Real Estate Terms

Good Stuff To Know!  Some basic terms used in real estate.

Abstract of Title documents recording the ownership of property throughout time.


Adjustable-Rate Mortgage (ARM) a mortgage loan that does not have a fixed interest rate. During the life of the loan the interest rate will change based on the index rate. Also referred to as adjustable mortgage loans (AMLs) or variable-rate mortgages (VRMs)

Amortization a payment plan that enables you to reduce your debt gradually through monthly payments. The payments may be principal and interest, or interest-only. The monthly amount is based on the schedule for the entire term or length of the loan

Annual Percentage Rate (APR) a measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest of the mortgage


Appraisal a document from a professional that gives an estimate of a property's fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property


Appraised Value an estimation of the current market value of a property


Arbitration a legal method of resolving a dispute without going to court

As-is Condition the purchase or sale of a property in its existing condition without repairs

Assessed Value the value that a public official has placed on any asset (used to determine taxes)

Back End Ratio (debt ratio) a ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to gross monthly income

Biweekly Payment Mortgage a mortgage paid twice a month instead of once a month, reducing the amount of interest to be paid on the loan

Bridge Loan a short-term loan paid back relatively fast. Normally used until a long-term loan can be processed

Cash Reserves a cash amount sometimes required of the buyer to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender

Certificate of Title a document provided by a qualified source, such as a title company, that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims

Clear Title a property title that has no defects. Properties with clear titles are marketable for sale

Closing the final step in property purchase where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other agents. At the closing the seller receives payment for the property. Also known as settlement

Closing Costs fees for final property transfer not included in the price of the property. Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes. A common estimate of a Buyer's closing costs is 2 to 4 percent of the purchase price of the home. A common estimate for Seller's closing costs is 3 to 9 percent

Collateral is security in the form of money or property pledged for the payment of a loan. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made

Commission an amount, usually a percentage of the property sales price that is collected by a real estate professional as a fee for negotiating the transaction. Traditionally the home seller pays the commission. The amount of commission is determined by the real estate professional and the seller and can be as much as 6% of the sales price

Comparative Market Analysis (CMA) a property evaluation that determines property value by comparing similar properties sold within the last year

Condominium a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owner also shares financial responsibility for common areas

Conforming loan is a loan that does not exceed Fannie Mae's and Freddie Mac's loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans

Contingency a clause in a purchase contract outlining conditions that must be fulfilled before the contract is executed. Both, buyer or seller may include contingencies in a contract, but both parties must accept the contingency

Conventional Loan a private sector loan, one that is not guaranteed or insured by the U.S. government


Cooperative (Co-op) residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan


Counter Offer a rejection to all or part of a purchase offer that negotiates different terms to reach an acceptable sales contract


Covenants legally enforceable terms that govern the use of property. These terms are transferred with the property deed. Discriminatory covenants are illegal and unenforceable. Also known as a condition, restriction, deed restriction or restrictive covenant

 

Credit Bureau an agency that provides financial information and payment history to lenders about potential borrowers. Also known as a National Credit Repository


CC&R's (covenants, conditions and restrictions) are the governing documents that dictate how the homeowners association operates. These are legal documents and may also be called the bylaws, the master deed or HOA docs. These are legally enforceable by the homeowners association, unless a specific provision conflicts with federal, state or local laws


Credit Enhancement a method used by a lender to reduce default of a loan by requiring collateral, mortgage insurance, or other agreements

Credit History a record of an individual that lists all debts and the payment history for each. The report that is generated from the history is called a credit report. Lenders use this information to gauge a potential borrower's ability to repay a loan

Credit Score a score calculated by using a person's credit report to determine the likelihood of a loan being repaid on time. Scores range from about 360 - 840: a lower score meaning a person is a higher risk, while a higher score means that there is less risk.


Debtor The person or entity that borrows money. The term debtor may be used interchangeably with the term borrower

Debt-to-Income Ratio a comparison or ratio of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income

Deed a document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner's signature. Also known as the title

Default the inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when payment has not been paid after 60 to 90 days. Once in default the lender can exercise legal rights defined in the contract to begin foreclosure proceedings

 

Deposit (Earnest Money) money put down by a potential buyer to show that they are serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal. During the contingency period the money may be returned to the buyer if the contingencies are not met to the buyer's satisfaction

Disclosures the release of relevant information about a property that may influence the final sale, especially if it represents defects or problems. "Full disclosure" usually refers to the responsibility of the seller to voluntarily provide all known information about the property. Some disclosures may be required by law, such as the federal requirement to warn of potential lead-based paint hazards in pre-1978 housing. A seller found to have knowingly lied about a defect may face legal penalties

Discount Point normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan. In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to give you a lower rate and lower payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate will probably go up depending on the index rate

Down Payment the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a down payment less than 20 percent is made


Document Recording after closing on a loan, certain documents are filed and made public record. Discharges for the prior mortgage holder are filed first. Then the deed is filed with the new owner's and mortgage company's names


Easements the legal rights that give someone other than the owner access to use property for a specific purpose. Easements may affect property values and are sometimes a part of the deed

Encroachments a structure that extends over the legal property line on to another individual's property. The property surveyor will note any encroachment on the lot survey done before property transfer. The person who owns the structure will be asked to remove it to prevent future problems

 

Encumbrance anything that affects title to a property, such as loans, leases, easements, or restrictions

 

Equity an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property

Escrow Account a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc

FICO Score "FICO" is an abbreviation for Fair Isaac Corporation and refers to a person's credit score based on credit history. Lenders and credit card companies use the number to decide if the person is likely to pay his or her bills. A credit score is evaluated using information from the three major credit bureaus and is usually between 300 and 850

Fair Housing Act a law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability


First Mortgage the mortgage with first priority if the loan is not paid


Fixed Expenses payments that do not vary from month to month


Fixed-Rate Mortgage a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change

Fixture personal property permanently attached to real estate or real property that becomes a part of the real estate

Foreclosure a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower. Foreclosure laws are based on the statutes of each state

Front End Ratio a percentage comparing a borrower's total monthly cost to buy a house (mortgage principal and interest, insurance, and real estate taxes) to monthly income before deductions

Good Faith Estimate an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application

 

Grantee an individual to whom an interest in real property is conveyed

Grantor an individual conveying an interest in real property

Gross Income money earned before taxes and other deductions. Sometimes it may include income from self-employment, rental property, alimony, child support, public assistance payments, and retirement benefits

Hazard Insurance protection against a specific loss, such as fire, wind etc., over a period of time that is secured by the payment of a regularly scheduled premium

Home Equity Line of Credit a mortgage loan, usually in second mortgage, allowing a borrower to obtain cash against the equity of a home, up to a predetermined amount

Home Equity Loan a loan backed by the value of a home (real estate). If the borrower defaults or does not pay the loan, the lender has some rights to the property. The borrower can usually claim a home equity loan as a tax deduction

Home Inspection an examination of the structure and mechanical systems to determine a home's quality, soundness and safety; makes the potential home buyer aware of any repairs that may be needed. The home buyer generally pays inspection fees

Home Warranty offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance; coverage extends over a specific time period and does not cover the home's structure

Homeowner's Insurance an insurance policy, also called hazard insurance, that combines protection against damage to a dwelling and its contents including fire, storms or other damages with protection against claims of negligence or inappropriate action that result in someone's injury or property damage. Most lenders require homeowners insurance and may escrow the cost. Flood insurance is generally not included in standard policies and must be purchased separately

Homestead Credit property tax credit program, offered by some state governments, that provides reductions in property taxes to eligible households

HUD1 Statement also known as the "settlement sheet," or "closing statement" it itemizes all closing costs; must be given to the borrower at or before closing. Items that appear on the statement include real estate commissions, loan fees, points, and escrow amounts

 

HVAC Heating, Ventilation and Air Conditioning; a home's heating and cooling system

Interest a fee charged for the use of borrowing money

Interest Rate the amount of interest charged on a monthly loan payment, expressed as a percentage

Joint Tenancy (with Rights of Survivorship) two or more owners share equal ownership and rights to the property. If a joint owner dies, his or her share of the property passes to the other owners, without probate. In joint tenancy, ownership of the property cannot be willed to someone who is not a joint owner

Judgment a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source

Jumbo Loan or non-conforming loan, is a loan that exceeds Fannie Mae's and Freddie Mac's loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans

Late Payment Charges the penalty the homeowner must pay when a mortgage payment is made after the due date grace period

Lease a written agreement between a property owner and a tenant (resident) that stipulates the payment and conditions under which the tenant may occupy a home or apartment and states a specified period of time

Liabilities a person's financial obligations such as long-term / short-term debt, and other financial obligations to be paid

Liability Insurance insurance coverage that protects against claims alleging a property owner's negligence or action resulted in bodily injury or damage to another person. It is normally included in homeowner's insurance policies

Lien a legal claim against property that must be satisfied when the property is sold. A claim of money against a property, wherein the value of the property is used as security in repayment of a debt. Examples include a mechanic's lien, which might be for the unpaid cost of building supplies, or a tax lien for unpaid property taxes. A lien is a defect on the title and needs to be settled before transfer of ownership. A lien release is a written report of the settlement of a lien and is recorded in the public record as evidence of payment

 

Lien Waiver A document that releases a consumer (homeowner) from any further obligation for payment of a debt once it has been paid in full. Lien waivers typically are used by homeowners who hire a contractor to provide work and materials to prevent any subcontractors or suppliers of materials from filing a lien against the homeowner for nonpayment

 

Life Cap (or Lifetime Cap) a limit on the range interest rates can increase or decrease over the life of an adjustable-rate mortgage (ARM)


Listing Agreement a contract between a seller and a real estate professional to market and sell a home. A listing agreement obligates the real estate professional (or his or her agent) to seek qualified buyers, report all purchase offers and help negotiate the highest possible price and most favorable terms for the property seller


Loan money borrowed that is usually repaid with interest

Loan Origination Fee a charge by the lender to cover the administrative costs of making the mortgage. This charge is paid at the closing and varies with the lender and type of loan. A loan origination fee of 1 percent of the mortgage amount is common

Loan Servicer the company that collects monthly mortgage payments and disperses property taxes and insurance payments. Loan servicers also monitor nonperforming loans, contact delinquent borrowers, and notify insurers and investors of potential problems. Loan servicers may be the lender or a specialized company that just handles loan servicing under contract with the lender or the investor who owns the loan

Loan to Value (LTV) Ratio a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment

 

Lock-In since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time

Lock-in Period the length of time that the lender has guaranteed a specific interest rate to a borrower

Margin the number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment

 

Market Value the amount a willing buyer would pay a willing seller for a home. An appraised value is an estimate of the current fair market value

Maturity the date when the principal balance of a loan becomes due and payable

Median Price the price of the house that falls in the middle of the total number of homes for sale in that area.  Half the home on the market are above median the other half are below

Merged Credit Report raw data pulled from two or more of the major credit-reporting firms


Modification when a lender agrees to modify the terms of a mortgage without refinancing the loan

Mortgage a lien on the property that secures the Promise to repay a loan. A security agreement between the lender and the buyer in which the property is collateral for the loan. The mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met

Mortgage Insurance a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. Insurance purchased by the buyer to protect the lender in the event of default. Typically purchased for loans with less than 20 percent down payment. The cost of mortgage insurance is usually added to the monthly payment. Mortgage insurance is maintained on conventional loans until the outstanding amount of the loan is less than 80 percent of the value of the house or for a set period of time (7 years is common). Mortgage insurance also is available through a government agency, such as the Federal Housing Administration (FHA) or through companies (Private Mortgage Insurance or PMI)

Mortgage Insurance Premium (MIP)  a monthly payment -usually part of the mortgage payment - paid by a borrower for mortgage insurance


Mortgage Interest Deduction the interest cost of a mortgage, which is a tax - deductible expense. The interest reduces the taxable income of taxpayers


Mortgage Note a legal document obligating a borrower to repay a loan at a stated interest rate during a specified period; the agreement is secured by a mortgage that is recorded in the public records along with the deed

Mortgagee the lender in a mortgage agreement


Mortgagor the borrower in a mortgage agreement


Multiple Listing Service (MLS) Realtors submit listings and agree to attempt to sell all properties in the MLS. The MLS is a service of the local Board of Realtors. The local MLS has a protocol for updating listings and sharing commissions. The MLS offers the advantage of more timely information, availability, and access to houses and other types of property on the market

Note a legal document obligating a borrower to repay a mortgage loan at a stated interest rate over a specified period of time


Notice of Default a formal written notice to a borrower that there is a default on a loan and that legal action is possible

Notary Public a person who serves as a public official and certifies the authenticity of required signatures on a document by signing and stamping the document

Offer indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing


Original Principal Balance the total principal owed on a mortgage prior to any payments being made


Origination the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal

Origination Fee the charge for originating a loan; is usually calculated in the form of points and paid at closing. One point equals one percent of the loan amount. On a conventional loan, the loan origination fee is the number of points a borrower pays

Owner's Policy the insurance policy that protects the buyer from title defects


PITI: Principal, Interest, Taxes, and Insurance the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due


Payment Due Date Contract language specifying when payments are due on money borrowed. The due date is always indicated and means that the payment must be received on or before the specified date. Grace periods prior to assessing a late fee or additional interest do not eliminate the responsibility of making payments on time


Power of Attorney (POA) a legal document that authorizes another person to act on your behalf. A power of attorney can grant complete authority or can be limited to certain acts or certain periods of time or both


Pre-Approval a lender commits to lend to a potential borrower a fixed loan amount based on a completed loan application, credit reports, debt, savings and has been reviewed by an underwriter. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. This does not guaranty a loan until the property has passed inspections underwriting guidelines


Prepayment Penalty a provision in some loans that charge a fee to a borrower who pays off a loan before it is due


Pre-Qualify a lender informally determines the maximum amount an individual is eligible to borrow. This is not a guaranty of a loan

Prepayment Penalty a fee charged to a homeowner who pays one or more monthly payments before the due date. It can also apply to principal reduction payments


Principal the amount of money borrowed to buy a house or the amount of the loan that has not been paid back to the lender. This does not include the interest paid to borrow that money. The principal balance is the amount owed on a loan at any given time. It is the original loan amount minus the total repayments of principal made


Promissory Note a written promise to repay a specified amount over a specified period of time


Property Tax a tax charged by local government and used to fund municipal services such as schools, police, or street maintenance. The amount of property tax is determined locally by a formula, usually based on a percent per $1,000 of assessed value of the property

Property Tax Deduction the U.S. tax code allows homeowners to deduct the amount they have paid in property taxes from there total income


Punch List a list of items that have not been completed at the time of the final walk through of a newly constructed home


Purchase Offer A detailed, written document that makes an offer to purchase a property, and that may be amended several times in the process of negotiations. When signed by all parties involved in the sale, the purchase offer becomes a legally binding contract, sometimes called the Sales Contract

Qualifying Ratios guidelines utilized by lenders to determine how much money a homebuyer is qualified to borrow. Lending guidelines typically include a maximum housing expense to income ratio and a maximum monthly expense to income ratio


Quitclaim Deed a deed transferring ownership of a property but does not make any guarantee of clear title


RESPA (Real Estate Settlement Procedures Act) a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships


Radon a radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems

REALTOR® a real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations


Recorder the public official who keeps records of transactions concerning real property. Sometimes known as a "Registrar of Deeds" or "County Clerk"


Recording Fees charges for recording a deed with the appropriate government agency


Right of First Refusal a provision in an agreement that requires the owner of a property to give one party an opportunity to purchase or lease a property before it is offered for sale or lease to others


Setback the distance between a property line and the area where building can take place. Setbacks are used to assure space between buildings and from roads for a many of purposes including drainage and utilities

Settlement Statement a document required by the Real Estate Settlement Procedures Act (RESPA). It is an itemized statement of services and charges relating to the closing of a property transfer. The buyer has the right to examine the settlement statement 1 day before the closing. 


Short Sale a sale of real estate where proceeds are less than the liens on the property.  This lien balance may include not only principal balance but in some cases past due amounts and fees if there are missed payments.   If the owner cannot make up the difference, the lien holder has agreed to accept less than the lien amount.


Survey a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc. Surveys are conducted by licensed surveyors and are normally required by the lender in order to confirm that the property boundaries and features such as buildings, and easements are correctly described in the legal description of the property


Title a legal document establishing the right of ownership and is recorded to make it part of the public record. Also known as a Deed


Title Company a company that specializes in examining and insuring titles to real estate


Title Defect an outstanding claim on a property that limits the ability to sell the property. Also referred to as a cloud on the title


Title Insurance insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for home buyers. An insurance policy guaranteeing the accuracy of a title search protecting against errors. Most lenders require the buyer to purchase title insurance protecting the lender against loss in the event of a title defect. This charge is included in the closing costs. A policy that protects the buyer from title defects is known as an owner's policy and requires an additional charge


Title Search a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property


Transfer Taxes State and local taxes charged for the transfer of real estate. Usually equal to a percentage of the sales price


Truth-in-Lending (TIL) a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan. Otherwise known as TILA or Truth-in-Lending Act


Trustee a person who holds or controls property for the benefit of another


Underwriting the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value


Up Front Charges the fees charged to homeowners by the lender at the time of closing a mortgage loan. This includes points, broker's fees, insurance, and other charges


Variance a special exemption of a zoning law to allow the property to be used in a manner different from an existing law


Walk Through or Final Walk Through, the final inspection of a property being sold by the buyer to confirm that any contingencies specified in the purchase agreement such as repairs have been completed, fixture and non-fixture property is in place and confirm the electrical, mechanical, and plumbing systems are in working order

Warranty Deed a legal document that includes the guarantee the seller is the true owner of the property, has the right to sell the property and there are no claims against the property

Zoning local laws established to control the uses of land within a particular area. Zoning laws are used to separate residential land from areas of non-residential use, such as industry or businesses. Zoning ordinances include many provisions governing such things as type of structure, setbacks, lot size, and uses of a building

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