 March 20, 2010 |
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March 20, 2010 |
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Glossary of Mortgage and Real Estate Terms
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Abstract (or Abstract Of Title)
A summary of the public records relating to the title to a particular property.
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. The abstract also identifies encumbrances, easements and
covenants that affect the property. Also known as a Title Report.
Acceleration Clause
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. Many states have statutes which limit the enforcement of these
provisions.
Agreement of Sale
Known by various names - such as contract of purchase, purchase contract,
purchase agreement, purchase & sales agreement, or sales agreement - according to
local custom. This is a written contract in which a seller agrees to sell and a buyer
agrees to buy the subject property. This contract spells out specific terms and conditions
of the agreement and is signed by both parties.
Amortization
The reduction of debt by regular payments of principal and interest which are
sufficient to pay-off the loan entirely by its maturity date.
Appraisal
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. T mortgagee's consent is required to release the
original mortgagor.
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 necessarily required for a sale subject to a mortgage.
Broker
(See Real Estate Broker or Mortgage 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.
Closing
The actual process whereby all parties to a real estate transaction conclude the
details of a sale or mortgage. This process includes the signing and transfer of documents
and the distribution of funds.
Closing Costs
The expenses which buyers and sellers normally incur to complete a transaction in
the transfer of ownership or mortgage of real estate. These costs are in addition to price
of the property and are items prepaid at the closing day. This is a general list of
buyer's and seller's expenses:
Loan Fees, Documentary Stamps on Notes, Cost of Abstract, Recording Deed and Mortgage, Documentary Stamps on Deed, Escrow Fees, Real Estate Commissions, Attorney's Fees, Title Insurance, Survey Charge, Appraisal Fees, Inspection Fees.
The agreement of sale negotiated previously between the buyer and the seller should state in writing who will pay each of the above costs or how they will be split. Most areas have local customs that guide which party typically pays which expense.
Closing Day
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 an
attorney or escrow officer and this cost charged to either buyer or seller. The buyer
signs the mortgage, and closing costs are paid. The final closing merely confirms the
original agreement reached in the agreement of sale.
Closing Statement
An accounting of funds made at the completion of every real estate transaction.
Cloud On Title
An outstanding claim, condition or encumbrance which adversely affects the
marketability of title.
Commission
Money paid to a real estate agent or broker by the seller as compensation for
finding a buyer and completing the sale. Usually it is a percentage of the sale price -- 5
to 7 percent on houses, and can be up to 10 percent on land.
Condemnation
The taking of private property for public use by a government unit 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.
Condominium
A system of real estate ownership that includes individual ownership of a
dwelling unit and an interest in the common areas and facilities which serve the all
condominium units.
Contract of Purchase
(See Agreement of Sale)
Contractor
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, road building, bridge and dam erection,
and others.
Conventional Mortgage
A mortgage loan not insured by HUD (FHA loans) or guaranteed by the Veterans'
Administration (VA loans). It is subject to conditions established by the lending
institution and State statutes. The mortgage rates may vary with different institutions
and between States.
Cooperative Housing
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.
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 (or trustor), 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. When
the borrower satisfies the debt, the deed of trust becomes reconveyed to the borrower and
is extinguished. However, if the borrower 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 and within
statutory requirements. 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.
Default
Failure to make timely mortgage payments as agreed to an in accordance with the
terms in the mortgage or deed of trust. It is the borrower's responsibility to remember
the due date and send the payment prior to the due date. In the event of default, the
mortgage may give the lender the right to accelerate payments, take possession, receive
rents and/or start foreclosure. Defaults may also come about by the failure to observe
other conditions in the mortgage or deed of trust.
Depreciation
Decline in value of real estate due to passage of time, physical deterioration,
loss of function or for other reasons. Depreciation also has technical meanings as it
relates to the valuation or real estate for tax purposes.
Documentary Stamps
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 and in some States stamps are no longer used. In some States these are also
known as Transfer Taxes.
Downpayment
The amount of money to be paid by the purchaser to the seller upon the signing of
the agreement of sale, also known as Earnest Money. 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.
Downpayment also refers to the difference between the sales price and maximum mortgage amount. It is expressed as a dollar figure or a percentage of the purchase price. For example, when a house is purchased for $100,000 and $90,000 is borrowed to finance the purchase, then the downpayment is said to be 10% ($10,000).
Easement
A right-of-way granted to a person or company which authorizes access to another
person's land for a specific purpose. An electric company obtaining a right-of-way across
private property to install or maintain its electricity lines is a common example.
Encroachment
An obstruction, building, or part of a building or other improvement that
intrudes beyond a legal boundary onto neighboring land. A common example would be fences
or walls that are built on the other side of a property line and thereby
"encroach" on the neighbors property.
Encumbrance
A legal right or interest in land that affects or limits complete ownership and control
over property. 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 necessarily prevent transfer of the property to
another, but may diminish its value. A title search will usually reveal the existence of
such encumbrances, and it is up to the buyer to determine whether he wants to purchase the
property with the encumbrance.
Equity
The value of a homeowner's interest in real estate over and above all liens.
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 down 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. This is often called owning a property
"free and clear" of liens.
Escrow
The deposit of the purchase agreement, funds, deeds or other instruments with a
neutral third party to carry out the provisions of the agreement. An escrow company or
attorney usually acts as the escrow agent and completes the transaction as instructed by
the parties.
Grantee
That party in the deed who is the buyer or recipient.
Grantor
That party in the deed who is the seller or giver.
HUD
The United States Department of Housing and Urban Development. Federal Housing
Administration (FHA) is a division of HUD which insures home mortgage loans made by
lenders and sets minimum standards for such homes.
Also, to have an interest in real estate means to have a partial ownership or a right to a share of the real estate.
Interest Only Loan
A non-amortizing loan in which the lender receives only interest during the term
of the loan and the principal is repaid at maturity.
Interest Rate
The percentage of loan amount borrowed which is charged by the lender for use of
the money. Interest rates are usually expressed as the percentage per year.
Maturity
(or Maturity Date)
The date a loan becomes payable in full. This is most often the due date of the
final payment of a loan.
Mortgage
Generally speaking, a mortgage is a lien against real property given by a buyer
or property owner to the lender as security for money borrowed. In the event of
non-payment of the loan or other default, the property may be sold by foreclosure to
satisfy the debt. Mortgage foreclosure procedures are primarily dictated by statute in the
property's jurisdiction.
Mortgage Broker
A licensed middle man or agent who represents borrowers and/or lenders in mortgage
financing transactions. Brokers' fees for their services are usually charged on a
commission basis upon the loan closing. Broker's often charge other fees in addition to
their commissions to offset specific costs associated with originating a loan.
Mortgage Commitment
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
Guaranty insurance that protects conventional lenders from losses on a portion of a
particular loan. Also known as MI, PMI or Private Mortgage Insurance.
Mortgage Insurance Premium
With FHA loans, 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.
Mortgage Note
A written agreement to repay a loan that is secured by a mortgage. The note
serves as proof of indebtedness, states the actual amount of the debt that the mortgage
secures and enumerates the terms of repayment.
Mortgage (Open-End)
A mortgage note with a provision that permits borrowing additional money in the
future without refinancing the loan. Open-end provisions often limit such borrowing to no
more than would raise the balance to the original principal amount.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
Points (also Discount Points)
An amount of money paid to a lender to obtain a loan at a certain interest rate.
A point is one percent of the principal amount of the loan. For example, if a loan is for
$100,000, one point is $1,000. Points are paid at closing.
Buyers are prohibited from paying points on FHA or VA guaranteed loans; however sellers can pay. On a conventional mortgage, points may be paid by either buyer or seller or split between them.
Prepayment
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 prepayment penalty. The Federal Housing Administration does
not permit such restrictions in FHA insured mortgages.
Principal
The amount of money borrowed, the amount of the loan. Principal is the amount
upon which interest is paid.
Also, principal is a term used to describe a party to a real estate transaction. Buyers and sellers are principals in real estate transactions, real estate brokers and agents are not.
Purchase Agreement
See Agreement of Sale.
Refinancing
The process where a borrower pays-off one loan with the proceeds from another
loan. A property can be refinanced with a new loan from the current holder of the mortgage
or from a new lender.
Restrictive Covenants (or Covenants)
Private restrictions limiting the use of real property. Restrictive covenants may
bind all subsequent purchasers of the land or may be binding only between the original
seller and buyer. Restrictive covenants may affect the property's value and marketability
of title. Restrictive covenants are used for many purposes and may limit the use of the
property, regulate size, style or price range of buildings to be erected, or prevent
particular businesses from operating or activities occurring. Covenants are widely used
today because of the proliferation of privately planned communities which use them as a
tool to control and guide future development.
Special Assessments
A special tax imposed on property, individual lots or all property in the
immediate area, for road construction, sidewalks, sewers, street lights, or other public
projects that benefit particular property owners.
In the context of condominium and private community association, special assessments are charges to property owners, over and above their customary periodic payments, to fund special projects
Special Warranty Deed
A deed in which the grantor warrants or guarantees the title only against defects
arising during grantor's ownership of the property and not against title defects existing
before the time of the grantor's ownership.
State Stamps
See Documentary Stamps
Survey
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 sometimes required by the lender to assure him that a building
is actually sited on the land according to its legal description.
In common real estate usage, title may refer to the actual documents or deeds by which a right of ownership is established.
Title Insurance
An insurance policy that protects lenders or property owners up to a specified
amount from certain types of loss of interest in property due to legal defects in title.
Title Search (or Title Records Examination)
A check of the title records to establish that the buyer is purchasing a property
from the legal owner and to determine all of the liens, assessments, claims, convenants,
or other encumbrances or restrictions that would affect the title to the property. The
results of the search are expressed in a Title Report or Abstract. The primary purpose of
the search is to establish whether the property has marketable title.
Trustee
A party who is given legal responsibility to hold and administer property for the
benefit of another (the beneficiary). Trustee's are obligated to act in the best interest
of the beneficiary.
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