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Real Estate Terms
and Definitions
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 agreement 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.
Rescission
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. |
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