REAL ESTATE TERMINOLOGY
Abstract (Of Title)
A summary of the public records relating to the title to a particular
piece of land. An attorney or title insurance company reviews an abstract
of title to determine whether there are any title defects which must be
cleared before a buyer can purchase clear, marketable, and insurable title.
Acceleration
The right of the mortgagee (lender) to demand the immediate repayment
of the mortgage loan balance upon the default of the mortgagor (borrower),
or by using the right vested in the Due-on-Sale-Clause.
Acknowledgment
A formal declaration before an authorized official (usually a notary public)
by a person who has executed a document, that he did in fact execute (sign)
the document.
Addendum
Something added. Items added to a document, letter, contract, escrow instructions,
etc.
Agent
A person who acts or has the power to act for another. A real estate agent
acts on behalf of the principal (the buyer or seller) and has a fiduciary
responsibility towards the principal. Buyer's Agent: a agent who represents
the buyer and owes fiduciary duties to the buyer. Seller's Agent: an agent
who represents the seller and owes fiduciary duties to the seller. They
are usually referred to as the listing agent who is authorized by a property
owner to find a buyer or a tenant for the property.
Agreement of Sale
A written agreement of contract in which the seller agrees to sell and
the buyer agrees to buy under specific terms and conditions.
Alienation Clause
A clause within a loan instrument calling for a debt in its entirety upon
the transfer of ownership of the secured property. Also called a "due
on sale" clause.
Amenities
Features that enhance and add to the value or desirability of real estate.
Common amenities include swimming pools, professional landscaping, gourmet
kitchen and so on.
Amortization
The reduction of a debt over time by making periodic payments, usually
monthly, a portion of which is interest and a portion of which reduces
the outstanding amount of the debt. The monthly mortgage payments remain
the same over the life of the loan, even though the proportion of principal
to interest changes over time. In the early part of the loan period the
principal repayment is very small and interest repayment is very high.
At the end of the loan that relationship is reversed.
Appraisal
An estimate of the value of property, made by a qualified professional
called an "appraiser".
Appraiser
Someone who practices appraisal. Appraisers' work involves appraising,
review (the process of critically studying a report prepared by another),
or consulting (the process of providing information, analysis of real
estate data, and recommendations on diversified problems in real estate,
other than estimating value).
APR - Annual Percentage Rate
The actual interest rate taking into account the points and other prepaid
fees expressed in annual percentage terms. Not to be confused with initial
interest rate, a teaser rate lenders use to get you into a loan.
ARM-Adjustable Rate Mortgage
A loan that allows the interest rate to change periodically up or down.
The interest rate on an ARM is determined by adding a margin or spread
to a specified financial index. Financial indexes include; Treasury, Certificate
of Deposit,Cost of Funds. The margin is the difference between the index
rate and the ARM rate. Adjustment interval is how often the interest rate
is adjusted. A loan that adjusts its interest rate after six months is
called a six-month ARM. Rate caps limit how much your interest rate can
move up or down. Periodic caps limit the change per adjustment period,
and a lifetime cap governs the maximum amount the interest rate can increase
or decrease over the life of the loan.
Assessment
A local tax levied against a property for a specific purpose, such as
a sewer or street lights.
Assessor
One appointed to assess property for taxation.
Assignment
A transfer or making over to another the whole of any property, real or
personal, or of any estate or right therein. To assign is to transfer.
Assumption
The agreement between the buyer and seller where the buyer takes over
the payments on an existing mortgage from the seller. Assuming a loan
can usually save the buyer money since this is an existing mortgage debt,
unlike a new mortgage where closing costs and new, probably higher, interest
rates will apply.
Balloon Mortgage
A mortgage for a fixed term shorter than necessary to fully repay the
debt. As a result, the remaining amount of principal is due at the maturity
of the loan.
Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for
the same mortgage.
Bond
An insurance agreement by which one party is insured against loss or default
by a third party. In the construction business a performance bond ensures
the interested party that the contractor will complete the project.
Breach
Violation of an obligation in a contract.
Bridge Loan
A loan, usually short term, that finances the portion of the purchase
price not provided by the mortgage loan and the down payment. A bridge
loan is commonly used when a purchaser has not sold his existing home
before he closes on his purchase of a new home. The bridge loan is paid
off when the old home is sold, out of the proceeds of that sale.
Broker
A real estate professional who has acquired a higher level of training
and experience than a sales agent. A minimum number of classes must be
taken along with passing a state exam to acquire a brokers license. Generally
they are a legal representative or a proprietor of the office. Brokers
usually charge a fee or receive a commission for their services.
Building Code
A set of stringent laws that control the construction of buildings, design,
materials and other similar factors.
Building Line or Setback
Distances from the ends and/or sides of the lot beyond which construction
may not extend. The building line may be established by a filed plat of
subdivision, by restrictive covenants in deeds or leases, by building
codes, or by zoning ordinances.
Buy-down
When the lender and or the home builder subsidized the mortgage by lowering
the interest rate during the first years of the loan. While the payments
are initially low, they will increase when the subsidy expires.
Buyers Market
A market condition which occurs in real estate where more homes are for
sale than there are interested buyers.
Cash Flow
The amount of cash derived over a certain period of time from an income-producing
property. The cash flow should be large enough to pay the expenses of
the income producing property (mortgage payment, insurance, maintenance,
utilities, etc.)
Capital Gain
Income that results from sale of a capital (tangible) asset.
Capitalization
An appraising term used in determining value by considering net operating
income and a percentage of reasonable return on investment.
Certificate of Eligibility
The document given to qualified veterans which entitles them to VA guaranteed
loans for homes, business, and mobile homes. Certificates of eligibility
may be obtained by sending DD-214 (Separation Paper) to the local VA office
with VA form 1880 (request for Certificate of Eligibility).
Chain Of Title
A history of conveyances and encumbrances affecting the title as far back
as records are available.
Closing
The end of the transaction when the seller hands over the title to the
buyer in exchange for payment. Also called settlement.
Closing Costs
Costs the buyer must pay at the time of the closing in addition to the
down payment which may include points, title charges, credit report fee,
document preparation fee, mortgage insurance premium, inspections, appraisals,
prepayments for property taxes, deed recording fee, and homeowners insurance.
Closing costs can vary considerably from one financial institution to
another.
Cloud (On Title)
An outstanding claim or encumbrance which adversely affects the marketability
of title.
Commission
Money paid to a real estate agent or broker by the seller as compensation
for finding a buyer and completing the sale. Usually it is a percentage
of the sale price: 4 to 7 percent on houses, 10 percent on land.
Condemnation
A declaration by governing powers that a structure is unfit for use.
Conditional Sales Contract
A contract for the sale of property where the buyer has possession and
use, but the seller retains title until the conditions of the contract
have been fulfilled. Also known as a land contract.
Condominium or Condo
A condominium is a home in a shared building or development. The buyer
gets title the space inside the unit, shares the common areas with other
unit owners and pays a maintenance fee to the condominium association
to pay for needed maintenance, repairs and improvements to the property.
Construction Loan
A short term interim loan to pay for the construction of building or homes.
These are usually designed to provide periodic disbursements to the builder
as he progresses.
Contingency
A condition that must be met before a contract is binding. Contingencies
include: the property must appraise for sales price or buyers approving
of various inspections.
Contract Sale or Deed
A contract between purchaser and a seller of real estate to convey title
after certain conditions have been met. It is a form of installment sale.
Conventional Loan
A fixed rate and fixed term loan that is made without government insurance.
Convertible Loan
Some ARM Color loans include a provision that allows it to convert to
a fixed rate mortgage at specific times, usually from the end of the first
through the fifth years. There is usually an additional fee, $300-$500,
to convert it.
Conveyance
The transfer of the title to land from one to another.
Co-operative or Co-op
In a residential co-operative, the buyer purchases shares in the co-op
corporation which is made up of the residents in the co-op property. The
buyer owns the shares rather than owning real property. In exchange he
has the right to lease and occupy a co-op unit.
Covenants
Agreements written into deeds and other instruments stating performance
or non-performance of certain acts or noting certain uses or non-uses
of property.
Credit Report / History
Lenders will investigate your credit record which is a history of your
debts. They get a report from a credit reporting agency (TRW, Equifax,
TransUnion) which shows if you pay you debts on time and with who you
have current debts with.
Debt-to-income Ratio
The ratio, expressed as a percentage, which results when a borrower's
monthly payment obligation on long-term debts is divided by his or her
gross monthly income.
Deed
A legal document by which property title is transferred from one owner
to another.
Default
Failure to meet legal obligations in a contract, specifically, failure
to make the monthly payments on a mortgage.
Depreciation
Decline in value of a house due to wear and tear, adverse changes in the
neighborhood, or any other reason.
Devisee
A person who receives real estate from another by will.
Down Payment
The down payment is the percentage of the purchase price that the buyer
must pay in cash and may not borrow from the lender. The down payment
amount in addition to the mortgage equals the purchase price of a property.
They can vary from 0% to over 50%. The less your down payment the better
your credit has to be. Lower down payments generally result in higher
interest rates.
Dual Agency
Representing both parties in a transaction. In virtually all states it
is unethical and illegal for a broker to represent buyer and seller in
a real estate transaction without written consent of both.
Due-on-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand
immediate payment of the balance of the mortgage if the mortgage holder
sells the home.
Earnest Money
The deposit money given to the seller by the potential buyer as evidence
of good faith in purchasing real estate. The broker places the money in
an escrow or trust account until closing, when it becomes part of the
down payment.
Easement Rights
A right- of- way granted to a person or company authorizing access to
or over the owner's land. An electric company obtaining a right- of- way
across private property is a common example.
Economic Obsolescence
Loss of useful life and desirability of a property through economic forces,
such as change in zoning, changes in traffic flow, etc., rather than deterioration.
Encroachment
An obstruction, building, or part of a building that intrudes beyond a
legal boundary onto neighboring private or public land, or a building
extending beyond the building line.
Encumbrance
A legal right or interest in land that affects a good or clear title,
and diminishes the land's value.
Equal Credit Opportunity Act (ECOA)
Is a federal law that requires lenders and other creditors to make credit
equally available without discrimination based on race, color, religion,
national origin, age, sex, marital status or receipt of income from public
assistance programs.
Equity
The value of the property less the amount of unpaid mortgages and any
outstanding liens.
Escalation Clause
A clause in a lease providing for an increased rent at a future time due
to increased costs to lessor, as in cost of living index, tax increases,
etc.
Escheat
The reverting of property to the state in the absence of heirs.
Escrow
Money or other valuables given to a third party with directions to deliver
them to another party upon the fulfillment of a specific act or condition.
Escrow Instructions
This discloses when the escrow should be closing and when possession should
take place, proration of property taxes, transfer taxes, release of funds
and the basics of satisfying the escrow demands.
Estate
The ownership interest of a person in real property. Also refers to a
deceased person's property.
Exclusive Agency Listing
A written agreement giving the broker the right to market an owner's property
for a certain period of time, but also allowing the owner to sell the
property during that period without paying a commission.
Exclusive Right - to Sell
A written agreemen Color t between the agent and the owner whereby the
owner promises to pay a fee or commission to the broker if his property
is sold during the listing period, regardless of whether the broker is
responsible for the sale.
Fair Market Value
That price a property will bring given that both buyer and seller are
fully aware of market conditions and comparable properties.
Fannie Mae - FNMA
Nickname for the Federal National Mortgage Association. FNMA is a public
corporation originally established by the federal government. Fannie Mae
purchases mortgage loans from lenders and results in a major source of
funds for mortgage companies.
Fee Simple
Ownership of title to property without any limitation, which can be sold,
left at will, or inherited.
FHA - Federal Housing Administration
Part of the US Department of Housing and Urban Development (HUD). It was
established in 1934 to encourage improvement in housing standards and
communities. The FHA insures mortgage loans.
FHA Mortgage
A mortgage loan insured by the Federal Housing Administration.
FHA Mortgage Insurance
Requires a fee (up to 2.25% of the loan amount) paid at closing to insure
the loan with FHA. In addition, FHA mortgage insurance requires an annual
fee of up to 0.5% of the current loan amount, paid in monthly installments.
The lower the down payment, the more years the fee must be paid.
Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged
property because the borrower has not met the terms of the mortgage. Also
known as a repossession of property.
Freddie Mac - FHLMC
Nickname for Federal Home Loan Mortgage Corporation. It is a quasi-governmental
agency that purchases conventional mortgages from insured depository institutions
and HUD- approved mortgage bankers.
Functional Obsolescence
Loss in value due to out-of-date or poorly designed equipment while newer
equipment and structures have been invented since it's construction.
Ginnie Mae - GNMA
Government National Mortgage Association
Graduated Payment Mortgage - GPM
A type of flexible-payment mortgage where the payments increase for a
specified period of time and then level off. This type of mortgage has
negative amortization built into it.
Grantee
That party in the deed who is the buyer or recipient.
Grantor
That party in the deed who is the seller or giver.
Home or Property Inspection
A detailed inspection of the physical structure, the plumbing, electrical
and heating systems and the overall condition of the home. Typically the
cost is $150-$300 and the results are detailed in a multiple page report.
Homeowners Insurance
Insurance that protects the homeowners from Casualty losses or damage
to the home or personal property and from liability damages to other people
or property. Homeowners insurance is required by the lender and may be
included in the monthly mortgage payment.
Home Owners Association
An association of homeowners within a community formed to improve and
maintain the quality of the community. An association formed by the developer
of condominiums or planned developments.
Housing Expense-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's
housing expenses are divided by his or her gross monthly income.
HUD-The US Department of Housing and Urban Development
Department of Housing and Urban Development, a government agency created
to make the American Dream of home ownership a real possibility for everyone.
HUD has many programs involving homeownership assistance for low and moderate
income families, community planning and development, fair housing and
equal opportunity, and home improvement loans. The Housing and Urban Development
home page is a rich resource of information.
Impound
That portion of a borrower's monthly payments held by the lender or servicer
to pay for taxes, hazard insurance, mortgage insurance, lease payments,
and other items as they become due. Also known as reserves.
Index
A published interest rate against which lenders measure the difference
between the current interest rate on an adjustable rate mortgage and that
earned by other investments (such as one-three and five-year U.S. Treasury
security yields, the monthly average interest rate on loans closed by
savings and loan institutions, and the monthly average costs-of-funds
incurred by savings and loans), which is used to adjust the interest rate
on an adjustable mortgage.
Initial Interest Rate
The initial rate quoted usually is a lower introductory rate, sometimes
called a teaser or discount rate. This lower rate lasts only until the
first adjustment, after which you will be charged the fully indexed rate.
Interest
A charge paid for borrowing money.
Joint Tenancy
Joint ownership by two or more persons with right of survivorship. Upon
the death of a joint tenant, his interest does not go to his heirs, but
to the remaining joint tenants.
Jumbo Loan
A loan which is larger than the limits set by the FNMA and FHLMC (more
than $207,000 as of 1/1/96). Because jumbo loans cannot be funded by these
two agencies, they usually carry a higher interest rate.
Lease
A contract between the owner of real property, called the lessor, and
another person referred to as the lessee, covering all conditions by which
the lessee may occupy and use the property.
Lease With Option To Purchase
A lease where the lessee has the option to purchase the leased property.
The terms of the purchase option must be set forth in the lease.
Legal Description
The geographical identification of a parcel of land.
Lien
A hold or claim on the property of another to satisfy an unpaid debt or
obligation.
Life Time Cap
Life time cap governs the maximum amount the interest rate increase or
decrease over the
life of the loan.
Listing Contract
An agreement between a homeowner and a licensed real estate broker that
authorizes the broker to market the property for sale during a given time
period.
Loan Origination Fee
A fee charged by the lender for evaluating, preparing and submitting a
proposed mortgage loan.
Loan-to-Value Ratio
The ratio of a mortgage loan principal to the property's appraised value
or its sales price, whichever is lower. Loan-to-value ratios vary depending
upon the individual lender's policy.
Lock-in Rate
A commitment made by a lender to make a mortgage loan at a specified rate,
pending loan approval, on or prior to a specified date.
Market Value
The highest price a buyer will pay for a property and the lowest price
the seller will accept in a typical market.
Margin
The amount a lender adds to the index on an adjustable rate mortgage to
establish the adjusted interest rate.
Mechanic's Lien
A lien created by statute on a specific property for labor or materials
contributed to an improvement on that property.
Mortgage
A lien on real estate given by the buyer to secure money borrowed to purchase
the real estate.
Mortgage Broker
An individual or company that obtains mortgages for others by finding
lending institutions, insurance companies or private sources to lend the
money. The mortgage broker may also handle collections and disbursements.
Mortgage Insurance
A policy that provides protection for the lender in case of default and
or which guarantees repayment of the loan if the borrower becomes disabled
or dies.
Mortgage Insurance Premium - MIP
Insurance from FHA to the lender against incurring a loss on account of
the borrower's default.
Multiple Listing
A listing taken by a member of an organization of brokers, whereby all
members have an opportunity to find a buyer.
NAR - National Association of Realtors
The largest trade association in the country serving over 700,000 Realtors.
The purpose of the association is to enhance the ability and opportunity
of its members to conduct business successfully and ethically and to promote
the preservation of the right to own, transfer and use real property.
Negative Amortization
Occurs when your monthly payments are not large enough to pay all the
interest due on the loan. This unpaid interest is added to the unpaid
balance of the loan. The danger of negative amortization is that the home
buyer ends up owing more than the original amount of the loan.
Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage
without the prior approval of the lender.
Notary Public
One who is authorized by federal or local government to attest authentic
signatures and administer oaths.
Note
A written instrument acknowledging a debt and promising payment.
Offer
A proposal to purchase real estate at a particular price, subject to other
specified terms and conditions. Acceptance of the offer by the seller
creates a purchase contract. A counteroffer is a different offer made
in response to the initial offer.
Origination Fee
Application fee(s) for processing a proposed mortgage.
Option
A right given, for consideration, to purchase or lease property upon stipulated
terms within a specific period of time.
Periodic Caps
Periodic caps limit the change per adjustment period of a loan.
PITI Payment
A loan payment that combines Principal, Interest, Taxes and Insurance.
Plat
A map or chart of a lot, subdivision or community drawn by a surveyor
showing boundary lines, buildings, improvements on the land, and easements.
PMI - Private Mortgage Insurance
Insurance issued to a lender to protect it against loss on a defaulted
mortgage loan. Its use is usually limited to loans with high loan-to-value
ratios, generally in excess of 80%. The borrower pays the premiums.
Point
An amount equal to one percent of the loan amount paid to a lender for
making the loan. A lender may charge the borrower several points in order
to provide the loan.
Power of Attorney
A legal document authorizing one person to act on behalf of another.
Prepayment
A privilege in a mortgage permitting the borrower to make payments in
advance of their due date.
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are
allowed in some form, but are not necessarily imposed in many states.
Primary Mortgage Market
Lenders making mortgage loans directly to borrowers such as savings and
loan associations, commercial banks, and mortgage companies. These lenders
sometimes sell their mortgages into the secondary market such as FNMA
or GNMA.
Pre-qualification
Getting pre-qualified for a loan is a free process and normally takes
between 15 minutes to an hour on the phone. The lender will ask you some
basic questions about your household income, time on the job, credit history,
down payment and personal savings. You should get pre-qualified before
looking for properties so you and your real estate agent know in what
price range to start looking.
Principal
One of the parties to a transaction. For example, the buyer and seller
are principals in the purchase of real property. Also the amount of debt,
not counting interest, left on a loan.
Purchase Agreement
An agreement between buyer and seller denoting price and terms of the
sale.
Rate Caps
Rate caps limit how much the interest rate can move up or down.
Real Estate Agent
A licensed person who works under the direction of a broker selling and
renting real estate.
Real Estate Broker
A middle man or agent who buys and sells real estate for a company, firm,
or individual on a commission basis. The broker does not have title to
the property, but generally represents the owner.
Realtor
A Realtor is a real estate professional who is a member of the National
Association of Realtors and subscribes to its strict Code of Ethics. This
professional is committed to protecting and promoting private ownership
of real property, establishing and maintaining high professional standards
of practice, and creating unity in the National Association of Realtors
organization and respect for the real estate profession.
Recision
The cancellation of a contract. With respect to mortgage refinancing,
the law that gives the homeowner three days to cancel a contract in some
cases once it is signed if the transaction uses equity in the home as
security.
Refinance
Obtaining a new mortgage loan on a property already owned.
Often to replace existing loans on the property.
RESPA
Short for the Real Estate Settlement Procedures Act. RESPA is a federal
law that allows consumers to review information on known or estimated
settlement costs once after application and once prior to or at a settlement.
The law requires lenders to furnish the information after application
only.
Restrictive Covenants
Private restrictions limiting the use of real property. Restrictive covenants
are created by deed and may "run with the land," binding all
subsequent purchasers of the land, or may be "personal" and
binding only between the original seller and buyer.
Reverse Annuity Mortgage - RAM
A form of mortgage in which the lender makes periodic payments to the
borrower using the borrower's equity in the home as Satisfaction of Mortgage:
the document issued by the mortgagee when the mortgage loan is paid in
full.
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the
first one.
Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make
to obtain more funds to originate more new loans. It provides liquidity
for the lenders.
Seller's Market
More buyers than sellers.
Shared Appreciation Mortgage - SAM
A mortgage in which a borrower receives a below-market interest rate in
return for which the lender or investor, receives a portion of the future
appreciation in the value of the property. May also apply to mortgage
where the borrowers share the monthly principal and interest payments
with another party in exchange for part of the appreciation.
Special Assessments
A special tax imposed on property, individual lots or all property in
the immediate area, for road construction, sidewalks, sewers, street lights,
etc.
Survey
A map or plat made by a licensed surveyor showing the results of measuring
the land with its elevations, improvements, boundaries, and its relationship
to surrounding tracts of land.
Title
Ownership of real property. Title is transferred from one party to another
through a document called a deed.
Title Insurance
Protection for lenders and homeowners against financial loss resulting
from legal defects in or other claims against the property's title. The
cost of the policy is usually a function of the value of the property
and is often borne by the purchaser and or seller.
Title Search
An examination of municipal records to determine the legal ownership of
property. Usually is performed by a title company.
Trust
A property interest held by one person for the benefit of another.
Trustee
A party who is given legal responsibility to hold property in the best
interest of or "for the benefit of" another.
Truth-In-Lending
A federal law requiring disclosure of the APR-Annual Percentage Rate to
home buyers shortly after they apply for the loan. Also known as Regulation
Z.
Underwriting
The decision whether to make a loan to a potential home buyer based on
credit, employment, assets, and other factors and the matching of this
risk to an appropriate rate and term or loan amount.
VA or US Department of Veterans Affairs
A federal agency designed and operated to help veterans enter the housing
market. The VA assists veterans in terms of low or no down payment, mortgage
qualifications assistance and low interest rates.
VA Loan
A mortgage loan guaranteed by the US Department of Veterans Affairs against
loss to the lender and made through a private lender.
Variable Interest Rate
A fluctuating interest rate which can go up or down depending on the going
market rate.
Waive
To relinquish, or abandon. To forego a right to enforce or require anything.
Wraparound Mortgage
Results when an existing assumable loan is combined with a new loan, resulting
in an interest rate somewhere between the old rate and the current market
rate. The payments are made to a second lender or the previous homeowner,
who then forwards the payments to the first lender after taking the additional
amount off the top.
Zoning Ordinances
The acts of an authorized local government establishing building codes,
and setting forth regulations for property land usage.
