Glossary of Real Estate Terms

Abstract of title: A historical summary of all records regarding the sale, transfer, liens, mortgages, or other instances that would affect the title to a piece of real property.

Acceleration clause: A clause that allows a lender to speed up an event, such as the rate of repayment of a mortgage, usually tied to a violation of certain provisions in the loan documents.

Adjustable rate mortgage: ARM, a variable or flexible rate mortgage in which the interest rate adjusts according to a certain financial index or formula and at intervals determined by the lender.

Amenities: Features of a home or property that may benefit the owner but not be necessary to its use, such as a swimming pools, tennis courts, or access to water or natural areas.

Amortization: Repayment of a mortgage loan through regularly scheduled payments of principal and interest over a specified time period.

Annual percentage rate (APR): The costs of a loan, including discount points and other finance charges, expressed as a yearly interest rate. Lenders are required by law to disclose the APR which allows buyers to compare the actual costs of competing mortgage companies.

Appraisal: A document stating the estimated fair market value of a piece of real property and required by lenders to determine loan amount.

Assessed value: The value placed on a piece of real property by the local governing body for the purpose of taxation.

Assessment: Special taxes or charges levied on real property by governments or community associations to pay for improvements or repairs to common or municipal property.

Assumability: The ability of a mortgage loan to be assumed or transferred to another buyer. Loans with assumability usually require that the buyer qualify and are subject to lender approval. Loans without an assumability clause are generally due in full upon the sale of the property.

Balloon mortgage: Mortgages that offer low rates for a specified amount of time (usually 5-10 years) after which time the balance either must be paid in full or refinanced.

Biweekly mortgage: Loans that require payments of principal and interest to be made every two weeks. Such loans are repaid faster than typical loans with a monthly payment schedule.

Broker: As applied to mortgages a person who acts as an intermediary between borrower and lender. In real estate, a broker is generally the person in charge of a real estate office and who oversees the actions of a group of agents. It is also a designation available to real estate agents through additional study and internship.

Buydown: The process by which a purchaser may prepay a certain amount of interest in order to gain a lower interest rate on a mortgage. Common in adjustable rate mortgages, buydowns may decrease the interest rate for a specified and limited amount of time.

Cap: A limit upon how much the interest rate or payment can change during a specified time period. Payment caps can result in negative amortization.

Certificate of title: A document from an attorney or title company that states an opinion of a property’s title based upon a search of public records.

Closing: Also known as settlement, the time of transfer of a piece of real property from one owner to another. During closing the purchaser assumes the mortgage obligation, pays all closing costs, and assumes ownership.

Closing costs: The costs, other than the sale price, associated with the transfer of a piece of real property. Lenders are required by law to present a “good-faith” estimate of closing costs after loan application.

Commission: An amount, typically a percentage of the sales price, that is paid to the real estate professional as a fee for negotiating the transaction.

Commitment fees: Fees charged by lenders to guarantee a specific interest rate and points to be charged on a mortgage for a limited amount of time.

Condominium: A form of ownership in which individuals purchase and own a unit of housing in a multi-housing complex and also share financial responsibility for common areas.

Conforming loan: A loan that conforms to the guidelines of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.

Construction loan: A short-term loan used to build or to make improvements to a home. Such loans must be repaid, refinanced, or converted to permanent loans within a specified period, usually no longer than one year.

Conventional loan: Private sector loans that are not insured or guaranteed by the federal government.

Conversion clause: Provisions in some adjustable mortgages that allows for conversion to a fixed-rate loan at a specified point during the life of the loan.

Cooperative (Co-op): A form of housing where owners purchase shares of stock in a corporation that actually owns a structure. Such ownership grants the right of the stock owner to occupy a unit of housing in the building. It is common for co-ops to require approval of a board of directors or the shareholders prior to sale.

Co-signer: A person who assumes joint responsibility with another for repaying a loan without sharing in the ownership of the property on which the loan is made.

Covenants: The rules and restrictions governing the use of a piece of real property.

Credit report: A report that shows past and current debts and the timeliness with which they have been repaid. Lenders evaluate credit reports to help determine credit worthiness.

Credit score: A numerical score generated by a credit bureau that assists lenders in qualifying applicants for mortgages. Those with lower scores either fail to qualify or are charged higher interest rates.

Debt-to-income ratio: A comparison of gross income to housing and non-housing expenses. Conventional mortgage lenders generally use an applicant’s gross monthly income while FHA/VA loans are based on net effective income.

Deed: The legal document that transfers ownership in a piece of real property from one party to another.

Deed-in-lieu: A deed given by an owner to their lender to avoid foreclosure. While homeowners are not allowed to remain in the property, lenders accepting such deeds avoid many of the costs and efforts of foreclosure.

Deed of trust: A document used in some states in lieu of a mortgage. Deeds of trust are held by a trustee until the mortgage is paid in full.

Default: The inability of a borrower to meet the meet the terms of a loan to make payments as scheduled. Nonpayment of a mortgage beyond a specified number of payments is considered default.

Delinquency: The status of a loan or mortgage when payments are not current.

Discount points: A percentage of a loan amount (one point = one percent) paid to the lender for a reduction in the interest rate.

Down-payment: The portion of a home’s purchase price that is paid in cash and is not a part of the mortgage loan. Down payments create instant equity in a property.

Earnest money: Cash or some other form of deposit made by the potential purchaser as a good faith gesture to indicate that they intend to consummate the sale. If the offer to purchase is accepted, the earnest money becomes part of the down-payment, if rejected it is returned, and it is forfeited if the buyer fails to meet the terms of the offer to purchase.

Easement: A right granted by one party to another for the purpose of allowing access to a certain portion of a piece of real property, common with utility lines and underground services. Easements can also be granted to neighboring properties for driveways or access to common areas.

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

Equity: An owner’s financial interest in a piece of property determined by calculating the difference between the current market value and all outstanding loans on a property.

Escape clause: The provision in a contract allowing one or both parties to cancel all or part of the agreement in the event certain conditions fail to occur.

Escrow: Money held by a third party for safekeeping and paid when certain conditions of a contract are met.

Escrow account: A separate account into which lenders deposit a portion of each month’s payment to provide funds for the payment of items such as taxes and insurance.

Fair market value: The hypothetical price of a property based upon a comparison of comparable properties within the same area.

Federal Housing Administration (FHA): A government agency within the Department of Housing and Urban Development that sets standards and underwrites mortgages made by private lenders to encourage them to make loans to borrowers who might not qualify for conventional loans.

Federal Home Loan Mortgage Corporation (Freddie Mac): A quasi-government agency that acts as a secondary investor to purchase and sell mortgage loans.

Federal National Mortgage Association (Fannie Mae): A federally chartered, private corporation that purchases residential mortgages and converts them into securities for sale to investors, the purchase of which supplies funds for lenders to make mortgages.

Fee simple: The unqualified ownership of property, with the right to occupy and sell as desired.

Fixed-rate mortgage: A mortgage whose interest rate and terms do not change during the life of the loan.

Flood insurance: Insurance that protects property owners from loss due to flood. Lenders require that h homes located within known flood plains be protected with such coverage during the term of the mortgage.

Foreclosure: A legal process in which a mortgaged property is sold to pay the loan of a buyer who has defaulted.

Good faith estimate: An estimate of all closing fees, pre-paid or otherwise, escrow items, and lender charges associated with a mortgage; required by law to be given to applicants within three days of loan application.

Government National Mortgage Association (Ginnie Mae): A government-owned corporation overseen by the Department of Housing and Urban Development that participates in the secondary market by pooling FHA and VA loans to back securities by private investment. Funds generated are used to provide additional mortgages through lenders.

Graduated payment mortgage: A fixed interest loan with payments that gradually escalate for a specified time and then remain level until the loan is repaid.

Hazard insurance: Insurance on a home that provides coverage against losses from physical damage such as fire or storm. Mortgage lenders generally require borrowers to maintain hazard insurance in an amount at least equal to the amount of the mortgage loan.

H.E.L.P.: The Homebuyer Education Learning Program; an educational program conducted by the FHA that guides people through the homebuying process. Participation in the program may entitle borrowers to reduced initial FHA mortgage insurance premium.

Home equity loan: A second mortgage on a property that allows owners to borrow against the accumulated equity in a property.

Home inspection: A thorough examination of the structure and mechanical systems of a home to make potential purchasers aware of any defects of repairs that may be needed.

Homeowners insurance: Insurance that provides protection against damage to a dwelling and its contents as well as liability and other coverage.

HUD: The U.S. Department of Housing and Urban Development; a government agency that administers FHA, GNMA, and other housing related agencies, and is charged with enforcing fair housing laws.

HUD1: A statement also known as the “settlement sheet” that itemizes all closing costs related to a property and loan closing. A copy of the statement must be provided to the borrower at or before closing.

HVAC: Heating, Ventilation, and Air Conditioning; a home’s heating and cooling systems.

Index: A measure used by lenders to determine changes in the interest rate of an adjustable rate loan.

Inflation: A reduction in the value of the dollar caused when the number of dollars in circulation exceeds the amount of goods and services available for purchase.

Interest: The fee charged by lenders for the use of their money.

Interest cap: A limit in the amount of increase in the interest rate for an adjustable rate mortgage.

Interest rate: The amount of interest, stated as a percentage of the loan amount, charged by lenders for money borrowed.

Joint tenancy: Equal ownership of a piece of real property by two or more parties, each with the right of survivorship.

Judgment: A legal decision regarding the repayment of a debt. Judgments can be filed against property allowing the person owed to be repaid when the property is sold.

Jumbo loan: Referred to as “nonconforming loans,” these loans are generally those above $625.000 and cannot be purchased by Fannie Mae or Freddie Mac.

Lien: A legal claim against a property that must be satisfied when the property is sold.

Liquidity: The ability to readily convert an asset into cash.

Loan discount: See: Points

Loan fraud: Purposely giving incorrect information on a loan application in order to better qualify for a loan; can result in criminal prosecution.

Loan-to-value ratio (LTV): A relationship expressed as a percentage calculated by dividing the loan amount by the price or appraised value of a property ($80,000 borrowed on $100,000 property equals a 80% loan to value ratio).

Lock-in: A guarantee from a lender of a specific interest rate if a loan is closed within a limited time.

Margin: An amount a lender adds to an index to determine the interest rate for an adjustable rate mortgage.

Market value: The hypothetical value of a property based upon comparisons with the selling prices of comparable properties in the same area.

Modification: A change in the terms of a mortgage, such as an interest rate adjustment in an adjustable rate mortgage.

Mortgage: The legal document that represents a property as collateral for a loan.

Mortgage banker: A lender that originates loans and resells them to secondary lenders.

Mortgage broker: A firm that originates and processes loans for multiple lenders.

Mortgage insurance: A policy that insures lenders against losses that may occur when a borrower defaults on a mortgage loan. It is required on loans with less than 20 percent down payment.

Mortgage insurance premium (MIP): A monthly payment, usually combined with the mortgage payment, that borrowers pay for mortgage insurance.

Mortgagee: The lender.

Mortgagor: The person borrowing.

NAHB: The National Association of Home Builders; a professional association of homebuilders that requires members to adhere to certain standards and a strict code of ethics.

Negative amortization: The situation in which a loan’s payments are not sufficient to cover the actual interest rate of a loan. The interest cost not covered is added back to the original loan amount and results in an increase in the outstanding balance even though payments have been made. It is generally, a very bad form of loan for homeowners.

Non-assumption clause: A stipulation in a mortgage that does not allow another to assume the loan without approval of the lender.

Non-conforming loan: A loan that does not meet the guidelines of the FHLMC OR FNMA. Jumbo loans, those above a continually adjusted ceiling, are non-conforming.

Note: A legal document that describes a debt and a borrower’s obligation to pay.

Offer: Also known as purchase offer, an indication of a potential buyer’s willingness to purchase a piece of real property for a specified amount and under certain conditions.

Origination: The process of preparing, submitting, and evaluating a mortgage application.

Origination fee: The fee charged by a lender for origination, usually expressed as a percentage of the loan amount (points).

P&I: The abbreviation for principal and interest.

PITI: The abbreviation for principal, interest, taxes, and insurance; frequently the four elements of a mortgage payment.

PMI: Private Mortgage Insurance; Insurance offered by private companies to insure a lender against loss; required on conventional loans with less than 20 percent down payment. With FHA loans a charge of 1.5 percent of the loan amount is paid at closing and 0.5 percent of the loan amount is added to each monthly payment.

PITIO: The abbreviation for principal, interest, taxes, insurance, and other monthly non-housing costs.

Points: Equal to one percent of the loan amount of a mortgage (a mortgage of $100,000 with 1.5 points equals a payment of $1,500 to the lender). Discount points are sometimes used to buy down the interest rate.

Pre-approval: A commitment from a lender to a borrower for a specific amount of money. Pre-approval are usually valid for as long as the borrower meets the qualifications.

Pre-foreclosure: The condition that exists once a lender announces the intention to foreclose on a property in which the borrower is in default. Owners choosing to sell during this period can avoid foreclosure; and purchasers are sometimes afforded opportunities to buy at prices below market.

Pre-qualification: An informal determination by a lender of the maximum someone is eligible to borrow.

Premium: The amount paid an insurance company to provide a specific coverage.

Prepayment: Payment made on a mortgage in advance of the due date; in some loans may result in a penalty being charged to the borrower.

Prime rate: The interest rate charged banks to their most credit-worthy customers; frequently used as an index for adjustable rate loans.

Principal: The amount borrowed from a lender not including interest.

Property tax: The amount charged by state or local governments as a tax on real property.

Prorate: To divide or distribute proportionately; in real estate transactions usually refers to a division of amounts owed between buyer and seller.

Qualification: A determination by a lender of an applicant’s ability to repay a loan based upon a review of the applicant’s assets, income, debts, and credit history.

Radon: A naturally occurring radioactive gas caused by the breakdown of uranium in soil, rock, and water, the concentration of which varies widely across the country. Because of the pressure differences between a house and the outdoors, in areas of high concentration, radon may reach dangerous levels of concentration indoors. The EPA recommends that all homes be tested for radon prior to purchase.

Real estate agent: An individual licensed to negotiate and arrange the sale of real estate.

Realtor®: A real estate agent or broker who is a member of the National Association of Realtors and who agrees to abide by a strict code of ethics.

Refinancing: The paying of one loan by obtaining another; normally done to improve the interest rate or terms.

Rehabilitation mortgage: A mortgage that includes the costs of repairs and improvements as a part of the loan.

RESPA: The Real Estate Settlement Procedures Act which requires lenders to disclose all settlement costs, practices, and relationships as a protection to consumers.

Reverse annuity mortgage: A type of loan in which a lender makes advance payments on a property (usually a lump sum followed by monthly payments) and accepts equity in the property as security.

Right of rescission: The right to cancel a transaction, provided under law so that borrowers who change their minds may rescind the loan within the first three days following the signing of the loan documents.

Rollover: The name applied to the process of a construction loan becoming a permanent mortgage.

Second mortgage: A loan on a piece of real property that is secondary to the first mortgage such as a home equity loan. Second mortgages are usually for shorter terms and carry a higher rate of interest.

Secondary market: A market of investors who buy large numbers of mortgages from lenders and resell them to other investors.

Servicing: The process of collecting the monthly mortgage payments and applying them to principal, interest, taxes, and insurance.

Settlement: A term used to describe the closing process.

Survey: A property diagram prepared by a registered professional that shows the dimensions, legal boundaries, easements, structures, roads, etc.

Sweat equity: The process of using one’s physical labor to improve or repair a property as a part of the down payment.

Tax deed: A document conveying title to a property that has been seized by a government authority for non payment of taxes.

Tenancy: Ownership of a property by more than one individual such as: Joint Tenancy—the equal ownership of a property by two or more individuals, each with right of survivorship, Tenancy in Common—equal ownership by two or more without the right of survivorship, Tenancy by the Entireties—ownership of a property between husband and wife, requiring the consent of both parties prior to sale, but with the right of survivorship.

Title: A legal document establishing ownership of a property.

Title insurance: Insurance that protects the insured against claims or disputes that arise regarding the true ownership of a property; required by lenders at closing (protects lender’s interest only) and available for homeowners.

Title 1: An FHA insured loan that allows a borrower to make non-luxury improvements on a home.

Underwriting: The process of analyzing a loan application to determine the amount of risk involved in a particular loan, including a review of the borrower’s credit history and an analysis of the property’s value.

Uniform settlement statement: A document containing the closing information and which is supplied to both buyer and seller.

Utility costs: The actual costs of operation of a home for water, electricity, sewage, gas, etc.

VA: The Veterans Administration; guarantees no-down-payment loans for qualified veterans, similar to mortgage insurance.

Variable rate mortgage: See Adjustable Rate Mortgage, ARM.

Walk-through: An inspection of a property by the prospective purchaser prior to closing; not the same as Home Inspection.

Warranty deed: A document showing ownership of a piece of real property.

Zoning: The process by which local governments specify and limit the use of private property as a method of controlling development.