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Home Buying Terms and Glossary

Adjustable rate mortgage (ARM) - A broad term for a loan (mortgage or deed of trust) with rates and terms that can change.  The Federal Housing Finance Agency (FHFA), which oversees Fannie May and Freddie Mac, the Comptroller of Currency, which regulates national banks, and the Office of Thrift Supervision, which governs federal savings and loan associations, have issued guidelines allowing the issuance of real estate loans having provisions to increase or decrease the rate of interest at certain time intervals (e.g., every six months) within a certain range (e.g., 1 percent).

Amenity - Feature, both tangible and intangible, that enhances and adds to the value or desirability of real estate.  In a condominium community, for example, common amenities include a swimming pool, clubhouse, and a good view.

Amortization - The gradual repayment or retiring of a debt by means of systematic payments of principal and/or interest over a set period, so that a zero balance remains at the end of the period.  The principal is thus directly reduced or amortized over the life of the loan.

Annual percentage rate (A.P.R.) - An expression of the relationship of the total finance charge to the total amount to be financed as required under the federal Truth in Lending Act.  Tables available from any Federal Reserve banks may be used to compute the rate, which must be calculated to the nearest one-eighth of 1 percent.  Use of the APR permits a standard expression of credit costs, which  facilitates easy comparison of lenders.

Appraisal - The process of developing and communicating an opinion about a property's value.  An appraisal is usually required when real property is sold, financed, condemned, taxed, insured, or partitioned.  Note that an appraisal is an estimate, not a determination of value.  An appraisal may be in the form of a lengthy written report, a completed preprinted form, a simple letter, or even an oral report.

Three approaches are used to estimate market value of a property: the direct sales comparison approach, the cost approach, and the income approach.

The direct sales comparison approach is a comparative analysis of recent sales prices of similar properties, after adjusting for the seller concessions, time, financing, and any differences in the properties.  This approach, formerly called the market data approach, is used most frequently by real estate brokers in the valuation of residences and is the approach usually preferred in court.

The cost approach is an estimated value based on the reproduction or replacement cost of the improvements, less depreciation, plus the value of the land (land value being usually determined by the direct sales comparison approach).  The cost approach is the most useful in appraising new or proposed construction, as well as service properties such as churches and post offices.

The income approach is an estimated value based on the capitalization of net operating income from a property at an acceptable market rate.  Often referred to as the income capitalization approach, it is most useful in appraising investment properties such as apartment buildings, office buildings, and shopping centers.

In most appraisals, the appraiser reconciles the indication of value by each of the three approaches.  The appraiser considers the definition of value, the purpose of the appraisal, the type of party and the adequacy of the compiled data to determine the relative weight (if any) to be the given to each approach in reaching a final estimate of value.  Moreover, in that each method is based on data obtained from the market, the three approaches serve as checks on each other.

Appreciation - A temporary or permanent increase in the net worth or value of property due to economic causes; the opposite of depreciation.

Assessment - An official valuation of real property for tax purposes based on appraisals by local government officials; the term is synonymous with assessed value.  Sales prices of comparable land are used to estimate land values, whereas building values are based on an amount representing the improvement's replacement cost less depreciation.

Assessor - A public official who appraises property for tax purposes.  The official determines only the assessed value, not the tax rate.

Asset - Something of value owned by a person; a useful item of property.  assets are either financial (cash or bonds), tangible or intangible, or physical (real or personal property).  Accountants analyze financial balance sheets made up of assets and liabilities to determine net worth, which is the difference between the two.

Assignment - The transfer of the right, title, and interest in the property of one person (the assignor) to another (the assignee).  There are assignments of, among other things, mortgages, sales contracts, contracts for deed, leases, and options.

Assumption of mortgage - The acts of acquiring title to property that has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including payments.  In effect, the buyer (grantee) becomes the principal guarantor on the mortgage note and is primarily liable for the amount of any deficiency judgment resulting from a default and foreclosure on the property.  The original mortgagor (grantor) is still liable as surety on the note if the grantee defaults.  The personal liability of the purchaser to pay the mortgage debt is usually created by an assumption clause in the deed (or assignment of lease if a leasehold mortgage is involved).  Normally, a deed need be signed only by the grantor, but where there is an assumption clause, both buyer and seller sign the deed so that the buyer becomes personally bound to the assumption.  Because of continued liability, the seller usually asks a higher price for the property if the buyer is to assume a mortgage - the seller is, in effect, trading on the low-interest rate of the existing mortgage.  The lender is, in effect, a third-party beneficiary of the assumption agreement.

Balloon (payment) mortgage - A final payment that is substantially larger than the previous installment payments and repays the debt in full; the remaining balance that is due at the maturity of a note or obligation.

Bill of sale - A written agreement by which one person sells, assigns, or transfers to another a right to, or interest in, personal property.  A bill of sale is sometimes used by the seller of real estate to evidence the transfer of personal property, such as when the owner of a store sells the building and includes the store equipment and trade fixtures.  The transfer of the personal property can be effected by mention in the deed or, as is more common, by a separate bill-of-sale document.  A bill of sale may be with or without warranties covering defects or unpaid liens of the property.

Borrower (Mortgagor) - The one who gives a mortgage as security for a debt.  

Breach of contract - Violation of any of the terms or conditions of a contract without legal excuse; default; nonperformance.  The nonbreaching party can usually seek one of three alternative remedies upon a material breach of the contract: rescission of the contract, action for money damages, or an action for a specific performance.

Broker - One who acts as an intermediary between parties to a transaction.  A real estate broker is a properly licensed party (individual, corporation, or partnership) who, for a valuable consideration or promise of consideration, serves as a special agent to others to facilitate the sale or lease of real property.

Buydown - A financing technique used to reduce the monthly payment for the home-buying borrower during the initial years.  Under some buydown plans, a residential developer, a builder, or the seller will make subsidy payments (in the form of points) to the lender that "buy down," or lower, the effective interest rate paid by the homebuyer, thus reducing monthly payments for their buyers for a set period of time, while reducing their own profit.

The amount of the interest supplement may remain fixed for the entire buydown period, or it may be graduated, with the amount of the subsidy declining each year.  Buydowns are costly: for example, with certain lenders, a three-year buydown might carry 2.7 points for each one-percentage-point drop of interest.

Certificate of title - A statement of opinion prepared by a title company, a licensed abstracter, or an attorney on the status of title to a parcel of real property, based on an examination of specified public records.  This certificate of title should not be confused with the certificate of title issued to a titleholder of land registered under the Torrens system, or with a title insurance policy.

A certificate of title does not guarantee title, but it does certify the condition of title as of the date the certificate is issued, on the basis of an examination fo the public records maintained by the recorder of deeds, the county clerk, the county treasurer, the city clerk and collector, and clerks of various courts of record.  The certificate also may include records involving taxes, special assessments, ordinances, zoning, and building codes.

Chain of title - The recorded history of matters that affect the title to a specific parcel of real property, such as ownership, encumbrances, and liens, usually beginning with the original recorded source of the title.  The chain of title shows the successive changes of ownership, each one linked to the next so that a "chain" is formed.

Chattel - An item of tangible personal property.  

Clear title - Title to property that is free from liens, defects, or other encumbrances, except those the buyer has agreed to accept, such as a mortgage to be assumed or a restriction of record; established title; title without clouds.

Closing - The consummation of a real estate transaction, when the seller delivers title to the buyer in exchange for payment by the buyer of the purchase price.  Closing in some areas may not occur until the documents are recorded; however, under general rules of real estate law, transfer of title takes place upon delivery of the deed to the grantee.  

Closing costs - Expenses of the sale (or loan refinancing) that must be paid in addition to the purchase price (in the case of the buyer's expenses) or be deducted from the proceeds of the sale (in the case of the seller's expenses).  Some closing costs result from legal requirements: others are a matter of local custom and practice.  To avoid disputes, the contract should clearly define which party will pay for what "closing cost" items.  

Cloud on title - Any document, claim, unreleased lien, or encumbrance that may superficially impair or injure the title to a property or cast doubt on the title's validity.  Clouds on title are usually revealed by a title search and may be removed from the record by a quitclaim deed or a quiet title proceeding initiated by the property owner.  Usually, the owner is prevented from conveying a marketable title while the "cloud" remains, unless it is only for a minor nuisance item.

Collateral - Something of value given or pledged as a security for a debt or obligation.  The collateral for a real estate mortgage loan is the hypothecated mortgaged property itself.

Comps - Recently sold or leased properties that are similar to a particular property being evaluated and are used to indicate a value for the subject property.  Comps need not be identical to the subject in physical characteristics or location, but the highest and best use, land to building ratio, terms of the sale, and the market conditions should be similar, or relatively easy to adjust for comparison.  

Condominium - An estate in real property consisting of an individual  interest in a unit (residential, commercial, or industrial) and an undivided common interest in the common areas in the condo project such as the land, parking areas, elevators, stairways, exterior structure, and so on.  Each condominium unit is a statutory entity that may be mortgaged, taxed, sold, or otherwise transferred in ownership, separately and independently of all other units in the condo project.  Units are separately assessed and taxed based on the combined value of the individual living unit and the proportionate ownership of the common areas.

Contingency - A provision in a contract that requires the completion of a certain act or the happening of a particular event before that contract is binding.  Often a buyer will submit an offer to purchase contingent on obtaining financing or rezoning.  In such a case, the seller should be sure that the contingency is specifically detailed and unambiguous and that there is a definite cutoff date; otherwise the buyer could tie up the seller's property indefinitely while attempting to get financing or rezoning.  

Conventional loan - A loan made with real estate as security and not involving government participation in the form of insuring (FHA) or guaranteeing (VA) the loan.  The mortgageee can be institutional lender or private party.  The loan is conventional in the sense that it conforms to accepted standards and that the lender looks solely to the credit of the borrower and the security of the property to ensure payments of the debt.  Conventional loans include those loans insured by private mortgage insurance companies. 

Cooperative (co-op) - A broker who assists another broker (usually the "listor") in the sale of real property.  Usually, the cooperating broker is the "selling" broker who found the buyer who offers to buy a piece of property listed with another (listing) broker.  

Credit Report - A report listing present and past debts, detailing the borrower's ability to make timely payments, and including information found from public records, such as tax liens and judgments.  This information is maintained and issued by credit reporting agencies, such as Dun & Bradstreet, TransUnion, Equifax, and Experian.  

Debt-to-Income Ratio - The relationship between the total loan owed the lender and the invested capital of the owner.

Deed of trust - A legal document in which title to property is transferred to a third-party trustee as security for an obligation owed by the trustor (borrower) to the beneficiary (lender).  Also called a trust deed. 

Default - The nonperformance of a duty or obligation that is part of a contract.

Delinquency - The past-due status of a financial obligation such as a promissory note.

Department of Veterans Affairs (VA) - The federal cabinet-level department established to serve as the principal advocate for America's veterans and their families.  Among its tasks, the VA administers the partially guaranteed loans for purchasing or constructing homes by eligible veterans and unmarried widows or widowers.

Depreciation - In the cost approach, a loss in value due to any cause; any condition that adversely affects the value of an improvement.

Discount Points - An added loan fee charged by a lender to increase the yield on a lower-than-market interest loan and to make the loan more competitive with higher interest loans.  Borrowers often pay discount points upfront in order to obtain a long-term, lower interest rate, an advantage for the buyer who plans on keeping the loan for a long period of time, and useful for loans held only a few years.

Down payment - The amount of cash a purchaser will pay at the time of purchase.

Due-on-Sale-Clause - An acceleration clause found in most mortgage loans, requiring the mortgagor to pay off the mortgage debt when the property is sold, resulting in automatic maturity of the note at the lender's option.

Earnest Money - The cash deposit paid by the prospective buyer of real property as evidence of good-faith intention to complete the transaction.  The amount of earnest money is negotiable between the parties, and its primary purpose is to serve as a source of payment of damages should the buyer default.

Easement - A nonpossessory property interest that one person has in land owned by another, entitling the holder of the interest to limited use or enjoyment of the other's land.  An easement fulfills the needs of one property at the expense of another.  

Encroachment - An unauthorized invasion or intrusion of an improvement or other real property onto another's property, thus reducing the size and value of the invaded property.  Common examples of encroachments are the roof of a building that extends over the property line or the front of a building that extends over the building setback line or extends onto a neighbor's property.  

Encumbrance - Any claim, lien, charge, or liability attached to and binding on real property that may lessen its value or burden, obstruct, or impair the use of a property but not necessarily prevent transfer of title; a right or interest in a property held by one who is not the legal owner of hte property.

Entitlement - To be owed something under the law.

Equity - That interest or value remaining in property after payment of all liens or other charges on the property.  An owner's equity in property is normally the monetary interest the owner retains over and above the mortgage indebtedness.

Escrow - The process, in some parts of the country in which a disinterested third person holds money and/or documents until satisfaction of the terms and conditions of the escrow instructions (as prepared by the parties to the escrow) have been achieved.  Once these terms have been satisfied, delivery and transfer of the escrowed funds and documents takes place.

Fannie Mae - Government-sponsored enterprise chartered by Congress that works in the secondary market, buying mortgage loans to ensure that mortgage money is readily available.  Fannie May is not permitted to originate loans or lend money directly to consumers in the primary mortgage market.

Freddie Mac - A federally chartered corporation established for the purpose of purchasing mortgages in the secondary market.  Its statutory mission is to provide liquidity, stability, and affordability to the U.S. housing market by purchasing loans from lenders to replenish their supply of funds so that they can make more mortgage loans to other borrowers.

FHA - A federal agency established in 1934 under the National Housing Act to encourage improvement in housing standards and conditions, to provide an adequate home financing system through the insurance of housing mortgages and credit, and to exert a stabilizing influence on the mortgage market.  

Fixed-Rated Mortgage - A loan with the same rate of interest for the life of the loan.

Foreclosure - A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document.

Ginnie Mae - A wholly owned government corporation within the U.S. Department of Housing and Urban Development (HUD).  Ginnie Mae guarantees the principal and interest payments from mortgage-backed securities that are collateralized by cash flows from insured or guaranteed loans.

Home inspection - A professionally inspection of a property to ascertain the condition of the improvements.  It is normally paid for by the buyer and made a contingency to the buyer's obligation to buy.  Some sellers authorize a home inspector to complete a report in the hopes this will make the property more marketable.  Buyers and sellers should review the scope of services covered - some inspectors roofs and foundations, whereas others do not.

Homeowner's insurance - A combined property and liability insurance policy designed for residential use.

Homeowner's warranty - A private insurance program that offers a buyer of a new home a ten-year warranty against certain physical defects, such as faulty roofing, heating, electrical services, and plumbing.  

HUD-1 statement - A form used at closings for all loans that are federally related, including FHA, VA, FDIC-insured funds, and any loans that will be sold to Fannie May or Freddie Mac.

Lease-purchase agreement - An agreement in which part of the rent payment is applicable toward a set purchase price.  Title is transferred from lessor to lessee when the lessor receives the prearranged total price.

Lien - A charge or claim that one person has on the property of another as security for a debt or obligation.

Market Value - The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale under guidelines published by federal lending institutions.

Mortgage - A legal document used to secure the performance of an obligation.  In the usual real estate transaction, the buyer seeks to borrow money to pay the seller the difference between the down payment and the purchase price.  

Mortgage broker - A person or firm that acts as an intermediary between borrower and lender; one who, for compensation or gain, negotiates, sells, or arranges loans and sometimes continues to service the loans.  

Mortgage Insurance - An insurance plan that pays off the mortgage balance in the event of the death or, in some plans, disability of the insured mortgagor.  In essence, mortgage insurance is decreasing-term life insurance.  

Mortgagee - In a mortgage transaction, the party who receives and holds a mortgage as security for a debt; the lender; a lender or creditor who holds a mortgage as security for payment of an obligation.

Mortgagor - The one who gives a mortgage as security for a debt; the borrower; usually the landowner, though it could be the owner of a leasehold estate; the borrower or debtor who hypothecates or puts up property as security for an obligation.

Note - A document signed by the borrower of a loan and stating the loan amount, the interest rate, the time and method of repayment, and the obligation to repay.  The note serves as evidence of the debt.

Origination Fee - The finance fee charged by a lender for making a mortgage.  An origination fee covers initial costs, such as preparation of documents and credit, inspection, and appraisal fees.  The origination fee is generally computed as a percentage of the face amount on the loan.

PITI - Abbreviation for principal,interest, taxes, and insurance, originally found in all-inclusive mortgage payment.  Monthly payments can also include private mortgage insurance (PMI), mortgage insurance premiums (MIP), flood insurance, and homeowners' association dues.

Principal - One of the main parties to a transaction.  For example, the buyer and the seller are principals in the purchase of real property.

Private Mortgage Insurance (PMI) - A special form of insurance designed to permit lenders to increase their loan-to-market-value ratio, often up to 97% of the market value of a property.  Many lenders are restricted to 80% loans by government regulations, special loss reserve requirements, or internal management policies related to mortgage portfolio mix.  A lender, however, may lend up to 95% of the property value if the excess of the loan amount over 80% of value is insured by a private mortgage guaranty insurer.  

Realtor - A real estate agent that belongs to the National Association of REALTORS (NAR).

Survey - The process by which boundaries are measured and land areas determined; the on-site measurement of lot lines, dimensions, and position of houses in a lot, including the determination of any existing encroachments, easements, party walls, and compliance with setback requirements.

Title - The right to or ownership of land; the evidence of the right to an estate.  Title to property encompasses all in the bundle of rights that an owner possesses; the totality of rights and property possessed by a person. Title may be held individually, jointly, in trust, or in corporate or partnership form.  Title is a common term used to denote the facts that, if proved, would enable a person to recover or retain possession of something.

Title Insurance - A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances.  Unlike other types of insurance, which protect a policyholder against loss from some future occurrence (such as a fire or auto accident, title insurance in effect protects a policyholder against loss from some occurrence that has already happened such as a forged deed somewhere in the chain of title.  Fannie Mae and Freddie Mac require title insurance on every loan they buy.

Underwriting - The analysis of the extent of risk assumed in connection with a loan.  Underwriting a loan includes the entire process of preparing the conditions of the loan, determining the borrower's ability to repay, and subsequently deciding where to give loan approval.

VA Loan - A government-sponsored mortgage assistance program, also called GI loans. The main purpose of the GI loan is to assist veterans in financing the purchase of reasonably priced homes, including condominium units and manufactured homes, with little or no down payment, relatively easy qualification criteria, and a comparatively low rate of interest.  

ABOUT THE AUTHOR:  

Rich Spaulding is the owner of Kennesaw Life Real Estate.  Rich is expert in Kennesaw, Georgia (and surrounding area) real estate knowledge and expertise.  Contact Rich directly at 678-687-3554 or rich@kennesawlife.com.  

Rich Spaulding