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Glossary of Real Estate Terms

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Prospective buyers and sellers will find this glossary helpful for understanding words and terms used in real estate transactions. There are, however, some factors that may affect these definitions:

Before signing any documents or depositing any money preparatory to entering into a real estate contract, purchasers should consult with an attorney of his choice to ensure that his rights are properly protected.

3/2 Option
An alternative Fannie Mae financing plan that enables households whose earnings are no more than 100 percent of the median income in their regional area to make a 3 percent down payment with their own funds, coupled with a 2 percent gift from a relative or a 2 percent grant or unsecured loan from a nonprofit organization or state or local government program.
Abstract (Of Title)
A summary of the public records relating to the title to a particular piece of land. An attorney or title insurance company reviews an abstract of title to determine whether there are any title defects that must be cleared before a buyer can purchase clear, marketable, and insurable title.
Acceleration Clause
A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if regular mortgage payments are not made or for breach of other conditions of the mortgage.
Adjustment Rate Mortgage (ARM)
A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.
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.
Amortization
A payment plan that enables the borrower to reduce his debt gradually through monthly payments of principal.
Amortization Schedule
A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the balance remaining.
Annual Percentage Rate (APR)
The total yearly cost of a mortgage stated as a percentage of the loan amount; includes such items as the base interest rate, primary mortgage insurance, and loan origination fee (points).
Appraisal
An expert judgment or estimate of the quality or value of real estate as of a given date.
Appreciation
An increase in the value of a property due to changes in market conditions or other clauses.
Assessed Value
The valuation placed upon property by a public tax assessor for purposes of taxation.
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 released from further liability under the mortgage. Since the 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.
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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 mortgage or 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 required to a sale subject to a mortgage.
"Assumption of Mortgage" and "Purchasing Subject to a Mortgage" are used to finance the sale of property. They may also be used when a mortgagor is in financial difficulty and desires to sell the property to avoid foreclosure.
Binder or "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.
Broker
(See real estate 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.
Cap
A provision of an ARM limiting how much the interest rate or mortgage payments may increase or decrease.
Cash Reserve
A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two monthly mortgage payments.
Certificate of Title
A certificate issued by a title company or a written opinion rendered by an attorney that the seller has good marketable and insurable title to the property that he is offering for sale. A certificate of title offers no protection against any hidden defects in the title that an examination of the records could not reveal. The issuer of a certificate of title is liable only for damages due to negligence. The protection offered a homeowner under a certificate of title is not as great as that offered in a title insurance policy.
Clear Title
A title that is free of liens or legal questions as to ownership of property.
Closing Costs
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:
  • Recording Deed and Mortgage
  • Documentary Stamps on Deed
  • Escrow Fees (or Prepaids)
  • Real Estate Commission
  • Attorney's Settlement Charges (document prep fees)
  • Lender Document Prep Fees (tax service & underwriting fees)
  • Title Insurance & Binder
  • Appraisal and Inspection
  • Survey Charge
  • Attorney's Fee The agreement of sale negotiated previously between the buyer and the seller may state in writing who will pay each of the above costs.
Closing Day (or Settlement)
The day on which the formalities of a real estate sale are concluded. The certificates of title, abstract, and deed are generally prepared for the closing by an attorney and this cost charged to the buyer. The buyer signs the mortgage, and closing costs are paid. The final closing merely confirms the original agreement reached in the agreement of sale.
Cloud (On Title)
An outstanding claim or encumbrance that 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-6 to 7 percent on houses, 10 percent on land.
Commitment Letter
A formal offer by a lender stating the terms under which it agrees to lender money to a home buyer.
Condemnation
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.
Condominium
Individual ownership of a dwelling unit and an individual interest in the common areas and facilities that serve the multi-unit project.
Contingency
A condition that must be met before a contract is legally binding.
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 or guaranteed by the Department of Veterans Affairs. It is subject to conditions established by the lending institution and State statutes. The mortgage rates may vary with different institutions and between States. (States have various interest limits.)
Convertible ARM
An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.
Cooperative
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 that 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.
Convenant
A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.
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.
Deed
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. (See also deed of trust, general warranty deed, quitclaim deed, and special warranty deed.)
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, 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 or beneficiary. If the borrower pays the debt as agreed, the deed of trust becomes void. If, however, he 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. 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 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. Generally, thirty days after the due date if payment is not received, the mortgage is in default. 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.
Delinquency
A loan in which a payment is overdue but not yet in default.
Deposit
See Earnest Money
Depreciation
Decline in value of a house due to wear and tear, adverse changes in the neighborhood, or any other reason.
Discount Points
See Points
Documentary (or Tax) 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. Some states do not have documentary (or tax) stamps, but they do have recordation fees.
Down Payment
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 down payment may not be refundable if the purchaser fails to buy the property without good cause. If the purchaser wants the down payment 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 down payment and to pay interest and expenses incurred by the purchaser.
Due-on-Sale Clause
A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.
Earnest Money
The deposit money given to the seller or his agent by the potential buyer upon the signing of the agreement of sale to show that he 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 binder or offer to purchase expressly provides that it is refundable.
Easement
A right-of-way granted to a person or company authorizing access to or over the owner's land. An electric company obtaining a right-of-way across private property is a common example.
Encroachment
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.
Encumbrance
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 is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether he wants to purchase with the encumbrance, or what can be done to remove it.
Equal Credit Opportunity Act (ECOA)
A federal law that prohibits lenders from denying mortgages on the basis of the borrower's race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
Equity
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.
Equity Loan
A loan based on the borrower's equity in his or her home.
Escrow (or Prepaids)
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.
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.
Fannie Mae
The Federal National Mortgage Association is a federally chartered, shareholder-owned, and privately managed corporation headquartered in Washington, D.C. A secondary mortgage lender of money for conventional loans.
FHA Mortgage
A mortgage that is insured by the Federal Housing Administration. Also referred to as a "government" mortgage.
First Mortgage
A mortgage that has first claim in the event of default.
Fixed-Rate Mortgage
A mortgage in which the interest rate does not change during the entire term of the loan.
Flood Insurance
Insurance that compensates for physical property damages resulting from flooding. It is required for properties located in federally designated flood areas.
Forbearance
The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.
Foreclosure
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.
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.
Graduated Payment Mortgage
A mortgage that starts with low monthly payments that increase at a predetermined rate. The initial monthly payments are set at an amount lower than that required for full amortization of the debt.
Grantee
That party in the deed who is the buyer or recipient.
Grantor
That party in the deed who is the seller or giver.
Grantor's Tax
See Transfer Tax
Hazard Insurance
Protects against damages caused to property by fire, windstorms, and other common hazards.
Homeowner's Insurance
An insurance policy that combines personal liability coverage and hazard insurance coverage for a dwelling and its contents.
Homeowner's Warranty (HOW)
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.
HUD
U.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders.
HUD-1
See Settlement Sheet
Interest
A charge paid for borrowing money. (See mortgage note.)
Interest Rate Cap
A provision of an ARM limiting how much interest rates may increase or decrease per adjustment period or over the life of a mortgage. See also Lifetime Cap.
Joint Tenancy
A form of co-ownership giving each tenant equal interest and equal rights in the property, including the right of survivorship.
Late Charge
The penalty a borrower must pay when a payment is made after the due date.
Lien
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.)
Lifetime Cap
A provision of an ARM that limits the highest rate that can occur over the life of the loan.
Loan Commitment
See Commitment Letter
Loan Servicing
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Loan-to-Value Percentage (LTV)
The relationship between the unpaid principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property.
Lock-in
A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
Marketable Title
A title that is free and clear of objectionable liens, clouds, or other title defects. A title that enables an owner to sell his property freely to others and which others will accept without objection.
Mortgage
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.
Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary market.
Mortgage Broker
An individual or company that for a fee acts as an intermediary between borrowers and lenders.
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
See Private Mortgage Insurance
Mortgage Insurance Premium (MIP)
The fee paid by a borrower to FHA or a private insurer for mortgage insurance.
Mortgage Interest Rate
The rate of interest in effect for the monthly payment due.
Mortgage Margin
The set percentage the lender adds to the index value to determine the interest rate of an ARM.
Mortgage Note
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.
Mortgage (Open-End)
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.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
Negative Amortization
A gradual increase in the 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 unpaid principal balance to create "negative" amortization.
Notice of Default
A formal written notice to a borrower that a default has occurred and the legal action may be taken.
Origination Fee
A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount.
Owner Financing
A property purchase transaction in which the property seller provides all or part of the financing.
Payment Cap
A provision of some ARMs limiting the amount by which a borrower's payments may increase regardless of any interest rate increase; may result in negative amortization. See Adjustable-Rate Mortgage
PITI
Stands for principal, interest, rates, and insurance -- the components of a monthly mortgage payment.
Planned Unit Developments (PUDs)
A planned unit development is a project or subdivision that consists of common property that is owned and maintained by an owners' association for the benefit and use of the individual PUD unit owners.
Plat
A map or chart of a lot, subdivision or community drawn by a surveyor showing boundary lines, buildings, improvements on the land, and easements. Also known as a survey.
Points
Sometimes called "discount points." A point is one percent of the amount of the mortgage loan. For example, if a loan is for $25,000, one point is $250. 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 Department of Veterans Affairs guaranteed loans (sellers can pay, however). On a conventional mortgage, or an FHA insured mortgage, points may be paid by either buyer or seller or split between them.
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.
Prepayment
Payment of mortgage loan, or part of it, before due date. Mortgage agreements use to restrict the right of prepayment either by limiting the amount that can be prepaid in any one year or charging a penalty for prepayment. Today, few loans have a prepayment penalty clause in them -however, confirm this fact with your lender at the time of loan application! The Federal Housing Administration does not permit such restrictions in FHA insured mortgages.
Prequalification
The process of determining how much money a prospective buyer will be eligible to borrow before a loan is applied for.
Principal
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.
Private Mortgage Insurance (PMI)
Insurance provided by nongovernment insurers that protects lenders against loss if a borrower defaults. Fannie Mae generally requires private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80 percent.
Purchase Agreement
See agreement of sale.
Qualifying Ratios.
Guidelines applied by the lenders to determine how large a loan to grant to a home buyer.
Quitclaim Deed
A deed that 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.)
Radon
A radioactive gas found in some homes that in sufficient concentrations can cause health problems.
Real Estate Broker
A middle man or agent who buys and sells real estate for a company, firm, or individual on a commission basis. The broker does not have title to the property, but generally represents the owner.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Refinancing
The process of the same mortgagor paying off one loan with the proceeds from another loan.
Restrictive Covenants
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 later discriminatory covenant is unconstitutional and has been declared unenforceable by the U.S. Supreme Court.)
Sales Agreement
See agreement of sale.
Second Mortgage
A mortgage that has a lien position subordinate to the first mortgage.
Secondary Mortgage Market
The buying and selling of existing mortgages.
Seller-Take-Back
An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.
Settlement Sheet (or HUD-1)
The computation of costs payable at closing that determines the seller's net proceeds and the buyer's net payment.
Special Assessments
A special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, street lights, etc.
Special Lien
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. In a special warranty deed the grantor guarantees to the grantee that he has done nothing during the time he held title to the property that has, or which might in the future, impair the grantee's title.
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 often required by the lender to assure him that a building is actually sited on the land according to its legal description.
Tax
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.
Tenancy by Entirety
A type of joint ownership of property that provides right of survivorship and is available only to a husband and wife.
Tenancy in Common
A type of joint ownereship in a property without right of survivorship.
Title
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.
Title Company
A company that specializes in examining and insuring titles to real estate.
Title Insurance
Protects lenders or homeowners against loss of their interest in property due to legal defects in title. Title insurance may be issued to either the mortgagor, as an"owner's title policy" or to the mortgagee, as 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.
Transfer Tax (or Grantor's Tax)
State or local tax payable when title passes from one owner to another.
Trustee
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.)
Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower's creditworthiness and the quality of the property itself.
VA Loan
A loan that is guaranteed by the Department of Veterans Affairs. Also referred to as a "government" mortgage.
Zoning Ordinances
The acts of an authorized local government establishing building codes, and setting forth regulations for property land usage.

The foregoing terms were taken from various real estate manuals, including "A Guide to Homeownership" by Fannie Mae and "The Homebuyer's Guide" by HUD.

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