Real Estate Terms

Nearly everyone, at some point in life, will have the opportunity of buying and selling real estate. The purchase of a home is probably the largest single investment a person will ever undertake and careful consideration should be given to the technical issues involved in the transfer of real estate before any action is taken. Whether you are a seller or a buyer, you should understand the contract terms and how they affect you.

AGENCY A legal relationship in which an owner-principal engages a broker-agent in the sale of a property or a buyerprincipal engages a broker-agent in the purchase of a property.

AGENCY RELATIONSHIP Agreement between an agent and a client in which the agent acts in the client’s best interest in a real estate transaction.

APPRAISAL Process of determining a property’s market value.

ARM (ADJUSTABLE RATE MORTGAGE) A mortgage with an interest rate that changes over time in conjunction with movements in a given index.

ASSESSED VALUE The valuation placed on property by a public tax assessor as the basis of property taxes.

ASSUMPTION OF MORTGAGE An agreement whereby the buyer assumes responsibility for a mortgage owed by the seller. The seller remains liable to the lender unless the lender agrees to release the seller from liability.

BALLOON PAYMENT A lump sum principal payment due at the end of some mortgages or other long-term loans.

BINDER An agreement, accompanied by a deposit, whereby the buyer evidences good faith.

BRIDGE LOAN A short-term loan made until a longer-term loan can be arranged; it is sometimes used when a person needs money to build or purchase a home before the present one has been sold.

BROKER A person licensed by a state real estate commission to act independently in conducting a real estate brokerage business.

BROKER AGENT An agent often from another company other than the listing company working with the home buyer but who legally represents the seller.

BUYDOWN Prepaid interest that brings the note rate on the loan down to a lower, permanent rate.

BUYER’S AGENT Acts exclusively on behalf of the buyer.

CAP The maximum amount an interest rate or monthly payment can change, either at adjustment time or over the life of the mortgage.

CLIENT The buyer represented by a Buyer’s Agent or the seller represented by a Seller’s Agent, also called the “principal.”

CLOSING The “closing” of the purchase of your home is the transaction in which you receive all the documents required to convey the title of your property. At the closing these documents are reviewed to be sure that the conditions and promises of the purchase contract are fulfilled. Also at this time, the balance of the purchase price is paid to the seller. Arrangements are made at the closing for the date when you

will occupy the home. Normally, when the full purchase price is paid, the keys to the house are delivered to the buyer, who then has the right to move in immediately. However, your purchase agreement may also specify a later date. In the long run, it’s likely to be more economical to have professional advice (your attorney’s advice) in making the purchase.

CLOSING COSTS Expenses over and above the price of the property, paid at the closing.

CLOUD ON TITLE A lien or encumbrance that can prevent the seller from delivering clear title and the buyer from obtaining title insurance.

COMMITMENT PERIOD The period during which a loan approval is valid.

COMMON CHARGES Monthly charges paid by condo owners that cover the cost of shared building amenities.

CONTINGENCY A condition that must be met before a contract is binding or that must be satisfied before a mortgage can close.

CONTRACTS A legal agreement between buyer and seller that outlines the terms of purchase or transfer of property. Once you’ve found the house you would like to buy and have agreed on the price, you will probably be asked to sign a paper and put down a deposit. This paper may be called “purchase offer” or “agreement” and is usually prepared by the seller’s attorney. Any one of these papers may constitute a binding contract requiring you to purchase the house. Before signing it, you should consider seeking legal advice. Remember that once a contract has been signed, your rights and obligations are fixed considering the transaction and your attorney will not have further opportunity to structure the contract to meet your objectives. The other parties to the contract are under no obligation to explain the terms and conditions to you. It is advised that you engage an attorney to represent you in the transaction before you sign any papers. The contract of sale should state the parties, the purchase price, and how it is to be paid, and adequate description of the property being sold, the kind of deed to be delivered, the quality of the seller’s title to the property, a description of personal property included in the sale, the date you are to take possession and other clauses in relation to the property and the parties’ respective responsibilities to each other. The contract should also permit the buyer to cancel the contract if financing can’t be obtained and provide for the return of payment if the sale falls through. Perhaps the seller may want to retain possession of the property for some time in order to find new accommodations. If so, appropriate clauses can be included in the contract defining such rights. These are only a few of the matters usually covered in the contract. However, they illustrate the variety of terms and conditions to be considered when you enter into such a transaction.

CONVERSION CLAUSE A provision in some ARMs that enables homebuyers to change an ARM to a fixed rate loan, usually after the first adjustment period. The new fixed rate is generally set at the prevailing rate for fixed rate mortgages.

CO-OP BOARD A group of residents elected to represent all shareholders within a co-op building. The board determines the rules of the building, addresses building issues and reviews new buyer applications.

CUSTOMER A buyer who works with a Seller’s Agent is considered a “customer” rather than a client of the “Seller’s Agent” because they have not entered into an agency relationship. The buyer has no representation.

DEBT RATIOS The comparison of a buyer’s housing costs to his or her gross or net effective income (housing ratio), and the comparison of a buyer’s total long-term debt to his or her gross or net effective income (total debt ratio).

DUE-ON-SALE CLAUSE This clause requires full payment of a mortgage or deed of trust when the secured property changes ownership.

DEED A legal document conveying title to a property.

DISCLOSED DUAL AGENCY Occurs when one brokerage company represents both the buyer and the seller.

EARNEST MONEY A portion of the down payment given to the seller by a potential buyer indicating the buyer’s intent to complete the purchase of the property.

EQUITY LOAN A loan based on the borrower’s equity in their home rather than on their credit worthiness.

ESCROW the placement of money or documents with a third party for safe-keeping pending the fulfillment of a specified condition.

FINAL WALK-THROUGH A property inspection that takes place prior to closing to ensure the condition of the property is true to what is specified in the contract.

FIXED RATE MORTGAGE

A conventional loan with a single interest rate for the life of the loan.

FORM OF DEED In residential transactions there are two generally used forms of deed. The first is called “warranty deed”, which assures the buyer that the title is good against anyone who may claim a superior title. The second commonly used form of deed is the “bargain and sale deed with covenants against grantor’s acts.” This deed assures the buyer that the seller has done nothing to affect the title to the property through his or her own acts. In both instances, if the title is insured by a title insurance company, the buyer will look to the title insurance for protection against claims even though the buyer may make claims against the seller.

GRADUATED PAYMENT MORTGAGE A mortgage that starts with low monthly payments and increases at a predetermined rate.

GROWING EQUITY MORTGAGE A mortgage loan in which the monthly payments increases by a specific amount each year, with the “overpayment” applied to the principal.

IN CONTRACT An offer has been made and accepted on a property. The buyer has paid a deposit and both seller and buyer have signed the offer. The listing is no longer available on the market unless the deal falls through. INSPECTION REPORT is the result of a visual inspection of the premises. It is not a guarantee or a form of insurance. The inspection cannot include the inspection of framing or piping that is behind walls. It is recommended that the buyer ask questions during this inspection regarding present plans, concerns and future plans for modifications. At the end of the inspection, the inspector will summarize the building condition for the buyer. A complete report will normally be typed and sent out to the buyer within five working days following the inspection.

JOINT TENANCY An equal undivided ownership of property by two or more persons. Upon death of any owner, the survivor takes the decedent’s interest in the property.

LIEN A legal claim against a property that must be paid when the property is sold.

LISTING AGENT Person acting on behalf of the seller; the agent who “lists” the home for sale, also called the “Seller’s Agent.”

LOAN COMMITMENT A written promise to make a loan for a specified amount on specified terms.

LOAN-TO-VALUE RATIO The relationship between the amount of a home loan and the total value of the property.

LOCK-IN RATE A commitment made by the lenders on a mortgage loan to “lock-in” a certain rate pending loan approval. Lock-in rates vary.

MAINTENANCE FEE Monthly charges paid by co-op owners to cover operating expenses of the building, including taxes, insurance, etc. MARGIN The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

MARKET VALUE The highest price a buyer will pay for a property and the lowest price the seller will accept.

MORTGAGE Loan that a bank or lender gives you to buy a house. A mortgage payment is made up of principal, interest, taxes and insurance.

MORTGAGE BROKER An individual or company that obtains mortgages for others by finding a lending institution, insurance company, or private sources to lend the money; may also handle collections and disbursements.

MORTGAGE INSURANCE A policy that provided protection for the lender in case of default and guarantees repayment of the loan if the borrower becomes disabled or dies.

NEGATIVE AMORTIZATION An increase in the outstanding balance of a loan resulting from the failure of periodic debt service payments to cover required interest charged on the loan.

ORIGINATION FEE A fee or charge for work involved in evaluating, preparing and submitting a proposed mortgage loan. The fee is limited to one percent for FHA and VA loans.

PAYMENT CAP The maximum amount the payment can adjust within a given time period.

PITI Principal, Interest, Taxes and Insurance

POINTS A dollar amount paid to a lender for making the loan. A point is one percent of the loan amount; also called discount points.

PRE-APPROVED Written statement from your bank or lender confirming that you are approved for a specific loan amount.

PRE-QUALIFIED An estimate of the loan amount you will likely be pre-approved for.

PRIVATE MORTGAGE INSURANCE (PMI) Insurance issued to a lender to protect it against loss on a defaulted mortgage loan. Its use is usually limited to loan with high loan-to-value ratios. The borrower pays the premiums.

REALTOR AND REALTOR ASSOCIATE Registered collective membership marks that identify real estate professionals who are members of the National Association of Realtors and subscribe to its strict Code of Ethics.

REPRESENTATION Remember one important point- the seller, broker, and bank in the transaction may have an attorney representing each of their interests. An attorney representing any of these parties is not your attorney, even though you may be charged with a fee, as in the case of a bank. It is your own responsibility, as a buyer, to seek the professional advice of an attorney to protect yourself and to be sure that you get precisely what you are legally entitled to receive.

SHARE EQUITY MORTGAGE A home loan in which an investor is granted a share of the equity, there by allowing the investors to participate in the proceeds from resale.

TENANCY IN COMMON A type of joint ownership of property by two or more persons with no right of survivorship. It is said to be an undivided one-half ownership in the property by each tenant in common.

TITLE The “title” to real estate is the right of the owner to its peaceful possession and use free from the claims of others. Often, however, the exercise of that right is limited by the existence of other rights which are called easements. To obtain electricity, sewers, telephone, etc., an owner gives the municipality or public utility the right to run its lines or pipes across his or her property to the house. Other common easements provide for drainage of surface water, or access right of way such as for a jointly used driveway. These easements must be recognized by the owner in the use of the property and considered by the buyer who is purchasing the property. There are other ways in which the use of the owner’s property may be limited. One is by restrictions in the deed with another by local zoning laws. Almost all land is subject to real property taxes, which, if not paid, may result in the loss of title. Other debts owed on the property (for example, special assessments or levies) can also cause problems later on. When you buy a home you should be certain that you have the right to occupy it without interference and that you later will be able to sell or mortgage it without problems.

TITLE INSURANCE Protection for lenders and homeowners against financial loss resulting from defects of title.

TITLE SEARCHES After the contract has been signed, you should satisfy yourself that the seller can convey a “marketable” title of the property to you as agreed upon in the contract of sale. In different areas of the state, varying methods are used to make sure that the title received from the seller is marketable. In some areas, your lawyer will make his or her own examination of the records and issue a certification indicating the finding. In other areas, your lawyer may supply you with a written title opinion based on an abstract of title (which is a simple title history) prepared by a commercial abstract company. Still, in other areas, your attorney may take out a title insurance policy. A combination of any of these methods may also be used. A word about title insurance, while it may give you protection against financial loss and the possible expense of defending your title, in court it does not lessen the importance of your lawyer’s advice. Your lawyer can advise you how to obtain title insurance and also on the terms, exceptions, and conditions of a title insurance policy.