betterment
An improvement that increases property value as distinguished
from repairs or replacements that simply maintain value.
bill
of sale
A written document that transfers title to personal property.
binder
A preliminary agreement, secured by the payment of an earnest
money deposit, under which a buyer offers to purchase real estate.
blanket
insurance policy
A single policy that covers more than one piece of property
(or more than one person).
bond
An interest-bearing certificate of debt with a maturity date.
An obligation of a government or business corporation. A real
estate bond is a written obligation usually secured by a mortgage
or a deed of trust.
breach
A violation of any legal obligation.
broker
A person who, for a commission or a fee, brings parties together
and assists in negotiating contracts between them.
budget
A detailed plan of income and expenses expected over a certain
period of time. A budget can provide guidelines for managing
future investments and expenses.
building
code
Local regulations that control design, construction, and materials
used in construction. Building codes are based on safety and
health standards.
capital
(1) Money used to create income, either as an investment in
a business or an income property. (2) The money or property
comprising the wealth owned or used by a person or business
enterprise. (3) The accumulated wealth of a person or business.
(4) The net worth of a business represented by the amount by
which its assets exceed liabilities.
cash-out
refinance
A refinance transaction in which the amount of money received
from the new loan exceeds the total of the money needed to repay
the existing first mortgage, closing costs, points, and the
amount required to satisfy any outstanding subordinate mortgage
liens. In other words, a refinance transaction in which the
borrower receives additional cash that can be used for any purpose.
certificate
of title
A statement provided by an abstract company, title company,
or attorney stating that the title to real estate is legally
held by the current owner.
chain
of title
The history of all of the documents that transfer title to a
parcel of real property, starting with the earliest existing
document and ending with the most recent.
clear
title
A title that is free of liens or legal questions as to ownership
of the property.
closing
A meeting at which a sale of a property is finalized by the
buyer signing the mortgage documents and paying closing costs.
Also called "settlement."
closing
costs
Expenses (over and above the price of the property) incurred
by buyers and sellers in transferring ownership of a property.
Closing costs normally include an origination fee, an attorney's
fee, taxes, an amount placed in escrow, and charges for obtaining
title insurance and a survey. Closing costs vary according to
the area of the country. Your real estate agent often provides
estimates of closing costs to prospective homebuyers.
collateral
An asset (such as a car or a home) that guarantees the repayment
of a loan. The borrower risks losing the asset if the loan is
not repaid according to the terms of the loan contract.
co-maker
A person who signs a promissory note along with the borrower.
A co-maker's signature guarantees that the loan will be repaid,
because the borrower and the co-maker are equally responsible
for the repayment. See endorser.
commission
The fee charged by a broker or agent for negotiating a real
estate or loan transaction. A commission is generally a percentage
of the price of the property or loan.
commitment
letter
A formal offer by a lender stating the terms under which it
agrees to lend money to a home buyer. Also known as a "loan
commitment."
common
area assessments
Levies against individual unit owners in a condominium or planned
unit development (PUD) project for additional capital to defray
homeowners' association costs and expenses and to repair, replace,
maintain, improve, or operate the common areas of the project.
common
areas
Those portions of a building, land, and amenities owned (or
managed) by a planned unit development (PUD) or condominium
project's homeowners' association (or a cooperative project's
cooperative corporation) that are used by all of the unit owners,
who share in the common expenses of their operation and maintenance.
Common areas include swimming pools, tennis courts, and other
recreational facilities, as well as common corridors of buildings,
parking areas, means of ingress and egress, etc.
community
property
In some western and southwestern states, a form of ownership
under which property acquired during a marriage is presumed
to be owned jointly unless acquired as separate property of
either spouse.
comparables
(comps)
An abbreviation for "comparable properties"; used for comparative
purposes in the appraisal process. Comparables are properties
like the property under consideration; they have reasonably
the same size, location, and amenities and have recently been
sold. Comparables help the appraiser determine the approximate
fair market value of the subject property.
compound
interest
Interest paid on the original principal balance and on the accrued
and unpaid interest.
condominium
A real estate project in which each unit owner has title to
a unit in a building, an undivided interest in the common areas
of the project, and sometimes the exclusive use of certain limited
common areas.
construction
loan
A short-term, interim loan for financing the cost of construction.
The lender makes payments to the builder at periodic intervals
as the work progresses.
contingency
A condition that must be met before a contract is legally binding.
For example, home purchasers often include a contingency that
specifies that the contract is not binding until the purchaser
obtains a satisfactory home inspection report from a qualified
home inspector.
contract
An oral or written agreement to do or not to do a certain thing.
conventional
mortgage
A mortgage that is not insured or guaranteed by the federal
government. Contrast with government mortgage.
cost
of funds index (COFI)
An index that is used to determine interest rate changes for
certain adjustable-rate mortgage (ARM) plans. It represents
the weighted-average cost of savings, borrowings, and advances
of the 11th District members of the Federal Home Loan Bank of
San Francisco. See adjustable-rate mortgage (ARM).
covenant
A clause in a mortgage that obligates or restricts the borrower
and that, if violated, can result in foreclosure.
credit
An agreement in which a borrower receives something of value
in exchange for a promise to repay the lender at a later date.
credit
history
A record of an individual's open and fully repaid debts. A credit
history helps a lender to determine whether a potential borrower
has a history of repaying debts in a timely manner.
credit
life insurance
A type of insurance often bought by mortgagors because it will
pay off the mortgage debt if the mortgagor dies while the policy
is in force.
creditor
A person to whom money is owed.
credit
report
A report of an individual's credit history prepared by a credit
bureau and used by a lender in determining a loan applicant's
creditworthiness.
credit
bureau
An organization that prepares reports that are used by lenders
to determine a potential borrower's credit history. The agency
obtains data for these reports from a credit repository as well
as from other sources.
debt
An amount owed to another. See installment loan and revolving
liability.
deed
The legal document conveying title to a property.
deed
of trust
The document used in some states instead of a mortgage; title
is conveyed to a trustee.
default
Failure to make mortgage payments on a timely basis or to comply
with other requirements of a mortgage.
delinquency
Failure to make mortgage payments when mortgage payments are
due.
deposit
A sum of money given to bind the sale of real estate, or a sum
of money given to ensure payment or an advance of funds in the
processing of a loan. See earnest money deposit.
depreciation
A decline in the value of property; the opposite of appreciation.
down
payment
The part of the purchase price of a property that the buyer
pays in cash and does not finance with a mortgage.
earnest money deposit
A deposit made by the potential home buyer to show that he or
she is serious about buying the house.
easement
A right of way giving persons other than the owner access to
or over a property.
effective
gross income
Normal annual income including overtime that is regular or guaranteed.
The income may be from more than one source. Salary is generally
the principal source, but other income may qualify if it is
significant and stable.
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
A homeowner's financial interest in a property. Equity is the
difference between the fair market value of the property and
the amount still owed on its mortgage.
escrow
An item of value, money, or documents deposited with a third
party to be delivered upon the fulfillment of a condition. For
example, the deposit by a borrower with the lender of funds
to pay taxes and insurance premiums when they become due, or
the deposit of funds or documents with an attorney or escrow
agent to be disbursed upon the closing of a sale of real estate.
estate
The ownership interest of an individual in real property. The
sum total of all the real property and personal property owned
by an individual at time of death.
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer
credit reports by consumer/credit reporting agencies and establishes
procedures for correcting mistakes on one's credit record.
fair
market value
The highest price that a buyer, willing but not compelled to
buy, would pay, and the lowest a seller, willing but not compelled
to sell, would accept.
fee
simple
The greatest possible interest a person can have in real estate.
firm
commitment
A lender’s agreement to make a loan to a specific borrower
on a specific property.
first
mortgage
A mortgage that is the primary lien against a property.
fixed
installment
The monthly payment due on a mortgage loan. The fixed installment
includes payment of both principal and interest.
fixed-rate
mortgage (FRM)
A mortgage in which the interest rate does not change during
the entire term of the loan.
fixture
Personal property that becomes real property when attached in
a permanent manner to real estate.
flood
insurance
Insurance that compensates for physical property damage resulting
from flooding. It is required for properties located in federally
designated flood areas.
foreclosure
The legal process by which a borrower in default under a mortgage
is deprived of his or her interest in the mortgaged property.
This usually involves a forced sale of the property at public
auction with the proceeds of the sale being applied to the mortgage
debt.
grantee
The person to whom an interest in real property is conveyed.
grantor
The person conveying an interest in real property.
H
hazard insurance
Insurance coverage that compensates for physical damage to a
property from fire, wind, vandalism, or other hazards.
home
equity line of credit (HELOC)
A mortgage loan, which is usually in a subordinate position,
that allows the borrower to obtain multiple advances of the
loan proceeds at his or her own discretion, up to an amount
that represents a specified percentage of the borrower's equity
in a property.
home
inspection
A thorough inspection that evaluates the structural and mechanical
condition of a property. A satisfactory home inspection is often
included as a contingency by the purchaser. Contrast with appraisal.
homeowners'
association
A 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.
homeowner's
insurance
An insurance policy that combines personal liability insurance
and hazard insurance coverage for a dwelling and its contents.
homeowner's
warranty
A type of insurance that covers repairs to specified parts of
a house for a specific period of time. It is provided by the
builder or property seller as a condition of the sale.
housing
expense ratio
The percentage of gross monthly income that goes toward paying
housing expenses.
income
property
Real estate developed or improved to produce income.
index
A number used to compute the interest rate for an adjustable-rate
mortgage (ARM). The index is generally a published number or
percentage, such as the average interest rate or yield on Treasury
bills. A margin is added to the index to determine the interest
rate that will be charged on the ARM. This interest rate is
subject to any caps that are associated with the mortgage.
inflation
An increase in the amount of money or credit available in relation
to the amount of goods or services available, which causes an
increase in the general price level of goods and services. Over
time, inflation reduces the purchasing power of a dollar, making
it worth less.
initial
interest rate
The original interest rate of the mortgage at the time of closing.
This rate changes for an adjustable-rate mortgage (ARM). Sometimes
known as "start rate" or "teaser."
installment
The regular periodic payment that a borrower agrees to make
to a lender.
installment
loan
Borrowed money that is repaid in equal payments, known as installments.
A furniture loan is often paid for as an installment loan.
insurance
A contract that provides compensation for specific losses in
exchange for a periodic payment. An individual contract is known
as an insurance policy, and the periodic payment is known as
an insurance premium.
insured
mortgage
A mortgage that is protected by the Federal Housing Administration
(FHA) or by private mortgage insurance (MI). If the borrower
defaults on the loan, the insurer must pay the lender the lesser
of the loss incurred or the insured amount.
interest
The fee charged for borrowing money.
interest
accrual rate
The percentage rate at which interest accrues on the mortgage.
In most cases, it is also the rate used to calculate the monthly
payments, although it is not used for an adjustable-rate mortgage
(ARM) with payment change limitations.
interest
rate
The rate of interest in effect for the monthly payment due.
interest
rate buydown
An arrangement wherein the property seller (or any other party)
deposits money to an account so that it can be released each
month to reduce the mortgagor's monthly payments during the
early years of a mortgage. During the specified period, the
mortgagor's effective interest rate is "bought down"
below the actual interest rate.
interest
rate ceiling
For an adjustable-rate mortgage (ARM), the maximum interest
rate, as specified in the mortgage note.
interest
rate floor
For an adjustable-rate mortgage (ARM), the minimum interest
rate, as specified in the mortgage note.
investment
property
A property that is not occupied by the owner.
joint tenancy
A form of co-ownership that gives each tenant equal interest
and equal rights in the property, including the right of survivorship.
leaseback
A technique in which a seller deeds property to a buyer for
a consideration, and the buyer simultaneously leases the property
back to the seller.
legal
description
A property description, recognized by law, that is sufficient
to locate and identify the property without oral testimony.
liabilities
A person's financial obligations. Liabilities include long-term
and short-term debt, as well as any other amounts that are owed
to others.
liability
insurance
Insurance coverage that offers protection against claims alleging
that a property owner's negligence or inappropriate action resulted
in bodily injury or property damage to another party.
lien
A legal claim against a property that must be paid off when
the property is sold.
line
of credit
An agreement by a commercial bank or other financial institution
to extend credit up to a certain amount for a certain time to
a specified borrower. See home equity line of credit.
liquid
asset
A cash asset or an asset that is easily converted into cash.
loan
A sum of borrowed money (principal) that is generally repaid
with interest.
loan
origination
The process by which a mortgage lender brings into existence
a mortgage secured by real property.
loan-to-value
(LTV)
The relationship between the principal balance of the mortgage
and the appraised value (or sales price if it is lower) of the
property. For example, a $100,000 home with an $80,000 mortgage
has a LTV percentage of 80 percent.
lock-in
A written agreement in which the lender guarantees a specified
interest rate if a mortgage goes to closing within a set period
of time. The lock-in also usually specifies the number of points
to be paid at closing.
lock-in
period
The time period during which the lender has guaranteed an interest
rate to a borrower. See lock-in.
margin
For an adjustable-rate mortgage (ARM), the amount that is added
to the index to establish the interest rate on each adjustment
date, subject to any limitations on the interest rate change.
maturity
The date on which the principal balance of a loan, bond, or
other financial instrument becomes due and payable.
mortgage
A legal document that pledges a property to the lender as security
for payment of a debt.
mortgage
banker
A company that originates mortgages exclusively for resale in
the secondary mortgage market.
mortgage
broker
An individual or company that brings borrowers and lenders together
for the purpose of loan origination. Mortgage brokers typically
require a fee or a commission for their services.
mortgagee
The lender in a mortgage agreement.
mortgage
insurance
A contract that insures the lender against loss caused by a
mortgagor's default on a government mortgage or conventional
mortgage. Mortgage insurance can be issued by a private company
or by a government agency such as the Federal Housing Administration
(FHA). Depending on the type of mortgage insurance, the insurance
may cover a percentage of or virtually all of the mortgage loan.
See private mortgage insurance.
mortgage
insurance premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either
to a government agency such as the Federal Housing Administration
(FHA) or to a private mortgage insurance (MI) company.
mortgage
life insurance
A type of term life insurance often bought by mortgagors. The
amount of coverage decreases as the principal balance declines.
In the event that the borrower dies while the policy is in force,
the debt is automatically satisfied by insurance proceeds.
mortgagor
The borrower in a mortgage agreement.
multi
dwelling units
Properties that provide separate housing units for more than
one family, although they secure only a single mortgage.
negative amortization
A gradual increase in mortgage debt that occurs when the monthly
payment is not large enough to cover the entire principal and
interest due. The amount of the shortfall is added to the remaining
balance to create "negative" amortization.
net
cash flow
The income that remains for an investment property after the
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
The value of all of a person's assets, including cash, minus
all liabilities.
note
A legal document that obligates a borrower to repay a mortgage
loan at a stated interest rate during a specified period of
time.
note
rate
The interest rate stated on a mortgage note.
origination
fee
A fee paid to a lender for processing a loan application. The
origination fee is stated in the form of points. One point is
1 percent of the mortgage amount.
owner
financing
A property purchase transaction in which the property seller
provides all or part of the financing.
periodic
payment cap
For an adjustable-rate mortgage (ARM), a limit on the amount
that payments can increase or decrease during any one adjustment
period.
periodic
rate cap
For an adjustable-rate mortgage (ARM), a limit on the amount
that the interest rate can increase or decrease during any one
adjustment period, regardless of how high or low the index might
be.
personal
property
Any property that is not real property.
point
A one-time charge by the lender for originating a loan. A point
is 1 percent of the amount of the mortgage.
prepayment
Any amount paid to reduce the principal balance of a loan before
the due date. Payment in full on a mortgage that may result
from a sale of the property, the owner's decision to pay off
the loan in full, or a foreclosure. In each case, prepayment
means payment occurs before the loan has been fully amortized.
prepayment
penalty
A fee that may be charged to a borrower who pays off a loan
before it is due.
pre-qualification
The process of determining how much money a prospective home
buyer will be eligible to borrow before he or she applies for
a loan.
prime
rate
The interest rate that banks charge to their preferred customers.
Changes in the prime rate influence changes in other rates,
including mortgage interest rates.
principal
The amount borrowed or remaining unpaid. The part of the monthly
payment that reduces the remaining balance of a mortgage.
principal
balance
The outstanding balance of principal on a mortgage. The principal
balance does not include interest or any other charges. See
remaining balance.
principal,
interest, taxes, and insurance (PITI)
The four components of a monthly mortgage payment. Principal
refers to the part of the monthly payment that reduces the remaining
balance of the mortgage. Interest is the fee charged for borrowing
money. Taxes and insurance refer to the amounts that are paid
into an escrow account each month for property taxes and mortgage
and hazard insurance.
private
mortgage insurance (PMI)
Mortgage insurance that is provided by a private mortgage insurance
company to protect lenders against loss if a borrower defaults.
Most lenders generally require MI for a loan with a loan-to-value
(LTV) percentage in excess of 80 percent.
promissory
note
A written promise to repay a specified amount over a specified
period of time.
purchase
and sale agreement
A written contract signed by the buyer and seller stating the
terms and conditions under which a property will be sold.
qualifying
ratios
Calculations that are used in determining whether a borrower
can qualify for a mortgage. They consist of two separate calculations:
a housing expense as a percent of income ratio and total debt
obligations as a percent of income ratio.
quitclaim
deed
A deed that transfers without warranty whatever interest or
title a grantor may have at the time the conveyance is made.
rate
lock
A commitment issued by a lender to a borrower or other mortgage
originator guaranteeing a specified interest rate for a specified
period of time. See lock-in.
real
estate agent
A person licensed to negotiate and transact the sale of real
estate on behalf of the property owner.
Real
Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers
advance notice of closing costs.
real
property
Land and appurtenances, including anything of a permanent nature
such as structures, trees, minerals, and the interest, benefits,
and inherent rights thereof.
recorder
The public official who keeps records of transactions that affect
real property in the area. Sometimes known as a "Registrar
of Deeds" or "County Clerk."
recording
The noting in the registrar’s office of the details of
a properly executed legal document, such as a deed, a mortgage
note, a satisfaction of mortgage, or an extension of mortgage,
thereby making it a part of the public record.
refinance
The process of paying off one loan with the proceeds from a
new loan using the same property as security.
rehabilitation
mortgage
A mortgage created to cover the costs of repairing, improving,
and sometimes acquiring an existing property.
reverse
mortgage
A special type of mortgage that enables older home owners to
convert the equity they have in their homes into cash, using
a variety of payment options to address their specific financial
needs. Unlike traditional home equity loans, a borrower does
not qualify on the basis of income but on the value of his or
her home. In addition, the loan does not have to be repaid until
the borrower no longer occupies the property.
right
of first refusal
A provision in an agreement that requires the owner of a property
to give another party the first opportunity to purchase or lease
the property before he or she offers it for sale or lease to
others.
right
of ingress or egress
The right to enter or leave designated premises.
right
of survivorship
In joint tenancy, the right of survivors to acquire the interest
of a deceased joint tenant.
second
mortgage
A mortgage that has a lien position subordinate to the first
mortgage.
secured
loan
A loan that is backed by collateral.
security
The property that will be pledged as collateral for a loan.
settlement
See closing.
subdivision
A housing development that is created by dividing a tract of
land into individual lots for sale or lease.
subordinate
financing
Any mortgage or other lien that has a priority that is lower
than that of the first mortgage.
survey
A drawing or map showing the precise legal boundaries of a property,
the location of improvements, easements, rights of way, encroachments,
and other physical features.
sweat
equity
Contribution to the construction or rehabilitation of a property
in the form of labor or services rather than cash.
tenants
in common
A type of joint tenancy in a property without right of survivorship.
Contrast with tenancy by the entirety and with joint tenacy.
title
A legal document evidencing a person's right to or ownership
of a property.
title
company
A company that specializes in examining and insuring titles
to real estate.
title
insurance
Insurance that protects the lender (lender's policy) or the
buyer (owner's policy) against loss arising from disputes over
ownership of a property.
title
search
A check of the title records to ensure that the seller is the
legal owner of the property and that there are no liens or other
claims outstanding.
total
expense ratio
Total obligations as a percentage of gross monthly income. The
total expense ratio includes monthly housing expenses plus other
monthly debts.
transfer
of ownership
Any means by which the ownership of a property changes hands.
Lenders consider all of the following situations to be a transfer
of ownership: the purchase of a property "subject to"
the mortgage, the assumption of the mortgage debt by the property
purchaser, and any exchange of possession of the property under
a land sales contract or any other land trust device. In cases
in which an inter vivos revocable trust is the borrower, lenders
also consider any transfer of a beneficial interest in the trust
to be a transfer of ownership.
transfer
tax
State or local tax payable when title passes from one owner
to another.
Treasury
index
An index that is used to determine interest rate changes for
certain adjustable-rate mortgage (ARM) plans. It is based on
the results of auctions that the U.S. Treasury holds for its
Treasury bills and securities or is derived from the U.S. Treasury's
daily yield curve, which is based on the closing market bid
yields on actively traded Treasury securities in the over-the-counter
market. See adjustable-rate mortgage (ARM).
Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing,
the terms and conditions of a mortgage, including the annual
percentage rate (APR) and other charges.
trustee
A fiduciary who holds or controls property for the benefit of
another.
underwriting
The process of evaluating a loan application to determine the
risk involved for the lender. Underwriting involves an analysis
of the borrower's creditworthiness and the quality of the property
itself.
unsecured
loan
A loan that is not backed by collateral.
wraparound
mortgage
A mortgage that includes the remaining balance on an existing
first mortgage plus an additional amount requested by the mortgagor.
Full payments on both mortgages are made to the wraparound mortgagee,
who then forwards the payments on the first mortgage to the
first mortgagee.
