Real Estate Terms You Should Know

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A
ACCELERATION CLAUSE  provision in a mortgage that enables the lender to declare the entire outstanding balance of a loan immediately due and payable for various reasons. The most common reasons for accelerating a loan are if the borrower defaults on the loan or transfers title to another individual without notifying the lender.

ADJUSTIBLE RATE MORTGAGE (ARM)  a mortgage where the interest rate changes periodically, according to corresponding fluctuations in a pre-selected index.  Although the initial interest rate may be lower than that of a fixed-rate mortgage, the monthly payments can go up or down when the rate is adjusted.

ADJUSTMENT DATE  date the interest rate changes on an adjustable rate mortgage.

AMENDMENT    A change-either to alter, add to, or correct-part of an agreement without changing the principal idea or essence.      

AMENITY a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, Woods, water) or man-made (like a swimming pool or garden).

AMORTISED LOAN A loan that is paid off - both interest and principal - by regular payments that are equal or nearly equal.

AMORTIZATION  repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)

ANNUAL PERCENTAGE RATE (APR) calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.

APPRAISAL    An estimate of value of property resulting from analysis of facts about the property; an opinion of value.   

APPRECIATION  An increase in the value of a property, due to changes in the market, inflation, and/or improvements to the property.

APPLICATION the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.

APPLICATION FEE   fee charged by the lender to the borrower for applying for a loan. Payment of this fee does not guarantee that a loan will be approved. Some lenders may apply the cost of the application fee to certain closing costs.

APPRAISAL a document that gives an estimate of a property's fair market value; 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.

ARM Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.

BROKER   Broker has several meanings in different situations. Most Realtors are "agents" who work under a Real Estate Broker. Some agents are brokers as well, either working for themselves or under another broker. In the mortgage industry, a broker is an individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself.  Brokers usually charge a fee or receive a commission for their services.

BUILDING CODE based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building

BUY DOWN   A temporary reduction, usually one to three years,  in an interest rate made by paying a lump sum or discount points up front.  A lump sum is paid and held in an account used to supplement the borrower’s monthly payment. Most common reason is that a borrower may expect his earnings to go up substantially in the near future, but wants a lower payment right now.

C
CAP a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease. A set percentage amount by which an adjustable rate mortgage may adjust each adjustment period. For adjustable loans, caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may adjust at each adjustment date while the second number indicates how much a loan may adjust over its lifetime.

CASH OUT REFINANCE  When a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of pulling out money for personal use, it is referred to as a "cash out refinance."

CASH RESERVES  a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.

CERTIFICATE OF ELIGIBILITY document issued by the federal government certifying a veteran's eligibility for a Department of Veterans Affairs (VA) loan.

CLOSE OF ESCROW    The date the documents are recorded and title passes from Seller to Buyer. On this date, the Buyer becomes legal owner, and title insurance becomes effective.   

CLOSING COSTS  customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.

CLOUD ON TITLE    A claim, encumbrance, or condition that impairs the title to real property until disproved or eliminated through such means as a quitclaim deed or a quiet title legal action.   

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. 

COMMUNITY PROPERTY in some Western and Southwestern states, the law specifies that property acquired during a marriage is presumed to be owned jointly by the husband and wife unless acquired as separate property of one spouse or the other.

COMPARABLE SALES    Sales that have similar characteristics as the subject property, used for analysis in the appraisal. Commonly called "comps."   

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.

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

CONVERTIBLE ARMs  An adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate mortgage within specific time and certain conditions as specified in the mortgage note.

CONVEYANCE    An instrument in writing, such as a deed or trust deed, used to transfer (convey) title to property from one person to another.

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.

CREDIT RATING   A borrowers's credit worthiness or risk profile as assessed by the lender. Credit ratings are expressed as letter grades such as A-, B, or C+. These ratings are based on several factors such as the borrower's payment history, any prior foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrower's credit, and different lenders may assign different credit ratings to the same borrower.

CREDIT REPORT A report obtained by a lender, usually from one of three major credit reporting bureaus, for the purpose of determining a borrower's history of debt repayment. The report lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.

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D
DEBT-TO-INCOME RATIO  a comparison of borrower's gross income to housing and non-housing expenses; the ratio is expressed as a percentage and is used by lenders to measure of eligibility for a loan. A front-end ratio compares all monthly housing expenses to the gross income. A back-end ratio also figures in other debts, such as auto loans and credit cards.With an 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 OF TRUST    An instrument used in many states (inc. Arizona) in place of a mortgage. A document, given by the borrower to a third party (trustee) vesting title to the property in the trustee as security for the borrower's repayment of the mortgage loan.     

DEED RESTRICTIONS    Limitations in the deed to a property that dictate certain uses that may or may not be made of the property.   

DELINQUENCY  A mortgage loan on which a payment has not been made by the due date. A serious delinquency is a single-family mortgage that is 90 days or more past due, or a multifamily mortgage that is two months or more past due.

DEPRECIATION  A decline in the value of property; the opposite of appreciation. Depreciation is also an accounting term which shows the declining monetary value of an asset and is used as an expense to reduce taxable income. Since this is not a true expense where money is actually paid, lenders will add back depreciation expense for self-employed borrowers and count it as income.

DISCOUNT POINT normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to the lender to reduce the interest rate on a loan.

DOWN PAYMENT  the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.

E
EARNEST MONEY DEPOSIT    Down payment made by the purchaser of real estate as evidence of good faith, a deposit or partial payment.    

EASEMENT    A right, privilege or interest limited to a specific purpose that one party has in the land of another.   

EEM   Energy Efficient Mortgage; an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase

EFFECIVE AGE  An appraiser’s estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age.

EMINENT DOMAIN  The right of a government to take private property for public use upon payment of its fair market value. Eminent domain is the basis for condemnation proceedings.

ENCROACHMENT  An improvement that intrudes illegally on another’s property.

ENCUMBRANCE  Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions. 

EQUAL CREDIT OPPORTUNITY ACT (ECOA)  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 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. Equity increases as a mortgage is paid and/or the property appreciates.

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

ESCROW DISBURSEMENTS   The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

ESCROW REVIEW or ANALYSIS the periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.

ESCROW PAYMENT  portion of a borrower's monthly payment that is held by the loan servicer to pay for taxes, hazard homeowners insurance, mortgage insurance, lease payments, and other items as they become due. Known as "impounds" or "reserves" in some states.

EXAMINATION OF TITLE  The report on the title of a property from the public records or an abstract of the title.

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F
F AIR HOUSING ACT a law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

FAIR MARKET VALUE the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.

FANNIE MAE Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.   

FEE SIMPLE an estate under which the owner is entitled to unrestricted powers to dispose of the property, and which can be left by will or inherited. The greatest interest a person can have in real estate.

FHA Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.  

FIDUCIARY  person in a position of trust and confidence for another.

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.

FLOOD INSURANCE  insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.  

FORECLOSURE  legal term applied to any of the various methods of enforcing payment of the debt secured by a mortgage, or deed of trust, by taking and selling the mortgaged property, and depriving the mortgagor of possession.

FREDDIE MAC Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders With funds for new homebuyers.

G
GENERAL WARRANTY DEED   deed which conveys not only all the grantor's interests in and title to the property to the grantee, but also warrants that if the title is defective or has a "cloud" on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic's liens against it) the grantee may hold the grantor liable.

GINNIE MAE   Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.

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. 

GRADUATED PAYMENT MORTGAGE residential mortgage which has monthly mortgage payments that start at a low level and increase at a predetermined rate.

GRANTEE that party in the deed who is the buyer or recipient.

GRANTOR  that party in the deed who is the seller or giver.

H
HAZARD INSURANCE    Real estate insurance protecting against fire, some natural causes, vandalism, etc., depending upon the policy. Buyer often adds liability insurance and extended coverage for personal property.   

HOME INSPECTION an examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed. A satisfactory home inspection is often included as a contingency by the buyer.

HOME WARRANTY offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance; ,overage extends over a specific time period and does not cover the home's structure.

HOMEOWNERS' ASSOCIATION nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements.

HOMESTEAD EXEMPTION    Automatic in Arizona, it allows any resident of Arizona, 18 years or older, to exempt from attachment, execution or forced sale $100,000. of equity in a single dwelling unit. Exceptions include (1) process and sale of a consensual lien, i.e. where a deed of trust or equity loan is foreclosed; (2) forced sale resulting from a mechanics lien, and (3) any equity beyond the $100,000.    (you should consult an attorney to determine if this exemption offers you protection in the case of an attachment, execution or forced sale.)

HUD the U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HUD-1 SETTLEMENT STATEMENT document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing. The blank form for the statement is published by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the "closing statement" or "settlement sheet."

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

INDEX  a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.

INTEREST RATE the amount of interest charged on a monthly loan payment; usually expressed as a percentage. 

INVOLUNTARY LIEN lien imposed against property without consent of an owner. Examples include taxes, special assessment, federal income tax liens, mechanics liens, and materials liens.

INSURABLE TITLE property title that a title insurance company agrees to insure against defects and disputes.

J  
JOINT TENANCY  equal undivided ownership of property by two or more persons. Upon the death of any owner, the survivors take the decedent's interest in the property.

JUMBO LOANS mortgage loans that exceed the loan amounts acceptable for sale in the secondary market; these jumbos must be packaged and sold differently to investors and therefore have separate underwriting guidelines.

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K


L
LEASE PURCHASE assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

LEGAL DESCRIPTION    A description of land recognized by law, based on government surveys, spelling out exact boundaries of the entire piece of land. It should so thoroughly indentify a parcel of land that it cannot be confused with any other.    

LENDER'S FEESfees payable to the lender to cover costs associated with processing, underwriting and closing of the loan.

LIEN    form of encumbrance that usually makes a specific property the security for the payment of a debt or discharge of an obligation. For example, judgements, taxes, mortgages, deeds of trust.   

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.

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METES AND BOUNDS description in a deed of the land location in which the boundaries are defined by directions and distances.

MORTGAGE    The instrument by which real property is pledged as security for repayment of a loan.   

MORTGAGE BANKER a company that originates loans and resells them to secondary mortgage lenders like :Fannie Mae or Freddie Mac.

MORTGAGE BROKER a firm that originates and processes loans for a number of lenders.

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.

MORTGAGE INSURANCE PREMIUM (MIP) a monthly payment -usually part of the mortgage payment - paid by a borrower for mortgage insurance.

MORTGAGE MODIFICATION a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.

N  

NEGATIVE AMORTIZATION occurs when monthly payments fail to cover the interest cost. The interest that isn't covered is added to the unpaid principal balance, which means that even after several payments the borrowers could owe more than they did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that aren't high enough to cover the interest.

NET CASH FLOW income that remains from an investment property after monthly operating income is reduced by the monthly housing expense, which includes principal, interest, taxes, and insurance (PITI) for the mortgage, homeowners' association dues, leasehold payments, and subordinate financing payments. 

NET WORTH value of all of a person's assets, including cash, minus all liabilities.

NON-LIQUID ASSET an asset that cannot easily be converted into cash.

NOTE  promissory note to lender detailing terms of repayment of amount borrowed.

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

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.

P
PITI    A payment that combines Principal, Interest, Taxes, and Insurance. 

PLOT  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; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price. 

POINTS  sometimes called "discount points." A point is one percent of the amount of the mortgage loan. For example, if a loan is for $25,000, one point is $250. Points are charged by a lender to raise the yield on his loan at a time when money is tight, interest rates are high, and there is a legal limit to the interest rate that can be charged on a mortgage. Buyers are prohibited from paying points on HUD or Veterans' Administration guaranteed loans (sellers can pay, however). On a conventional mortgage, points may be paid by either buyer or seller or split between them.

PRE-APPROVE lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.

PRE-QUALIFY a lender informally determines the maximum amount an individual is eligible to borrow.

PREPAYMENT payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.

PREPAYMENT PENALTY fee charged to a borrower who pays a loan before it is due. Not allowed for FHA or VA loans .

PRINCIPAL  the amount borrowed from a lender; doesn't include interest or additional fees.

PROMISSORY NOTE written promise to repay a specified amount over a specified period of time.

PURCHASE AGREEMENT    The purchase contract between Buyer and Seller. It is usually completed by the Real Estate agent and must be signed by both Buyer and Seller.   

Q
QUITCLAIM DEED    A deed operating as a release, intending to pass any title, interest, or claim which the grantor may have in the property, but not containing any warranty of a valid interest or title by the grantor.      

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

RECORDING    Filing documents affecting real property with the County Recorder as a matter of public record.

SURVEY  a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.

T
TAX LIEN a claim against property for the amount of its due and unpaid taxes.

TENANCY AT WILL holding of real estate that can be terminated at the will of either the lessor or the lessee, usually with notice.

TENANCY IN COMMON in law, the type of tenancy or estate created when real or personal property is granted, devised or bequeathed to two or more persons, in the absence of expressed words creating a joint tenancy. There is no right of survivorship.

TITLE   as generally used, the rights of ownership and possession of particular property. In real estate usage, title may refer to the instruments or documents by which a right of ownership is established (title documents), or it may refer to the ownership interest one has in the real estate.

TITLE INSURANCE insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available fro homebuyers.

TITLE SEARCHa check of public records to make certain the buyer is purchasing real property from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title. 

TRUTH-IN-LENDING 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.

TRUSTEE  party who is given legal responsibility to hold property in the best interest of or "for the benefit of" another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law. (See deed of trust.)

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U
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.

UNENCUMBERED PROPERTY rproperty the title to which is free and clear.    

USURY  charging more for the use of money than allowed by law.

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V
VA Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.   

VARIABLE RATE MORTGAGE mortgage agreement that allows for adjustment of the interest rate in keeping with a fluctuating market and terms agreed upon in the note.

From Home Seller's Guide / First American Title Insurance Company & HUD Housing Glossary

 

Builder's Terms