Real Estate Glossary

Real Estate Language Can Be Confusing. Learn What You’re Missing with Our Simple Guide.

A

Adjustable rate mortgage (ARM)
Also known as variable rate, an ARM is a mortgage with interest rates that may fluctuate up or down periodically, according to the index upon which it is based. Most ARMs will have a limit on the amount that the rate can vary. See index, interest cap and payment cap.

Agency
A legal relationship between two or more persons whereby one person (the agent) is authorized to act on behalf of the other(s). See dual agency and single agency.

Agent
Generally, someone who acts on behalf of another for a fee.

Amortization
The process of repaying a debt through regular payments of principal and interest.

Annual percentage rate
The true rate of interest, stated as a yearly percentage, for a loan over its projected life.

Appreciation
Increase in value of a property, not including increases from improvements.

As-is agreement
An agreement in which a property is sold without warranty in whatever condition it is in at the time the contract is signed.

Assessment
Tax or charge levied against a property by the government, typically to pay for local
Improvement, e.g. sidewalks, curbs sewers, etc.

Assignment clause

A sales contract with an assignment clause allows the buyer to transfer the interest in the property (e.g. the right to buy it at the given rates and terms) to another party.

B

Back end ratio
Ratio of monthly housing costs (principal, insurance, taxes and interest) plus regular monthly payments to gross monthly income used by lenders to evaluate an applicant qualification for a loan. Lenders will typically allow a back ratio between 32 and 45 percent.

Bankruptcy
A legal proceeding, which offers protection from creditor, if one is unable to pay debts.

Breach
Failure to perform on a promise made in contract without legal excuse.

Broker
A licensed professional who assists in the purchase, sale, rental, or management of real property. A broker can be employed by either the buyer or seller, and accordingly, his duties may include locating and showing properties to prospective buyers, advertising properties for sale, assisting in contract negotiations, and other related activities. The term agent is often used interchangeably with broker, although in actuality, agents work under a broker and act as agents for that broker.

C

Certificate of occupancy
A certificate stating that a building is approved for occupancy issued by the city or county building inspection department. It is important that a certificate has been issued, as some home insurance policies will not pay claims for damage to a property that has not been approved for occupancy.

Closing
Also referred to as settlement. The process of finalizing all dealings in the purchase of a property, including signing of papers, disbursement of money, preparation of deed, and transfer of ownership.

Closing costs
Costs associated with finalizing the purchase of a home or property, including property insurance, property taxes, title insurance, mortgage insurance premium, points, and filing fees.

Cloud on title
An invalid legal claim to the title of a property that appears during the sale of the property, due to a recording mistake or other error and thus not apparent to the buyer or seller beforehand.

Comparative market analysis = CMA
A comparison of sale prices of similar properties in a given area for the purpose of determining the fair market value of a property.

Condominium

An individually owned living unit (typically, an apartment) that is part of a building with many such units. As an owner of a condo, you typically have an ownership interest in the common areas of the complex, such as the land, parking facilities, swimming pool, and so on.

Contingency
A provision that makes the occurrence of one event dependent on the completion of another. For example, the purchase of a home may be contingent on the seller repairing the structural
damages.

Contract
A formal agreement between two or more parties that is typically legally binding.

Co-signer
A person who assumes joint liability with another person by signing documents (e.g. loan promissory note). A co-signer is not necessarily a co-owner.

Counteroffer
A rejection of an original offer, combined with a new offer stating different terms and conditions.

Credit report
A report from an independent source outlining the credit history of an individual, including current and previous debts, payment amounts, late payments and past due amounts, defaults, and other related information on every credit source the individual has used.

D

Deed
A written, sealed document which transfers title to real estate from one party to another.

Default
Failure or neglect to fulfill an obligation or requirement. A borrower defaults on a loan if he fails to make payment, or otherwise fails to perform according to the terms of the note.

Deposit
Money that is placed in trust to show good faith, usually delivered by the buyer to demonstrate an intent to purchase. See earnest money.

Deposit receipt
Another term for a purchase contract or offer, since most purchase contracts include a good faith deposit of money with a third party which the buyer will forfeit if they renege on their offer without cause.

Detached
Term used to describe a house that is completely separate from the units surrounding it.

Disclosure

Statement of fact(s) concerns the condition of the property for sale and the surrounding area. In most states, the buyer is protected by disclosure laws requiring sellers to divulge certain information about the property, e.g. if the property is in a special studies zone.

Down payment
The amount of payment required securing the purchase of a property. Lenders typically require a 20% down payment, although with mortgage insurance down payments of 5, 10, and 15% are common.

Dual agency
A situation where one broker represents both the buyer and seller in a purchase. Although there may be two separate agents involved, both act on behalf of the same broker. In order to have dual agency representation, both parties must be made aware of and agree to the relationship.

E

Earnest money deposit
A portion of the purchase price paid to demonstrate the buyer’s good faith (i.e. intent to go through with the purchase). Payment is usually accompanied by an agreement outlining the terms and conditions of the sale. See deposit.

Easement rights
The right of an individual to use another individual’s property for a particular purpose (e.g. access to their own property). The seller should make the buyer aware of any easement rights that affect the property for sale.

Encumbrance

Any claim against the title to a property, such as a lien or mortgage.

Equity
The amount or value of a person’s interest in a property in excess of any lien against the property. For example, if a person makes a down payment of $30,000 on a property with a market value of $120,000 and takes out a mortgage for $90,000, at the time of purchase the buyer would have a $30,000, or 25% equity in the property.

Escrow
A deed, contract, or something of value placed in the custody of a third party to be transferred upon fulfillment of a stipulated condition.

F

Fair market price
A price, which approximates what comparable homes, have sold at in the same area.

Fannie Mae
Another name for the Federal National Mortgage Association, a federally sponsored agency which buys mortgages from banks, savings and loans, and other lending institutions. Agencies such as Fannie Mae are part of the secondary market. See Freddie Mac.

Fee simple

Having full title ownership of an estate. The owner and owner’s heirs have the right to occupy the land indefinitely, to use it in any manner desired and to convey it to anyone at any time.

FHA Mortgage Insurance
Insurance provided by the Federal Housing Administration to protect banks, savings and loans, and mortgage companies against loss on real estate loans. Borrowers must pay a premium in order to get a FHA insured loan.

Fixture
An item that is attached to the property, e.g. a dishwasher or air conditioner, and usually sold with the property.

Flat
An apartment that occupies one whole floor of a building. Often, each flat in a building has its own entrance from the outside.

Foreclosure
Legal procedure used by creditors to take a mortgaged property from a debtor who has defaulted on the loan.

Freddie Mac

Another name for the Federal Home Loan Mortgage Corporation, a federally sponsored agency which buys and sells mortgages. Along with Fannie Mae, Freddie Mae is a major player in the secondary market.

Free and clear title
Title to a property, which is free from any mortgage, lien, or other encumbrance.

Freely assumable
Term used to describe a loan, which may be assumed by anyone without permission from the lender. In such a situation, however, the original borrower is usually held liable in the event the loan is not repaid. See assumption.

Front ratio
Ratio of monthly housing costs (principal, insurance, taxes, and interest) to gross monthly income used by lenders to evaluate an applicant qualification for a loan. Lenders will typically allow a front ratio between 28 and 40 percent. See back ratio.

G

Guaranteed mortgage
A mortgage that is guaranteed against default, such as a VA or FHA insured mortgage. Borrowers must pay an insurance premium in order to get a guaranteed mortgage (also called an insured mortgage).

Grace period

The time period between the due date of a mortgage payment and the date when late charges are assessed. For example, payments due on the first of the month may have a 14 day grace period, meaning that fees will be charged if payment is not received by the fifteenth.

Graduated payment mortgage
A mortgage with monthly payments that are smaller at the beginning of the loan period and gradually increase by a specified amount for the first five or ten years, after which they become fixed. A GPM has a fixed interest rate and fixed loan period.

Gross income
The total amount of money you make annually from all sources. This amount is reported on your federal tax returns.

H

Hazard insurance
Insurance that covers events such as earthquakes, floods, tornadoes, and other acts of god.

Homeowner’s insurance
Property insurance that protects homeowners against theft, personal liability, and fire.

Home warranty insurance

Private insurance for homebuyers that covers appliances and plumbing, heating, and electrical systems in the home.

HUD flood zone
An area prone to flooding, as determined by the Housing and Urban Development, a branch of the federal government.

Hybrid mortgage
A mortgage that combines some attributes of fixed rate mortgages with other attributes of adjustable rate mortgages. E.g. a loan which is fixed for 5 years but then reverts to an ARM.

I

Income to debt ratio
The percentage of gross income that lenders will allow for monthly housing costs when evaluating a borrower’s qualification for a particular loan amount. See front ratio.

Index
A market indicator used to determine the interest rate for an adjustable rate mortgage. Common indexes include one-year treasury securities and the 11th District Cost of Funds. The actual interest rate is calculated by adding the margin to the index.

Interest cap

A limit on the amount that the interest rate for an adjustable rate mortgage can change, regardless of how much the index changes. Most ARMs have a cap on both the amount it can increase or decrease at any periodic adjustment interval and a life-long cap that limits the amount the interest rate can vary over the life of the loan. The two interest caps are sometimes called a ‘periodic cap’ and a ‘life cap’.

Interest rate
The percentage rate on a principal amount charged by a lender for the use of a sum of money.

J

Junior lien
When a property is foreclosed, lenders are repaid in a particular order, established by the loan documents. The lender with the first claim to repayment is said to hold the first mortgage, and a lender whose repayment order is after the first claimant is said to hold a junior lien.

Junior mortgage also called a secondary mortgage.
A mortgage whose claim to repayment is second to another mortgage.

L

Leasehold
Interest in an estate that entitles a person to possession but not ownership of the land.

Lending institution
An entity that lends money to individuals or businesses as part of its normal business operations.

Lien
A claim against a property, typically as security for a debt. In addition to a mortgage lien, a property may also have a tax lien (e.g. overdue property taxes) or judgment lien, which is a court-appointed claim against a property.

Liquidated damages
Compensation paid to the seller if the buyer fails to complete the purchase even though all contingencies have been satisfied. For example, the seller may keep the buyer’s earnest money in the event the buyer defaults on the contract.

Loan
An agreement whereby one entity allows another entity to use its money, often for a fee called interest.

Loan-to-value ratio (LTV)
The ratio of a proposed loan amount to a lesser of a property’s appraised value or purchase price. For example, if a property is purchased for $110,000, appraised for $100,000 and the buyer is applying for a loan in the amount of $90,000, the LTV is 90% (90,000 divided by 100,000).

Lock-in

An assurance of a given interest rate at the time of settlement. For example, if the interest rate is at 7.5% when you apply for a loan, it may have risen (or fallen) by the time the loan is approved. A lock-in ensures that you will get the original interest rate. Some lenders charge a fee for locking in an interest rate.

Lump sum payment
A sum of money paid at one time, as opposed to spreading payments over a period of time.

M

Maintenance
Any repairs or general upkeep done to preserve the present condition of a property.

Margin
A fixed amount that is added to the index of an adjustable rate mortgage to determine the interest rate at a given time. For example, if an ARM has an index of 6% and a margin of 2.75, the interest rate is set at 8.75% (6 + 2.75).

Market value
Also known as fair market value. The price that a property can realistically be sold for, given the selling price of other comparable houses in the area.

Mortgage

A conditional contract in which a property is given as security for the repayment of a loan.

Mortgage broker
Mortgage brokers act as intermediaries between lending institutions and borrowers. Most brokers have access to a wide variety of lenders and can often find loans with lower interest rates than you might otherwise find. They can also save you time searching for a loan that fits your needs. However, brokers often charge higher points than lenders.

Mortgage interest
The amount of money the borrower pays the lender to compensate the lender for the use of its money to purchase the borrowers home. This interest is tax deductible.

N

National Association of Realtors (NAR)
A trade organization that sets the standards for the real estate profession and enforces a rigid code of honesty in real estate dealings. Membership includes real estate professionals across the country.

Negative amortization
The situation in which the balance of a loan gets larger, rather than smaller each month because payments made are too small to cover the loan’s interest charges. For example, if your monthly payment amount is based on a 4% interest rate but the actual rate being charged on the loan is 7.5%, your payments will not cover the accrued interest and each month the unpaid interest portion will be added to your loan balance.

O

Offer
A proposal outlining terms and conditions for the purchase of a property that may be accepted, rejected, or countered by the seller. If accepted, the offer becomes a contract.

Option
The right to purchase a property under certain terms and conditions, usually for a specific price and during a specific period of time.

Origination fee
A fee charged by a lending institution for processing the paperwork on a loan. This is in addition to any points which the lender may charge. See also processing fee.

P

Payment cap
A limit on the amount that the monthly payments on an adjustable rate mortgage can increase or decrease at each adjustment period. For example, if your monthly payments start at $1,000 and the ARM has a payment cap of 7.5%, the next adjustment cannot exceed plus or minus $75 per month regardless of how much the loan’s index changes. This can lead to negative amortization if the interest rate goes up and the monthly payment amount is too small to cover the increased interest charges.

Point
A fee charged by lenders at settlement equal to one percent of the loan amount. Points are charged so as to raise the lender’s yield above the apparent interest rate.

Prepayment penalty
A charge which a lender may assess a borrower if a loan is paid off before the due date.

Prequalification
The process of establishing a borrower’s qualification for a loan of a particular amount based on income and expenses. Prequalification does not guarantee that the loan amount will be approved, but can be used to demonstrate financial capability to an agent or seller.

Primary lender
A financial institution which actually makes mortgage loans from its funds. For example, if you obtain a mortgage from a bank and the bank then sells the mortgage to the secondary market, the bank is the original, or primary lender. Examples of primary lenders are banks, savings and loans, mortgage companies, and credit unions. See secondary market.

Prime rate
The rate of interest charged by a lender to its best customers.

Private mortgage insurance (PMI)
Mortgage insurance available for a premium which allows a borrower to take out a loan with a down payment of less than 20%. Unlike VA or FHA insurance, PMI is not backed by any government agency.

Processing fee

A fee charged by a lending institution for processing the paperwork on a loan. This is in addition to any points which the lender may charge. See also origination fee.

Property appraisal
An estimate of the value of the property. Common methods of appraisal include: the prices comparable houses have sold for in the recent past and the value of the land plus the cost to build the home minus building depreciation.

Q

Qualifying
The process of determining whether a buyer is financially able to assume a mortgage by checking credit history, present and previous employment, and any other sources which may help to determine the buyer’s financial capability

R

Realtor
A real estate professional who is a member of the National Association of Real Estate Boards. Also used more generally to refer to a real estate professional, although agents may not advertise themselves as Realtors unless they belong to the board.

REO – Real Estate Owned
Property that the bank owns as the result of foreclosure.

Right of first refusal
The right to purchase a property under terms and conditions made by another purchaser and accepted by the seller. For example, if the Jones’ make an offer of $120,000 on a property and the seller accepts the offer subject to the Wilson’s’ right of first refusal, the Wilsons have the right to buy the property for $120,000.

S

Secondary market
A collection of agencies that buy mortgages from primary lenders. These mortgage funds are then pooled and sold to investors, much like a mutual fund. By purchasing loans from primary lenders, the secondary market supplies money for additional mortgages. See primary lender.

Single agency
A situation where a broker represents the buyer or the seller but not both.

T

Teaser rate
An artificially low initial interest rate on an adjustable rate mortgage. Lenders often advertise low initial rates to attract borrowers, relying on a ‘catch-up’ clause to recoup their losses later.

Title

A formal document which establishes ownership of a property.

Title company
A company that provides title insurance and other services including researching the title, checking the public records for liens, and preparing title abstracts.

Transfer disclosure statement
A document filled out by the seller which describes the condition of the property.

Transfer taxes
Taxes imposed by local governments when transferring ownership of real property.

U

Unencumbered
The state of having no mortgages, liens, or other claims against a property. A property that is unencumbered is said to be ‘free and clear’. See free and clear title.

V

VA insurance Mortgage
insurance available to veterans of the U.S. military from the Veterans Administration. Eligible borrowers must pay a premium of 1 % of the loan amount to get a VA insured loan. The loan is then backed by the government in case of borrower default. See entitlement.

Valuation
An estimation of value of a property, as determined by various factors. See appraisal.

Variable rate mortgage
See adjustable rate mortgage.

W

Warranty
A guarantee or protection provided to the purchaser regarding the condition of appliances and certain fixtures. New homes often have more extensive warranties covering not only fixtures and appliances but the overall structure as well. See home warranty insurance.