Real Estate Glossary

Below is a real estate glossary including a list of definitions and commonly used terms.

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1031 EXCHANGE

Allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes.

203K LOAN

Allows the buyer to roll in the costs of repairs to rehabilitate the property into the mortgage loan.

401(k) / 403(b)

An employer-sponsored investment plan that allows individuals to set aside tax-deferred income for retirement or emergency purposes. 401(k) plans are proved by employers that are private corporations. 403(b) plans are provided by employers that are not for profit organizations.

401(k) / 403(b) LOAN

Some administrators of 401(k) / 403(b) plans allow for loans against the monies you have accumulated in these plans. Loan against 401(k) plans are an acceptable source of down payment for most types of loans.

A

ABSTRACT

A written history of public records on a property. (Also see “Title Report”).

ACCELERATION CLAUSE

A clause in your mortgage which allows the lender to demand payment of the outstanding loan balance for various reasons. The most common reason for accelerating a loan is if the borrower defaults on the loan or transfer title to another individual without informing the lender.

ADJUSTMENT INTERVAL

A specified period between changes in the interest rate or monthly payment on an Adjustable rate mortgage (ARM).

ADJUSTABLE RATE MORTGAGE (ARM)

A loan that has an interest rate which changes periodically based on the sum total of an index plus a margin.

AFFIDAVIT

A sworn statement in writing.

AGREEMENT OF SALE

A written contract (Agreement) that states the terms and conditions under which a property will be sold.

AMORTIZATION

Repayment of a mortgage, over regularly specified time intervals, with equal payments which would reduce principal after interest has been paid.

ANNUAL PERCENTAGE RATE (APR)

The actual cost of borrowing money expressed in the form of an annual rate to make it easy for one to compare costs of borrowing (includes but not limited to points, interest, discount points). (Also see “Truth-in-lending Act”).

APPLICATION FEE

Money paid to the lender for the initial expenditures of processing a loan application which may include the expense of a property appraisal, credit report, lock-in fee or closing costs incurred.

APPRAISAL

A report made by a qualified person indicating the value of a property at a given date as compared to recent market sales.

APPRAISAL FEE

Fee charged by a certified appraiser to give an opinion of current market value.

ASSUMABLE MORTGAGE

In a purchase transaction, the buyer (Obligor) may assume the existing mortgage against subject the property. Terms of assumption may require that the buyer “qualify” for the mortgage before the assumption can be granted.

B

BALLOON MORTGAGE

A form of a promissory note which calls for minimum amounts of principal to be paid resulting in a large lump sum payment at the end of the term or due date.

BANKRUPTCY

A proceeding in a federal court to relieve certain debts of a person or business.

BINDER

A preliminary agreement to purchase, often secured by the payment of money in earnest. Also known as a purchase offer.

BLANKET MORTGAGE

A single mortgage that covers two or more properties. (also known as cross-collateralization).

BOND FOR DEED

A contract to sell real property in which the purchase price is to be paid by the buyer to the seller in installments and in which the seller, after payment of the stipulated sum, agrees to deliver title to a buyer.

BORROWER (MORTGAGOR)

An individual who applies for and receives a loan. The individual is obligated to repay under certain terms.

BROKER

An individual who unites buyers and sellers and negotiates the contract for a client.

BUY-DOWN

Money advanced by an individual (e.g. builder, seller, buyer, developer) to obtain a lower interest rate on a mortgage.

BUYER’S MARKET

A market condition that favors buyers. If there are more sellers than buyers in the market, the seller may be forced to make major price concessions.

C

CAP (INTEREST RATE)

Periodic caps limit the periodic adjustments, and life caps limit the maximum interest rate allowable on an adjustable rate mortgage.

CAP (PAYMENT)

Payment caps limit the change in monthly payments based on a maximum percentage change in payment. Typically used in negative amortizing loans. (Also see “Negative Amortization”).

CASH OUT

Money received when you refinance as a result of the new loan being larger than the current balance of your mortgage. To determine whether or not a refinance is a “cash out” loan, subtract your current loan amount and the costs of refinancing from the new loan.

CERTIFICATE OF ELIGIBILITY

Obtainable from local VA office by submitting form DD-214 (Separation Paper) and VA form 1880 (request for Certificate or Eligibility), a Certificate of Eligibility is a document issued to qualified veterans which verify a veteran’s eligibility for a VA guaranteed loan. These are issued by the Veterans Administration.

CERTIFICATE OF TITLE

Issued by an attorney or title company, a Certificate of Title is a written opinion of the status of title to a property.

CERTIFICATE OF VETERAN STATUS

FHA from filled out to establish a borrower’s eligibility for an FHA Vet loan. To qualify, you must submit form DD 214 (Separation Paper) with form 26-8261a (request for a certificate of veteran status) at your local VA office.

CLOSING (OR SETTLEMENT)

The conclusion of your real estate transaction which includes the delivery of the security instrument
(Deed), signing of your legal documents and the disbursement of funds to the seller (in a purchase transaction) or to the current mortgage holder (in a refinance transaction).

CLOSING COSTS

Costs for services (such as title fees, recording fees, appraisal fees, credit report fees, pest inspection, attorney’s fees, taxes and surveying fees) that are incurred in order to close the transaction.

COFI

COFI is an acronym for Cost of Funds Index. (Also see “Cost of Funds Index”).

COLLATERAL

Assets (such as your home, car, boat, etc.) pledged as security for a debt.

COMMISSION

Money that a broker or real estate agent receives for negotiating a loan or real estate transaction.

CONFORMING LOAN

A mortgage loan that meets all conditions to be qualified for purchase by federal agencies such as FNMA and FHLMC. For a one-unit property, the maximum conforming loan amount is $252,700.00.

CONTRACT OF SALE

Agreement on the purchase price, terms and conditions of a sale, between a buyer and seller.

CONVENTIONAL LOAN

A loan that is not created under any government housing program. These loans are not liable to the restrictions of government housing programs.

CONVERSION CLAUSE

An additional provision in some Adjustable rate Mortgages wherein the obligor is allowed to convert the adjustable mortgage to a fixed rate. A nominal fee may be charged at the time of conversion.

CONVERTIBLE ARMs

An Adjustable Rate Mortgage that has the option to convert to a fixed rate during a given time frame.

COST OF FUNDS INDEX (COFI)

The Cost of Funds Index is the index of the weighted-average interest rate paid by savings institutions for sources of funds, usually by members of the 11th Federal Home Loan Bank District.

CREDIT REPORT

A report which details the credit history of a prospective borrower which is used to help determine eligibility.

CREDIT SALE

A sales transaction by which the buyer is allowed to take immediate possession of the purchase property and pay for them at a later date.

D

DEBT-TO-INCOME RATIO

The ratio (percentage) of an individual’s monthly income that will be needed to pay for all monthly expenses including principal, interest, tax and insurance (PITI).

DEED

Legal document containing a description of the real property which is signed, witnessed, and delivered to the buyer from the seller at closing.

DEED

A legal document containing a description of the real property which is signed, witnessed and delivered to the buyer from the seller at closing.

DEED OF TRUST

A legal document that conveys title to real property to a third party, who holds the title until the owner has repaid the full amount of the debt.

DEFAULT

Failure to meet legal obligations in a contract. A default under the terms of a note (contract) would occur as a result of non-payment.

DELINQUENCY

Neglecting to make payments as agreed in the loan contract.

DISCOUNT POINTS (OR POINTS)

A fee paid to the lender at the close of your loan to reduce the interest rate below current market rates.

DOWN PAYMENT

The amount (or percentage) of cash that will be paid at the closing towards the purchase price of the home.

DUE-ON-SALE

A clause in a mortgage or deed of trust allowing the lender to demand immediate payment of the loan balance upon sale of the property.

E

EARNEST MONEY

A sum of money paid by a buyer at the time of entering a contract to indicate the intention of the buyer and ability of the buyer to carry out the contract.

EASEMENT

The right of use over the property of another.

ENCUMBRANCE

A claim, lien, or liability attached to and binding real property.

EQUAL CREDIT OPPORTUNITY ACT (ECOA)

The Equal Credit Opportunity Act is a federal law requiring 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 difference between the fair Market value (appraised value) of your home and the outstanding mortgage balance, i.e. the portion of property you own.

ESCROW

Transactions involving a third party (escrow agent) where property (deed, bond etc.) are held until all conditions of a contract are fulfilled. At the close of escrow, the property is conveyed and monies disbursed.

ESCROW ACCOUNT

A bank account generally held in the name of the depositor and an escrow agent which is returnable to the depositor or paid to the third person on the fulfillment of escrow conditions.  (See “Impound Account”).

ESCROW AGENT

A person with fiduciary responsibility to the buyer and seller, or the borrower and lender, to make sure that the terms and conditions of the purchase/sale agreement, and lenders instructions are fulfilled.

F

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC, OR FREDDIE MAC)

This agency purchases loans that are underwritten to its specific guidelines. These guidelines represent the industry standard for residential conventional lending. Loan Prospector, or “LP” as it is commonly referred, is this agency’s electronic underwriting system. It can be accessed by authorized agents via the internet and allows the user to input and approve loans in minutes.

FEDERAL HOUSING ADMINISTRATION (FHA)

A federal agency within the Department of Housing and Urban Development (HUD), which insures residential mortgage loans made by private lenders. The FHA also sets standards for underwriting mortgage loans.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA OR FANNIE MAE)

This agency purchases loans that are underwritten to its specific guidelines. These guidelines represent the industry standard for residential conventional lending. Desktop Underwriter, or “DU” as it is commonly referred, is this agency’s electronic underwriting system. It can be accessed by authorized agents via the internet and allows the user to input and approve loans in minutes.

FEE SIMPLE

Complete ownership of real property. An absolute estate limited to a person and his or her heirs and assigns.

FIXED RATE MORTGAGE

A mortgage that has a fixed interest rate for the entire term of the loan and therefore, has the same payment from monthly to month until the loan is paid in full (reached its term).

FLOOD ELEVATION

A determination by the Federal Insurance Administrator of the water surface elevations of the base flood, that is the flood level that has one percent or greater chance of occurrence in any given year.

FLOOD INSURANCE

Typically not covered under standard hazard insurance, flood insurance compensates for physical damage to a property due to flooding.

FORECLOSURE (OR REPOSSESSION)

The selling of a mortgaged property to pay off a mortgage loan that is in default.

G

GOOD FAITH ESTIMATE

A written estimate describing settlement costs the borrower will probably have to pay at closing. The Real Estate Settlement Procedures Act (RESPA) requires the lender to provide this disclosure to the borrower within three days of receiving a loan application. (Also see “Truth-in-lending”).

GRACE PERIOD

The time at which a loan payment can be made after its due date without incurring a late penalty.

GRANTEE

Buyer of property.

GRANTOR

Seller of property.

GROSS INCOME

Total income before taxes, benefits, or expenses are deducted.

H

HAZARD INSURANCE

Insurance protection against damage to a property from fire, windstorms, and other common hazards.

HEIR

One who might inherit or succeed to an interest in lands under the rules of law applicable where an individual dies without leaving a will.

HOUSING AND URBAN DEVELOPMENT (HUD)

A U.S. Government agency established to implement federal housing and community development programs. HUD administers the FHA, FMHA and other community programs to assist homebuyers.

I

IMPOUND ACCOUNT

Also known as an Escrow Account, is one that’s held by the lender into which the borrower pays monthly installments, collected as part of the monthly mortgage payment, for yearly expenses such as taxes, insurance, and mortgage insurance (if required). The lender disburses these funds when they become due.

INDEX

An announced rate used by lenders that serve as the basis for determining interest rate changes on ARM loans. Typical indices are the 1-year treasury security (1 yr T-Bill), London Interbank Offered Rate (LIBOR), Prime Rate, 11th District Cost of Funds (COFI), and the CD index. All of these rates are published rates.

INITIAL RATE

The rate charged during the first period of an ARM loan.

INTEREST RATE CAP

INTEREST

Periodic caps limit the periodic adjustments, and life caps limit the maximum interest rate allowable on an adjustable rate mortgage.

The charge paid for borrowing money which is calculated as a percentage of the remaining balance of the amount borrowed.

J

JOINT LIABILITY

Liability shared among two or more people, each of whom is equally responsible for the full debt (joint and several liabilities).

JOINT TENANCY

A form of ownership of property which gives each person equal interest in the property including right of survivorship.

JUDGMENT

A decree of a court.

JUMBO LOAN

A mortgage loan greater than the $252,700 limit set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

K

None

L

LATE CHARGE

A fee paid by the borrower when a payment is made later than the due date (beyond the allowable grace period).

LENDER

The bank, mortgage company, typically the one who is actually funding the loan transaction.

LIEN

A legal claim by a person for the property of another as security for payment of a debt.

LOAN APPLICATION

Statement of personal and financial information required applying for a loan. Also known as 1003 (FNMA form 1003) is used when applying by mail or in writing. Most fields in on-line application mirror 1003 as this is the pertinent information for all automated underwriting systems.

LOAN APPLICATION FEE

Money paid to the lender for the initial expenditures of processing a loan application which may include the expense of a property appraisal, credit report, lock-in fee or other third party fees incurred.

LOAN-TO-VALUE RATIO (LTV)

The percentage of appraised value (or the sales price, whichever is less) to the loan amount of the property. For example, if you owe $50,000 on a $100,000 home, the ratio is 50%.

LOCK OR LOCK-IN

A lender’s guarantee of an interest rate for a specific time period, usually that between loan application approval and loan closing. The lock-in protects against rate increases during that time.

M

MARGIN

A fixed percent of interest added to the individual [financial] index to determine the new interest rate for ARM (adjustable-rate mortgage) loans.

MORTGAGE

A legal document where the owner uses the new property as security to guarantee repayment of the loan. The “mortgage” is also known as the lender and “mortgagor” as the borrower.

MORTGAGE BANKER

An individual or company that uses its own funds to make and/or service mortgage loans.

MORTGAGE BROKER

An individual or company that arranges to finance between the lender and the borrower.

MORTGAGE INSURANCE PROTECTION (MIP)

Insurance which protects the lender in the case of a loan default. Mortgage insurance is not necessary if you make a down payment of at least 20% of the home’s purchase price with a conventional loan. (Note, however, that FHA and VA loans have different insurance guidelines).

MORTGAGE LOAN

A loan in which real estate acts as collateral to provide for repayment in case of default.

MORTGAGE NOTE

Legal contract obligating a borrower to repay a loan at a stated interest rate during a set time frame. The agreement is secured by a mortgage or deed of trust or other security instrument.

N

NEGATIVE AMORTIZATION

A loan in which the outstanding principal balance goes up instead of down because the monthly payments are not large enough to cover the full amount of interest due. Also called deferred interest.

NON-ASSUMPTION CLAUSE

The statement in a contract to expressly deny the assumption of the terms to anyone other than the original mortgagor, especially if the title to the property is being conveyed.

NOTICE OF DEFAULT

Written notice to a borrower that a default has occurred. Legal action may follow.

O

ORIGINATION FEE

A commission charged for the work involved in the evaluation preparation and submission of a proposed mortgage loan.

P

PAYMENT CAP

Payment caps limit the change in monthly payments based on a maximum percentage change in payment. Typically used in negative amortizing loans. (Also see “Negative Amortization”).

PER DIEM INTEREST

Interest calculated daily. Depending on the day of the month on which closing takes place, you will have to pay interest from the date of closing to the end of the month. Your first mortgage payment will be due the first day of the following month.

PITI

Principal, Interest, Taxes and Insurance, which are the components of a monthly mortgage payment. (mortgage insurance is also included in this figure, see “PMI” or “Private Mortgage Insurance”).

PMI (PRIVATE MORTGAGE INSURANCE)

Insurance from a private corporation that limits the Lender’s liability in case of a default and foreclosure. This insurance is [typically] required on loans greater than 80% of the subject’s value.

POINTS

The fee charged at closing for making the loan. This fee is equal to a percentage of the loan amount. For example, 1.0 point = 1%, if the loan amount is $100,000, then 1.0 point would result in a $1,000.00 fee at closing.

POWER OF ATTORNEY

A document authorizing another to act on one’s behalf as his/her agent or attorney.

PRE-APPROVAL

Prior to loan application, pre-approval determines the maximum loan amount and sales price a prospective homebuyer will be eligible to borrower based on statements of income and review of a credit report (Also see “Pre-Qualification”).

PREPAID EXPENSES

Expenses such as taxes, insurance and assessments that are paid before their due dates. These expenses are included at closing.

PREPAID INTEREST

The interest that is paid before it is due. Generally, prepaid interest is charged to a borrower at closing to cover interest on the loan between the closing date through and including the end of the month.

PREPAYMENT

Full or partial repayment of the principal in advance of the contractual due date.

PREPAYMENT PENALTY

A fee charged to the borrower if the loan is paid off early.

PRE-QUALIFICATION

Prior to loan application, pre-qualification determines the type of loan and amount a homeowner will be eligible to the borrower based on stated income and review of a credit report. (Also see “Pre-approval”).

PRINCIPAL

The remaining balance of your mortgage (excluding earned interest).

PRIVATE MORTGAGE INSURANCE (PMI)

Insurance from a private corporation that limits the Lender’s liability in case of a default and foreclosure. This insurance is [typically] required on loans greater than 80% of the subject’s value.

PROMISSORY NOTE

Document signed and given to the lender by the borrower. It explains what is owed and how it will be paid.

PRO-RATE

To allocate between seller and buyer their proportionate share of an obligation paid or due.

PURCHASE AGREEMENT

Contract stating the terms and conditions under which a property will be sold. This is signed by both buyer and seller.

Q

QUIT CLAIM

Document by which the owner of a piece of real property transfers interest to a recipient.  The owner terminates (“quits”) his right and claim to the property, thereby allowing claim to transfer to the recipient.

R

RATE CAP

Periodic caps limit the periodic adjustments, and life caps limit the maximum interest rate allowable on an adjustable rate mortgage.

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

A federal law requiring lenders to provide mortgage loan borrowers with information on known or estimated settlement costs. (Also see “Good Faith Estimate” and “Truth-in-lending”).

REAL PROPERTY

Land and any improvements that are permanently attached, such as a home, shed, barn, or commercial building.

RECONVEYANCE

The owner receives a release of a lien (or reconveyance) when a mortgage loan is fully repaid.

RECORDING

Filing a legal document into the public records. (for example, the filing of a grant deed conveying ownership from one person to another).

RECORDING FEES

Fee for filing a legal document into the public records.

REFINANCING

The process of paying off one loan with the proceeds from a new loan that is secured (collateralized) by the same property.

REISSUE RATE

Reduce the rate of title insurance premium applicable in cases where the owner of the land is previously insured in an owner’s policy by the insurer within a certain time.

REVERSE MORTGAGE

Mortgage in which the lender pays the borrower a sum of money each month as opposed to a lump sum (cash-out) after which the title to the property is conveyed to the mortgagee.

RIGHT OF RESCISSION

Under the provisions of the Truth-Lending Act, the borrower has the right to cancel the loan (rescind the transaction), within three days of signing the closing (loan) documents, if the new loan is a refinance of an existing loan, and the subject property is the borrower’s principal dwelling.

S

SALES AGREEMENT

A written agreement (contract) that states the terms and conditions under which a property will be sold, signed by both buyer and seller.

SETTLEMENT (OR CLOSING)

The conclusion of your real estate transaction which includes the delivery of the security instrument (Deed), signing of your legal documents and the disbursement of funds to the seller (in a purchase transaction) or to the current mortgage holder (in a refinance transaction).

SETTLEMENT COSTS (HUD)

Costs for services (such as title fees, recording fees, appraisal fees, credit report fees, pest inspections, attorney’s fees, taxes and surveying fees) that must be performed before your loan can be initiated.

SECONDARY MARKET

The buying and selling of mortgages after closing.

SECOND MORTGAGE

A mortgage placed on a property with rights subordinate to the existing first trust deed.

SUCCESSION

The process by which the estate of a deceased person is passed to the rightful heir(s).

SURVEY

A measurement of land which shows a property’s boundaries, elevations, improvements, and relationship to surrounding tracts.

T

TAX IMPOUND

Used for yearly tax payments, a tax impound consists of money paid to and retained by a lender.

TAX LIEN

Claim against a real estate property for taxes that are unpaid.

TAX SALE

The property is sold to the public, by a government authority, as a result of taxes that are unpaid.

TERM

The time frame from the beginning date on a loan contract to the full repayment of the loan.

TITLE

A document showing ownership and public records of property.

TITLE COMPANY

Company insuring title to property.

TITLE INSURANCE

Insurance protection for the lender (lender’s policy) or the buyer (owner policy) against a loss stemming from disputes over ownership of a property.

TITLE SEARCH

Inspection of municipal records to make certain that the seller is the legal owner of a property and that there are no liens or other claims against the property.

TRANSFER TAX

A tax paid when a title is passed from one owner to the next.

TRUTH-IN-LENDING ACT

A written disclosure to the borrower from the lender, required by Federal law, of the mortgage terms (including the APR and other charges) after the loan application is completed. The rights include a rescission period.

U

UNDERWRITING

In mortgage lending, the process of establishing the risks, terms and conditions for a loan.

V

VA LOANS

Fixed-rate loans guaranteed by the U.S. Department of Veterans Affairs. VA loans are available to veterans, reservists, active duty personnel, and surviving spouses of veterans with 100% entitlement. Terms may include the option to purchase a home with no down payment, no cash reserves, no application fee, and lower closing costs than other financing options. The current maximum VA loan amount is $208,800. VA loans are intended to make housing more affordable for eligible US veterans.

VARIABLE RATE MORTGAGE

A mortgage loan in which the interest rate may increase or decrease at specified intervals within certain limits, based upon the value of an index plus a margin.

VERIFICATION OF DEPOSIT (VOD)

Written verification of the borrower’s account balance and history, provided by the borrower’s financial institution.

VERIFICATION OF EMPLOYMENT (VOE)

Written verification of borrower’s position and salary provided by the borrower’s employer.

VERIFICATION OF MORTGAGE (VOM)

Written verification of borrower’s mortgage history for a period of no less than 12 months.

VERIFICATION OF RENT (VOR)

Written verification of borrower’s rental history for a period of no less than 12 months.

W

WAIVER

Individual voluntarily surrenders or relinquishes some right or privilege.

WALK-THROUGH

A final inspection of a home, before closing, to check for problems that may need to be fixed.

WILL

A written document properly witnessed, providing for the distribution of property owned by the deceased.

X

None

Y

None

Z

None

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