Real Estate Dictionary
This dictionary will help you better understand some common terms used in a typical real estate transaction.
Abstract (Of Title)
A summary of the public records relating to the title to a particular piece of land. Basically, any essential legal documents that affect the property. The abstract will also show the names of all property owners and how long a particular holder owned it for as well as showing the price the land was exchanged for when it changed owners. Rarely an abstract will mention capital improvements to the property. Property abstracts are considered good starting places for research on historical buildings.
Condition in a mortgage that may require the balance of the loan to become due immediately, if regular mortgage payments are not made or for breach of other conditions of the mortgage.
Agreement of Sale
Known by various names, such as contract of purchase, purchase agreement, or sales agreement according to location or jurisdiction. A contract in which a seller agrees to sell and a buyer agrees to buy, under certain specific terms and conditions spelled out in writing and signed by both parties.
The paying off of debt in regular installments over a period of time.
The estimate of value of real property made by an impartial expert, typically including references to sales of comparable properties to estimate the value. A lender will require an appraisal, but it does not take the place of an inspection.
Costs charged for public improvements that benefit land. Pending assessments must be addressed in the purchase agreement and at closing.
Assumption of Mortgage
An obligation undertaken by the purchaser of property to be personally liable for payment of an existing mortgage. In an assumption, the purchaser is substituted for the original mortgagor in the mortgage instrument and the original mortgagor is to be released from further liability in the assumption, the mortgagee’s consent is usually required.
The original mortgagor should always obtain a written release from further liability if he desires to be fully released under the assumption. Failure to obtain such a release renders the original mortgagor liable if the person assuming the mortgage fails to make the monthly payments.
Certificate of Title
Real estate properties have certificates of title that serve as proof of an owner that he or she possesses the property in question. The certificate of title is a legal document that identifies an owner of a real property, whether it is land or tangible assets.
Aside from naming the owner of the property, a certificate of titles contains relevant information regarding the property. It details the status of the property along with the easements that may exist or any encumbrances on the property. The certificate of title provides a brief overview of the property, which helps any potential buyer or lender review the condition of the property.
A certificate of title is issued by a title company that provides extensive examination of the property for a party that may wish to acquire the property or for the owner who wishes to use the property as collateral. The title company performs an exhaustive research of the history and current situation of the property in order to provide the necessary and relevant information to the requesting party.
The closing, also known as the settlement, is a meeting at which a transfer of sold property is finalized. At closing, the buyer signs the mortgage documents and pays all closing costs, and the seller signs the deed. Both parties sign the closing statement, which is an accounting of funds credited to the buyer and seller.
The numerous expenses which buyers and sellers normally incur to complete a transaction in the transfer of ownership of real estate. These costs are in addition to price of the property and are items prepaid at the closing day. This is a typical list:
Buyer’s Expenses include but not limited to recording deed and mortgage, escrow fees, attorney’s fees, title insurance, appraisal, inspection and survey charge.
Seller’s Expenses include but not limited to abstract (cost) real estate commission(s), recording mortgage, survey (cost) escrow fees and attorney fees.
The day on which the formalities of a real estate sale are concluded. The final closing confirms the original agreement reached in the agreement of sale.
Cloud (On Title)
An outstanding encumbrance which adversely affects the marketability of title.
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 sales price, typically 6 percent.
The taking of private property for public use by a government unit, against the will of the owner, but with payment of just compensation under the government’s power of eminent domain. Condemnation may also be a determination by a governmental agency that a particular building is unsafe or unfit for use.
The owner of a condominium unit owns the unit and has the right, along with other unit owners, to use the common areas, which are owned by the condominium association. Typically include an association that maintains the building, pays taxes and insurance, and maintains the reserves for improvements.
Contract for Deed
A contract for deed is a contract that allows a buyer to take possession of property in exchange for monthly payments until the balance is paid off, even though the seller maintains legal title to the property until the final payment is made. The parties negotiate the terms of a contract for deed.
In the construction industry, an organization or individual that contracts with another organization or individual (the owner) for the construction of a building, road or other facility.
A mortgage loan is a home loan that is not guaranteed or insured by the Veterans Administration (VA) or Federal Housing Administration (FHA). Conventional mortgage loans typically require larger down payments than VA and FHA loans.
A formal written instrument by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the State where the property is located, and should be delivered to the purchaser at closing day. There are two parties to a deed: the grantor and the grantee.
Deed of Trust
Wherein legal title in real property is transferred to a trustee, which holds it as security for a loan (debt) between a borrower and lender. The equitable title remains with the borrower. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary of the deed of trust.
Failure to make mortgage payments as agreed to in a commitment based on the terms and at the designated time set forth in the mortgage or deed of trust. It is the mortgagor’s responsibility to remember the due date and send the payment prior to the due date, not after. In the event of default, the mortgage may give the lender the right to accelerate payments, take possession and receive rents, and start foreclosure. Defaults may also come about by the failure to observe other conditions in the mortgage or deed of trust.
Decline in value of a house due to wear and tear, adverse changes in the neighborhood, or any other reason.
The amount of money to be paid by the purchaser to the seller upon the signing of the agreement of sale. The agreement of sale will refer to the down payment amount and will acknowledge receipt of the down payment. Down payment is the difference between the sales price and maximum mortgage amount.
The deposit money given to the seller or it’s agent by the potential buyer upon the signing of the agreement of sale to demonstrate that the buyer is serious about buying the house. If the sale goes through, the earnest money is applied against the down payment. If the sale does not go through, the earnest money will be forfeited or lost unless the offer to purchase expressly provides that it is refundable.
An easement is the right to use another person’s land for a stated purpose. It can involve a general or specific portion of the property.
An obstruction, building, or part of a building that intrudes beyond a legal boundary onto neighboring private or public land, or a building extending beyond the building line.
A legal right or interest in land that affects a good or clear title, and diminishes the land’s value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes, or restrictive covenants. An encumbrance does not legally prevent transfer of the property to another. A title search will reveal the existence of such encumbrances. If any exist, then it is up to the buyer to determine whether they want to pursue the purchase with the encumbrance, or what can be done to remove it.
The value of a homeowner’s unencumbered interest in real estate. Equity is computed by subtracting from the property’s fair market value the total of the unpaid mortgage balance and any outstanding liens or other debts against the property. A homeowner’s equity increases as he pays off his mortgage or as the property appreciates in value. When the mortgage and all other debts against the property are paid in full the homeowner has 100% equity in his property.
Funds paid by one party to another (the escrow agent) to hold until the occurrence of a specified event, after which the funds are released to a designated individual. In FHA mortgage transactions an escrow account usually refers to the funds a mortgagor pays the lender at the time of the periodic mortgage payments. The money is held in a trust fund, provided by the lender for the buyer. Such funds should be adequate to cover yearly anticipated expenditures for mortgage insurance premiums, taxes, hazard insurance premiums, and special assessments.
A legal term applied to any of the various methods of enforcing payment of the debt secured by a mortgage, or deed of trust, by taking and selling the mortgaged property, and depriving the mortgagor of possession. Foreclosure proceedings vary by state, but typically include foreclosure by advertisement, which does not include a court proceeding, and foreclosure by action in court.
General Warranty Deed
A deed which conveys not only all the grantor’s interests in and title to the property to the grantee, but also warrants that if the title is defective or has a “cloud” on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic’s liens against it) the grantee may hold the grantor liable.
That party in the deed who is the buyer or recipient.
That party in the deed who is the seller or giver.
Protects against damages caused to property by fire, windstorms, and other common hazards.
U.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes.
A charge paid for borrowing money. (See mortgage note)
A claim by one person on the property of another as security for money owed. Such claims may include obligations not met or satisfied, judgments, unpaid taxes, materials, or labor. (See also special lien.)
A title that is free and clear of objectionable liens, clouds, or other title defects. A title which enables an owner to sell his property freely to others and which others will accept without objection.
A lien or claim against real property given by the buyer to the lender as security for money borrowed. Under government-insured or loan-guarantee provisions, the payments may include escrow amounts covering taxes, hazard insurance, water charges, and special assessments. Mortgages generally run from 10 to 30 years, during which the loan is to be paid off.
A written notice from the bank or other lending institution saying it will advance mortgage funds in a specified amount to enable a buyer to purchase a house.
Mortgage Insurance Premium
The payment made by a borrower to the lender for transmittal to HUD to help defray the cost of the FHA mortgage insurance program and to provide a reserve fund to protect lenders against loss in insured mortgage transactions. In FHA insured mortgages this represents an annual rate of one-half of one percent paid by the mortgagor on a monthly basis.
A mortgage loan is a loan that is secured with a lien on real property. Forms of mortgages include fixed rate, adjustable-rate, and balloon mortgages. The functioning, legal effect, and foreclosure of a mortgage varies greatly from state to state.
A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of an indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment.
A mortgage with a provision that permits borrowing additional money in the future without refinancing the loan or paying additional financing charges. Open-end provisions often limit such borrowing to no more than would raise the balance to the original loan figure.
The lender in a mortgage agreement.
The borrower in a mortgage agreement.
A map or chart of a lot, subdivision or community drawn by a surveyor showing boundary lines, buildings, improvements on the land, and easements.
Sometimes called “discount points.” A point is one percent of the amount of the mortgage loan. For example, if a loan is for $45,000, one point is $450. Points are charged by a lender to raise the yield on his loan at a time when money is tight, interest rates are high, and there is a legal limit to the interest rate that can be charged on a mortgage. Buyers are prohibited from paying points on HUD or Veterans’ Administration guaranteed loans (sellers can pay, however). On a conventional mortgage, points may be paid by either buyer or seller or split between them.
Payment of mortgage loan, or part of it, before due date. Mortgage agreements often restrict the right of prepayment either by limiting the amount that can be prepaid in any one year or charging a penalty for prepayment. The Federal Housing Administration does not permit such restrictions in FHA insured mortgages.
The basic element of the loan as distinguished from interest and mortgage insurance premium. In other words, principal is the amount upon which interest is paid.
Offer to Purchase
A preliminary agreement, secured by the payment of earnest money, between a buyer and seller as an offer to purchase real estate. A binder secures the right to purchase real estate upon agreed terms for a limited period of time. If the buyer changes his mind or is unable to purchase, the earnest money is forfeited unless the binder expressly provides that it is to be refunded.
A deed which transfers whatever interest the maker of the deed may have in the particular parcel of land. A quitclaim deed is often given to clear the title when the grantor’s interest in a property is questionable. By accepting such a deed the buyer assumes all the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has. (See deed.)
Real Estate Broker
A licensed person or entity that represents either the buyer or seller in the purchase or sale of real estate, usually on a commission basis. A “dual” broker represents both parties in the same transaction. The terms of broker agreements are negotiable.
Real Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act (RESPA) requires borrowers to receive disclosures regarding the costs associated with the settlement, the lender servicing and escrow account practices and the business relationships between settlement service providers. RESPA requires a mortgage lender to give the borrower a good faith estimate of the settlement service charges he or she is likely to have to pay.
The process of the same mortgagor paying off one loan with the proceeds from another loan.
Private restrictions limiting the use of real property. Restrictive covenants are created by deed and may “run with the land,” binding all subsequent purchasers of the land, or may be “personal” and binding only between the original seller and buyer. The determination whether a covenant runs with the land or is personal is governed by the language of the covenant, the intent of the parties, and the law in the State where the land is situated. Restrictive covenants that run with the land are encumbrances and may affect the value and marketability of title. Restrictive covenants may limit the density of buildings per acre, regulate size, style or price range of buildings to be erected, or prevent particular businesses from operating or minority groups from owning or occupying homes in a given area. (This latter discriminatory covenant is unconstitutional and has been declared unenforceable by the U.S. Supreme Court.)
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.
A special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, streetlights, etc.
A lien that binds a specified piece of property, unlike a general lien, which is levied against all one’s assets. It creates a right to retain something of value belonging to another person as compensation for labor, material, or money expended in that person’s behalf. In some localities it is called “particular” lien or “specific” lien. (See lien.)
Special Warranty Deed
A deed in which the grantor conveys title to the grantee and agrees to protect the grantee against title defects or claims asserted by the grantor and those persons whose right to assert a claim against the title arose during the period the grantor held title to the property. Ina special warranty deed the grantor guarantees to the grantee that he has done nothing during the time he held title to the property which has, or which might in the future, impair the grantee’s title.
A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. A survey is often required by the lender to assure him that a building is actually sited on the land according to its legal description.
As applied to real estate, an enforced charge imposed on persons, property or income, to be used to support the State. The governing body in turn utilizes the funds in the best interest of the general public.
As generally used, the rights of ownership and possession of particular property. In real estate usage, title may refer to the instruments or documents by which a right of ownership is established (title documents), or it may refer to the ownership interest one has in the real estate.
Protects lenders or homeowners against loss of their interest in property due to legal defects in title. Title insurance may be issued to a “mortgagee’s title policy.” Insurance benefits will be paid only to the “named insured” in the title policy, so it is important that an owner purchase an “owner’s title policy”, if he desires the protection of title insurance.
Title Search or Examination
A check of the title records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title.
A party who is given legal responsibility to hold property in the best interest of or “for the benefit of” another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law. (See deed of trust.)
The acts of an authorized local government establishing building codes, and setting forth regulations for property land usage.
A few notes about the “Home Buying-Selling Dictionary”:
- Terms are defined as they are commonly used in the mortgage and real estate industry. These same terms may have different meanings in another context.
- Definitions are intentionally general, non-technical and short. They may not encompass all possible meanings, and some definitions may not be applicable under all states’ existing laws.