price you agreed to pay. What happens next depends on your contract language and on what the parties negotiate.
Should I have an attorney review the purchase agreement?
Having a real estate attorney read through the contract before you sign is a sensible step. Whether one is required or customary depends on where you are buying, so check local practice.
This guide is general information about U.S. mortgages, not financial, tax or legal advice. Loan terms depend on the lender and on your credit, income and property, so confirm the details with your lender, and see consumerfinance.gov for official guidance.
