Real Estate and Mortgage Vocabulary
The potential home buyer or home seller will find this Vocabulary helpful for understanding words and terms used in real estate transactions. There are, however, some factors that may affect these definitions:
- Terms are defined as they are commonly understood in the mortgage and real estate industry. The same terms may have different meanings in another context.
- The definitions are intentionally general, non-technical and short. They do not encompass all possible meanings or nuances that a term may acquire in legal use.
- State laws, as well as custom and use in various States or regions of the country, may modify or completely change the meanings of certain terms defined.
Before signing any documents or depositing any money preparatory to entering into a real estate contract, the purchaser should consult with a professional Realtor or Attorney of his choice to ensure that his rights are properly protected.
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.
Condition in a mortgage that may require the balance of the loan to become due immediately, if regular mortgage payments are not made or for breach of other conditions of the mortgage.
Agreement of Sale
Known by various names, such as contract of purchase, purchase agreement, or sales agreement according to location or jurisdiction. A contract in which a seller agrees to sell and a buyer agrees to buy, under certain specific terms and conditions spelled out in writing and set by dates and signed by both parties.
Is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principal over time. A payment plan which enables the borrower to reduce his debt gradually through monthly payments of principal.
An expert judgment or estimate of the quality or value of real estate as of a given date.
Assumption of Mortgage
An obligation undertaken by the purchaser of property to be personally liable for payment of an existing mortgage. In an assumption, the purchaser is substituted for the original mortgagor in the mortgage instrument and the original mortgagor is to be released from further liability in the assumption, the mortgagee’s consent is usually required.
The original mortgagor should always obtain a written release from further liability if he desires to be fully released under the assumption. Failure to obtain such a release renders the original mortgagor liable if the person assuming the mortgage fails to make the monthly payments.
An “Assumption of Mortgage” is often confused with “purchasing subject to a mortgage.” When one purchases subject to a mortgage, the purchaser agrees to make the monthly mortgage payments on an existing mortgage, but the original mortgagor remains personally liable if the purchaser fails to make the monthly payments. Since the original mortgagor remains liable in the event of default, the mortgagee’s consent is not required to a sale subject to a mortgage.
Both “Assumption of Mortgage” and “Purchasing Subject to a Mortgage” are used to finance the sale of property. They may also be used when a mortgagor is in financial difficulty and desires to sell the property to avoid foreclosure.
Binder or “Offer to Purchase”
A preliminary agreement, secured by the payment of earnest money, between a buyer and seller as an offer to purchase real estate. A binder secures the right to purchase real estate upon agreed terms for a limited period of time. If the buyer changes his mind or is unable to purchase, the earnest money is forfeited unless the binder expressly provides that it is to be refunded.
(See real estate broker)
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.
Certificate of Title
A certificate issued by a title company or a written opinion rendered by an attorney that the seller has good marketable and insurable title to the property which he is offering for sale. A certificate of title offers no protection against any hidden defects in the title which an examination of the records could not reveal. The issuer of a certificate of title is liable only for damages due to negligence. The protection offered a homeowner under a certificate of title is not as great as that offered in a title insurance policy.
The numerous expenses which buyers and sellers normally incur to complete a transaction in the transfer of ownership of real estate. These costs are in addition to price of the property and are items usually paid on the closing day. Ask your mortgage lender for a Good Faith Estimate and Truth In Lending document to see each lenders specific closing costs, they may very from bank to bank or mortgage lender. The Truth in Lending give you and ARP based on both the interest rate charged and closing cost associated with the purchase loan. This is the easiest document to use in comparison shopping of lender/banks/mortgage companies.
The agreement of sale negotiated previously between the buyer and the seller may state in writing who will pay each of the closing costs.
A real estate closing is the completion of a transaction involving the sale or exchange or real estate. In a traditional closing, the title to the property is transferred to the purchaser and all finances pertaining to the purchase are settled. The buyer signs the mortgage docs. The day on which the formalities of a real estate sale are concluded. The certificate of title, abstract, and deed are generally prepared for the closing by a Title Company or attorney in some cases or States and this cost charged to the buyer and seller. The final closing merely confirms the original agreement reached in the contract of sale.
Cloud (On Title)
An outstanding claim or encumbrance which adversely affects the marketability of title.
The taking of private property for public use by a government unit, against the will of the owner, but with payment of just compensation under the government’s power of eminent domain. Condemnation may also be a determination by a governmental agency that a particular building is unsafe or unfit for use.
Individual ownership of a dwelling unit and an individual interest in the common areas and facilities which serve the multi-unit project.
Contract of Purchase
(See agreement of sale)
In the construction industry, a contractor is one who contracts to erect buildings or portions of them. There are also contractors for each phase of construction: heating, electrical, plumbing, air conditioning, dry wall, framing.
A mortgage loan not insured by HUD or guaranteed by the Veterans’ Administration. It is subject to conditions established by the lending institution and State statutes. The mortgage rates may vary with different institutions and between States. (States have various interest limits.)
An apartment building or a group of dwellings owned by a corporation, the stockholders of which are the residents of the dwellings. It is operated for their benefit by their elected board of directors. In a cooperative, the corporation or association owns title to the real estate. A resident purchases stock in the corporation which entitles him to occupy a unit in the building or property owned by the cooperative. While the resident does not own his unit, he has an absolute right to occupy his unit for as long as he owns the stock.
A formal written instrument by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the State where the property is located, and should be delivered to the purchaser at closing day. There are two parties to a deed: the grantor and the grantee. (See also deed of trust, general warranty deed, quitclaim deed, and special warranty deed.)
Deed of Trust
Like a mortgage, a security instrument whereby real property is given as security for a debt. However, in a deed of trust there are three parties to the instrument: the borrower, the trustee, and the lender, (or beneficiary). In such a transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the debt to the lender or beneficiary. If the borrower pays the debt as agreed, the deed of trust becomes void. If, however, he defaults in the payment of the debt, the trustee may sell the property at a public sale, under the terms of the deed of trust. In most jurisdictions where the deed of trust is in force, the borrower is subject to having his property sold without benefit of legal proceedings. A few States have begun in recent years to treat the deed of trust like a mortgage.
Failure to make mortgage payments as agreed to in a commitment based on the terms and at the designated time set forth in the mortgage or deed of trust. It is the mortgagor’s responsibility to remember the due date and send the payment prior to the due date, not after. Generally, thirty days after the due date if payment is not received, the mortgage is in default. In the event of default, the mortgage may give the lender the right to accelerate payments, take possession and receive rents, and start foreclosure. Defaults may also come about by the failure to observe other conditions in the mortgage or deed of trust.
Decline in value of a house due to wear and tear, adverse changes in the neighborhood, or any other reason.
A State tax, in the forms of stamps, required on deeds and mortgages when real estate title passes from one owner to another. The amount of stamps required varies with each State.
The amount of money to be paid by the purchaser to the seller upon the signing of the agreement of sale. The agreement of sale will refer to the downpayment amount and will acknowledge receipt of the downpayment. Downpayment is the difference between the sales price and maximum mortgage amount. The downpayment may not be refundable if the purchaser fails to buy the property without good cause. If the purchaser wants the downpayment to be refundable, he should insert a clause in the agreement of sale specifying the conditions under which the deposit will be refunded, if the agreement does not already contain such clause. If the seller cannot deliver good title, the agreement of sale usually requires the seller to return the downpayment and to pay interest and expenses incurred by the purchaser.
The deposit money given to the seller or his agent by the potential buyer upon the signing of the agreement of sale to show that he is serious about buying the house. If the sale goes through, the earnest money is applied against the downpayment. If the sale does not go through, the earnest money will be forfeited or lost unless the binder or offer to purchase expressly provides that it is refundable.
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.
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.
A legal right or interest in land that affects a good or clear title, and diminishes the land’s value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes, or restrictive convenants. An encumbrance does not legally prevent transfer of the property to another. A title search is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether he wants to purchase with the encumbrance, or what can be done to remove it.
The value of a homeowner’s unencumbered interest in real estate. Equity is computed by subtracting from the property’s fair market value the total of the unpaid mortgage balance and any outstanding liens or other debts against the property. A homeowner’s equity increases as he pays off his mortgage or as the property appreciates in value. When the mortgage and all other debts against the property are paid in full the homeowner has 100% equity in his property.
A form of joint ownership between an owner/occupant and an owner/investor. The investor takes depreciation
deductions for his share of the ownership. The occupant receives a portion of the tax write-offs for interest and taxes
and a part of his monthly payment is treated as rent. The co-owners divide the profit upon sale of the property.
Compare, JOINT OWNERSHIP AGREEMENT.
Funds paid by one party to another (the escrow agent) to hold until the occurrence of a specified event, after which the funds are released to a designated individual. In FHA mortgage transactions an escrow account usually refers to the funds a mortgagor pays the lender at the time of the periodic mortgage payments. The money is held in a trust fund, provided by the lender for the buyer. Such funds should be adequate to cover yearly anticipated expenditures for mortgage insurance premiums, taxes, hazard insurance premiums, and special assessments.
A 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.
General Warranty Deed
A 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.
That party in the deed who is the buyer or recipient.
That party in the deed who is the seller or giver.
Protects against damages caused to property by fire, windstorms, and other common hazards.
U.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes. A HUD home can also be an FHA loan that was foreclosed upon. HUD homes then become available to bid on for sale in an internet or online bidding process. Ask you Realtor for more details.
A charge paid for borrowing money. (See mortgage note)
Joint Ownership Agreement
An agreement between owners defining their rights, ownership, monetary obligations and responsibilities. This could be
between and investor and an occupant or the occupants. If an investor is involved, the investor does not take
depreciation deductions and none of the occupant’s payment is deemed rent for tax purposes. Compare, EQUITY
Two or more persons own a property. Joint tenants with the common law right of survivorship means the survivor
inherits the property without reference to the decedent’s will. Creditors may sue to have the property divided to settle
claims against one of the owners. Compare, TENANTS IN COMMON, TENANTS BY THE ENTIRETY.
A judgment is a lien against all real property owned by the judgment debtor in the county where the judgment is
A claim by one person on the property of another as security for money owed. Such claims may include obligations not met or satisfied, judgments, unpaid taxes, materials, or labor. (See also special lien.)
A title that is free and clear of objectionable liens, clouds, or other title defects. A title which enables an owner to sell his property freely to others and which others will accept without objection.
A lien or claim against real property given by the buyer to the lender as security for money borrowed. Under government-insured or loan-guarantee provisions, the payments may include escrow amounts covering taxes, hazard insurance, water charges, and special assessments. Mortgages generally run from 10 to 30 years, during which the loan is to be paid off.
A written notice from the bank or other lending institution saying it will advance mortgage funds in a specified amount to enable a buyer to purchase a house.
Mortgage Insurance Premium
The payment made by a borrower to the lender for transmittal to HUD to help defray the cost of the FHA mortgage insurance program and to provide a reserve fund to protect lenders against loss in insured mortgage transactions. In FHA insured mortgages this represents an annual rate of one-half of one percent paid by the mortgagor on a monthly basis.
A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of an indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment.
A mortgage with a provision that permits borrowing additional money in the future without refinancing the loan or paying additional financing charges. Open-end provisions often limit such borrowing to no more than would raise the balance to the original loan figure.
The lender in a mortgage agreement.
The borrower in a mortgage agreement.
A written promise to pay a certain sum of money at a certain time. A negotiable note starts “Pay to the order of” and is
transferable by endorsement similar to a check.
One authorized by law to acknowledge and certify documents and signatures.
A map or chart of a lot, subdivision or community drawn by a surveyor showing boundary lines, buildings, improvements on the land, and easements.
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.
Payment of mortgage loan, or part of it, before due date. Mortgage agreements often restrict the right of prepayment either by limiting the amount that can be prepaid in any one year or charging a penalty for prepayment. The Federal Housing Administration does not permit such restrictions in FHA insured mortgages.
The basic element of the loan as distinguished from interest and mortgage insurance premium. In other words, principal is the amount upon which interest is paid.
(See agreement of sale.)
A deed which transfers whatever interest the maker of the deed may have in the particular parcel of land. A quitclaim deed is often given to clear the title when the grantor’s interest in a property is questionable. By accepting such a deed the buyer assumes all the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has. (See deed.)
Real Estate Broker
If you’re entering the real estate market for the first time, you may find real estate professionals’ various titles a little confusing. Sometimes consumers use these titles interchangeably, but there are some important differences between the roles of the various professionals, as well as different requirements for using particular titles.
Titles for Real Estate Professionals – The real estate profession is regulated by state governments, which have different requirements for earning a license. In general, though, the titles you may come across include:
Real estate agent: Anyone who earns a real estate license can be called a real estate agent, whether that license is as a sales professional, an associate broker or a broker. State requirements vary, but in all states you must take a minimum number of classes and pass a test to earn your license.
REALTOR®: A real estate agent who is a member of the National Association of REALTORS®, which means that he or she must uphold additional and higher standards of the association and its code of ethics.
Real estate broker: A person who has taken education beyond the agent level as required by state laws and has passed a broker’s license exam. Brokers can work alone or they can hire agents to work for them.
Real estate salesperson: Another name for a real estate agent.
Real estate associate broker: Someone who has taken additional education classes and earned a broker’s license but chooses to work under the management of a broker.
An 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, seller or buyer.
There are different types of agencies in which a real estate agent can represent you.
|Seller’s Agent: A seller’s agent (or listing agent) works solely on behalf of the seller to promote the interests of the seller with the utmost good faith, loyalty and fidelity. The agent negotiates on behalf of and acts as an advocate for the seller. The seller’s agent must disclose to potential buyers all adverse material facts actually known by the seller’s agent about the property. A separate written listing agreement is required which sets forth the duties and obligations of the broker and the seller.|
|Buyer’s Agent: A buyer’s agent works solely on behalf of the buyer to promote the interests of the buyer with the utmost good faith, loyalty and fidelity. The agent negotiates on behalf of and acts as an advocate for the buyer. The buyer’s agent must disclose to potential sellers all adverse material facts actually known by the buyer’s agent including the buyer’s financial ability to perform the terms of the transaction and, if a residential property, whether the buyer intends to occupy the property. A separate written buyer agency agreement is required which sets forth the duties and obligations of the broker and the buyer.|
|Transaction-Broker: A transaction-broker assists the buyer or seller or both throughout a real estate transaction by performing terms of any written or oral agreement, fully informing the parties, presenting all offers and assisting the parties with any contracts, including the closing of the transaction without being an agent or advocate for any of the parties. A transaction-broker must use reasonable skill and care in the performance of any oral or written agreement, and must make the same disclosures as agents about all adverse material facts actually known by the transaction-broker concerning a property or a buyer’s financial ability to perform the terms of a transaction and, if a residential property, whether the buyer intends to occupy the property. No written agreement is required.|
| Customer: A customer is a party to a real estate transaction with whom the broker has no brokerage relationship because such party has not engaged or employed the broker, either as the
party’s agent or as the party’s transaction-broker.
The process of the same mortgagor paying off one loan with the proceeds from another loan.
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. The determination whether a covenant runs with the land or is personal is governed by the language of the covenant, the intent of the parties, and the law in the State where the land is situated. Restrictive covenants that run with the land are encumbrances and may affect the value and marketability of title. Restrictive covenants may limit the density of buildings per acre, regulate size, style or price range of buildings to be erected, or prevent particular businesses from operating or minority groups from owning or occupying homes in a given area. (This latter discriminatory covenant is unconstitutional and has been declared unenforceable by the U.S. Supreme Court.)
See agreement of sale.
A special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, street lights, etc.
A lien that binds a specified piece of property, unlike a general lien, which is levied against all one’s assets. It creates a right to retain something of value belonging to another person as compensation for labor, material, or money expended in that person’s behalf. In some localities it is called “particular” lien or “specific” lien. (See lien.)
Special Warranty Deed
A deed in which the grantor conveys title to the grantee and agrees to protect the grantee against title defects or claims asserted by the grantor and those persons whose right to assert a claim against the title arose during the period the grantor held title to the property. In a special warranty deed the grantor guarantees to the grantee that he has done nothing during the time he held title to the property which has, or which might in the future, impair the grantee’s title.
(See documentary stamps.)
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. A survey is often required by the lender to assure him that a building is actually sited on the land according to its legal description.
As applied to real estate, an enforced charge imposed on persons, property or income, to be used to support the State. The governing body in turn utilizes the funds in the best interest of the general public.
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.
Protects lenders or homeowners against loss of their interest in property due to legal defects in title. Title insurance may be issued to a “mortgagee’s title policy.” Insurance benefits will be paid only to the “named insured” in the title policy, so it is important that an owner purchase an “owner’s title policy”, if he desires the protection of title insurance.
Title Search or Examination
A check of the title records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive convenants filed in the record, which would adversely affect the marketability or value of title.
A 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.)
Charging more than the maximum legally permitted rate of interest.
The acts of an authorized local government establishing building codes, and setting forth regulations for property land usage.