Real Estate Closing Terms to Know

Real Estate Closing Terms to Know

You may encounter many terms when buying a house that you are not familiar with. In this process, it is crucial to understand what your realtor, loan officer and contracts are saying. Here are some closing terms you might encounter when buying a house to help you understand them.


Underwriting is a process by which an institution or individual assumes financial risk in exchange for a fee. Mortgages are the most common form of underwriting. The mortgage underwriting process involves researching factors like income, employment status, debt and credit score in order to determine whether or not the borrower will be able to repay the loan as agreed.

The underwriters estimate the level of risk that the applicant can handle before taking on the risk. The research is then used to help underwriters determine fair loan rates. In some cases the risks of the borrower are too high for the underwriters to take on the risk. The underwriters may then reject the applicant.

Closing costs

This is possibly the most widely known and understood of the closing terms on this list. Closing costs refer to the additional expenses that buyers and sellers incur in order to close a real estate deal. These costs can include origination charges, discount points, title searches, and appraisal fees. They may also include title insurance, surveys, taxes or deed recording fee.

Closing costs are the additional charges/fees that you pay for the completion of the purchase process. They do not include your monthly mortgage payment. As stated above, these charges are extra fees like taxes. The buyer is entitled to a fair estimate of the expected costs and conditions. This estimate is done earlier in the process, after a loan application has been submitted. Closing costs are a concern for both buyers and sellers.

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A deed, which is a legal document signed by the owner of an asset, grants them specific rights to that asset if they meet certain conditions. Deeds can be used to prove ownership or transfer title. Deeds are a document that proves ownership. It is a signed physical document filed by both parties. The deed must be in writing, filed with the public records,, and notarized. The deed may be challenged in court if these requirements aren’t met.

There is a small difference between the terms “deed” and “title”. The deed, as stated earlier, is a document that proves the ownership. The deed states the ownership or title of the property. The title is not a real thing, but a legal concept that states who owns the property. The ultimate ownership is the legal right of the buyer to use the property.


Escrow refers to a legal concept that describes a financial instrument in which an asset or escrow funds are held by a third-party on behalf of other parties who are completing a deal. An escrow is a financial instrument that holds assets such as money, securities and other assets for one party, before they are transferred to the other. It is often used to buy a house, but it can also be used for other situations.

Say, for example, that company A sells machines to company B located in a different country. Company A will not send machines to another country until it is assured that they will be paid. Company B will not pay company A until the machines are received in good condition. In this case, company B can put the payment into an escrow account and give instructions for the disbursement of the money once the machines arrive. Escrow guarantees that both parties receive the goods they require.

Earnest money

Earnest Money Deposits are funds that buyers deposit to show sellers they’re serious about making an offer. This can be a controversial and confusing part of the home buying process. What happens to the deposit? If everything goes well, the deposit will be used to pay for the down payment and closing cost of a buyer. If the buyer cancels the deal without good cause, the seller will keep the EMD. Although there are some legitimate reasons for backing out, which would entitle the buyer to get their money back.


Buyers can walk away and keep their earnest deposit if they have valid reasons. For the deal to be completed, all contingencies need to be removed. If the buyers have placed a 10-day contingency, they can hire a home inspection company to inspect the entire house for obvious flaws. If nothing major was found on the 10th, the buyers would be asked to remove the stipulation. After the buyers have removed their contingencies they must proceed with the purchase, or lose their earnest money.

title insurance

Title insurance

How can you be sure that the seller of a house is the owner and that the property will not be contested by a long-lost relative? Title insurance offers protection from competing claims on the property. The insurer will search public records for any loose ends, such as liens on the property, or fraudulent signatures. You should get your own title insurance policy, as there are separate policies for lenders and buyers. This policy establishes your legal ownership of the property and is recorded in public records.

Private mortgage insurance

PMI is an insurance policy that reimburses the mortgage lender in the event of a default by the buyer. The lender is reimbursed if the foreclosure sale price (mortgage plus costs) is lower than the amount due. Homebuyers who pay less than 20% as a down payment may be required to buy PMI by their lender.

Closing disclosure (CD)

Closing disclosure is a document that the buyer must receive at least three days prior to closing. The closing disclosure summarizes the buyer’s loan, including the mortgage payment breakdown and any fees the buyer must bring. You should use this time wisely. The devil can often be found in the details. If you notice something amiss, ask your title attorney or realtor.

Cash to close

Cash to Close is the amount that buyers will need to complete the transaction on the closing day. This amount is typically between 3% and 6% of the purchase price (which would be $2 539 for a $200,000 mortgage) and includes the appraisal fee, title insurance, attorneys fees, down payment, and any prepaid items, such as funds held in an escrow account.


When certain fees or tax are divided between buyer and seller according to the length of time they have owned the property, this is called prorating. If annual property taxes for a home total $3,000, and the seller leaves the house one-third through the year, on April 1, then they are responsible for one-third, or $1,000, of those taxes. The rest is paid by the buyer.

Learn before you buy

These are only a few real estate closing terms that you might hear at the closing of a house. It is important to understand the closing terms used during other stages of the buying process. It will help you to understand what the parties are saying and what you need to do as a buyer. Be prepared to buy a home by familiarizing yourself with these closing terms.