Buyer guide



Crash Course in Real Estate Terminology

When I was 13 my parents took me to Paris. Since I do no speak French
I had to rely on people I trusted to translate for me. Buying a home
can be allot like visiting a foreign country. Maybe you've never been
to France or its been a few years since your last visit. Either way,
its likely that you would invest in a recent travel guide for the
area, right?! Of course you would! Below are a few definitions for you to to
familiarize your self with.


acceleration clause
A clause in your mortgage which allows the lender to demand payment of
the outstanding loan balance for various reasons. The most common
reasons for accelerating a loan are if the borrower defaults on the
loan or transfers title to another individual without informing the
lender.

adjustable-rate mortgage (ARM)
A mortgage in which the interest changes periodically, according to
corresponding fluctuations in an index. All ARMs are tied to indexes.

adjustment date
The date the interest rate changes on an adjustable-rate mortgage

amortization
The loan payment consists of a portion which will be applied to pay
the accruing interest on a loan, with the remainder being applied to
the principal. Over time, the interest portion decreases as the loan
balance decreases, and the amount applied to principal increases so
that the loan is paid off (amortized) in the specified time.

amortization schedule
A table which shows how much of each payment will be applied toward
principal and how much toward interest over the life of the loan. It
also shows the gradual decrease of the loan balance until it reaches
zero.

annual percentage rate (APR)
This is not the note rate on your loan. It is a value created
according to a government formula intended to reflect the true annual
cost of borrowing, expressed as a percentage. It works sort of like
this, but not exactly, so only use this as a guideline: deduct the
closing costs from your loan amount, then using your actual loan
payment, calculate what the interest rate would be on this amount
instead of your actual loan amount. You will come up with a number
close to the APR. Because you are using the same payment on a smaller
amount, the APR is always higher than the actual note rate on your
loan.

appraised value
An opinion of a property's fair market value, based on an appraiser's
knowledge, experience, and analysis of the property. Since an
appraisal is based primarily on comparable sales, and the most recent
sale is the one on the property in question, the appraisal usually
comes out at the purchase price.

assessed value
The valuation placed on property by a public tax assessor for purposes
of taxation.

asset
Items of value owned by an individual. Assets that can be quickly
converted into cash are considered "liquid assets." These include bank
accounts, stocks, bonds, mutual funds, and so on. Other assets include
real estate, personal property, and debts owed to an individual by
others.

balloon mortgage
A mortgage loan that requires the remaining principal balance be paid
at a specific point in time. For example, a loan may be amortized as
if it would be paid over a thirty year period, but requires that at
the end of the tenth year the entire remaining balance must be paid.
balloon payment
The final lump sum payment that is due at the termination of a balloon mortgage.

bankruptcy
By filing in federal bankruptcy court, an individual or individuals
can restructure or relieve themselves of debts and liabilities.
Bankruptcies are of various types, but the most common for an
individual seem to be a "Chapter 7 No Asset" bankruptcy which relieves
the borrower of most types of debts. A borrower cannot usually qualify
for an "A" paper loan for a period of two years after the bankruptcy
has been discharged and requires the re-establishment of an ability to
repay debt.

bridge loan
Not used much anymore, bridge loans are obtained by those who have not
yet sold their previous property, but must close on a purchase
property. The bridge loan becomes the source of their funds for the
down payment. One reason for their fall from favor is that there are
more and more second mortgage lenders now that will lend at a high
loan to value. In addition, sellers often prefer to accept offers from
buyers who have already sold their property.

broker
Broker has several meanings in different situations. Most Realtors are
"agents" who work under a "broker." Some agents are brokers as well,
either working form themselves or under another broker. In the
mortgage industry, broker usually refers to a company or individual
that does not lend the money for the loans themselves, but broker
loans to larger lenders or investors. (See the Home Loan Library that
discusses the different types of lenders). As a normal definition, a
broker is anyone who acts as an agent, bringing two parties together
for any type of transaction and earns a fee for doing so.

buydown
Usually refers to a fixed rate mortgage where the interest rate is
"bought down" for a temporary period, usually one to three years.
After that time and for the remainder of the term, the borrower's
payment is calculated at the note rate. In order to buy down the
initial rate for the temporary payment, a lump sum is paid and held in
an account used to supplement the borrower's monthly payment. These
funds usually come from the seller (or some other source) as a
financial incentive to induce someone to buy their property. A "lender
funded buydown" is when the lender pays the initial lump sum. They can
accomplish this because the note rate on the loan (after the buydown
adjustments) will be higher than the current market rate. One reason
for doing this is because the borrower may get to "qualify" at the
start rate and can qualify for a higher loan amount. Another reason is
that a borrower may expect his earnings to go up substantially in the
near future, but wants a lower payment right now.

chain of title
An analysis of the transfers of title to a piece of property over the years.

clear title
A title that is free of liens or legal questions as to ownership of
the property.

closing
This has different meanings in different states. In some states a real
estate transaction is not consider "closed" until the documents record
at the local recorders office. In others, the "closing" is a meeting
where all of the documents are signed and money changes hands.

closing costs
Closing costs are separated into what are called "non-recurring
closing costs" and "pre-paid items." Non-recurring closing costs are
any items which are paid just once as a result of buying the property
or obtaining a loan. "Pre-paids" are items which recur over time, such
as property taxes and homeowners insurance. A lender makes an attempt
to estimate the amount of non-recurring closing costs and prepaid
items on the Good Faith Estimate which they must issue to the borrower
within three days of receiving a home loan application.

cloud on title
Any conditions revealed by a title search that adversely affect the
title to real estate. Usually clouds on title cannot be removed except
by deed, release, or court action.

co-borrower
An additional individual who is both obligated on the loan and is on
title to the property.

collateral
In a home loan, the property is the collateral. The borrower risks
losing the property if the loan is not repaid according to the terms
of the mortgage or deed of trust.

collection
When a borrower falls behind, the lender contacts them in an effort to
bring the loan current. The loan goes to "collection." As part of the
collection effort, the lender must mail and record certain documents
in case they are eventually required to foreclose on the property.

commission
Most salespeople earn commissions for the work that they do and there
are many sales professionals involved in each transaction, including
Realtors, loan officers, title representatives, attorneys, escrow
representative, and representatives for pest companies, home warranty
companies, home inspection companies, insurance agents, and more. The
commissions are paid out of the charges paid by the seller or buyer in
the purchase transaction.

community property
In some states, especially the southwest, property acquired by a
married couple during their marriage is considered to be owned
jointly, except under special circumstances. This is an outgrowth of
the Spanish and Mexican heritage of the area.

comparable sales
Recent sales of similar properties in nearby areas and used to help
determine the market value of a property. Also referred to as "comps."

construction loan
A short-term, interim loan for financing the cost of construction. The
lender makes payments to the builder at periodic intervals as the work
progresses.

contingency
A condition that must be met before a contract is legally binding. For
example, home purchasers often include a contingency that specifies
that the contract is not binding until the purchaser obtains a
satisfactory home inspection report from a qualified home inspector.

down payment
The part of the purchase price of a property that the buyer pays in
cash and does not finance with a mortgage.

easement
A right of way giving persons other than the owner access to or over a property.

eminent domain
The right of a government to take private property for public use upon
payment of its fair market value. Eminent domain is the basis for
condemnation proceedings.

encroachment
An improvement that intrudes illegally on another's property.

encumbrance
Anything that affects or limits the fee simple title to a property,
such as mortgages, leases, easements, or restrictions.

escrow
An item of value, money, or documents deposited with a third party to
be delivered upon the fulfillment of a condition. For example, the
earnest money deposit is put into escrow until delivered to the seller
when the transaction is closed.

escrow account
Once you close your purchase transaction, you may have an escrow
account or impound account with your lender. This means the amount you
pay each month includes an amount above what would be required if you
were only paying your principal and interest. The extra money is held
in your impound account (escrow account) for the payment of items like
property taxes and homeowner's insurance when they come due. The
lender pays them with your money instead of you paying them yourself.

escrow analysis
Once each year your lender will perform an "escrow analysis" to make
sure they are collecting the correct amount of money for the
anticipated expenditures.

escrow disbursements
The use of escrow funds to pay real estate taxes, hazard insurance,
mortgage insurance, and other property expenses as they become due.

estate
The ownership interest of an individual in real property. The sum
total of all the real property and personal property owned by an
individual at time of death.

eviction
The lawful expulsion of an occupant from real property.

examination of title
The report on the title of a property from the public records or an
abstract of the title.

exclusive listing
A written contract that gives a licensed real estate agent the
exclusive right to sell a property for a specified time.

fair market value
The highest price that a buyer, willing but not compelled to buy,
would pay, and the lowest a seller, willing but not compelled to sell,
would accept.

Fannie Mae (FNMA)
The Federal National Mortgage Association, which is a congressionally
chartered, shareholder-owned company that is the nation's largest
supplier of home mortgage funds. For a discussion of the roles of
Fannie Mae, Freddie Mac (FHLMC), and Ginnie Mae (GNMA), see the
Library.

Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development
(HUD). Its main activity is the insuring of residential mortgage loans
made by private lenders. The FHA sets standards for construction and
underwriting but does not lend money or plan or construct housing.
(top)

fee simple
The greatest possible interest a person can have in real estate.

FHA mortgage
A mortgage that is insured by the Federal Housing Administration
(FHA). Along with VA loans, an FHA loan will often be referred to as a
government loan.

fixture
Personal property that becomes real property when attached in a
permanent manner to real estate.

flood insurance
Insurance that compensates for physical property damage resulting from
flooding. It is required for properties located in federally
designated flood areas.

foreclosure
The legal process by which a borrower in default under a mortgage is
deprived of his or her interest in the mortgaged property. This
usually involves a forced sale of the property at public auction with
the proceeds of the sale being applied to the mortgage debt.

home inspection
A thorough inspection by a professional that evaluates the structural
and mechanical condition of a property. A satisfactory home inspection
is often included as a contingency by the purchaser.

homeowners' association
A nonprofit association that manages the common areas of a planned
unit development (PUD) or condominium project. In a condominium
project, it has no ownership interest in the common elements. In a PUD
project, it holds title to the common elements.

homeowner's insurance
An insurance policy that combines personal liability insurance and
hazard insurance coverage for a dwelling and its contents.

homeowner's warranty
A type of insurance often purchased by homebuyers that will cover
repairs to certain items, such as heating or air conditioning, should
they break down within the coverage period. The buyer often requests
the seller to pay for this coverage as a condition of the sale, but
either party can pay.

HUD-1 settlement statement
A document that provides an itemized listing of the funds that were
paid at closing. Items that appear on the statement include real
estate commissions, loan fees, points, and initial escrow (impound)
amounts. Each type of expense goes on a specific numbered line on the
sheet. The totals at the bottom of the HUD-1 statement define the
seller's net proceeds and the buyer's net payment at closing. It is
called a HUD1 because the form is printed by the Department of Housing
and Urban Development (HUD). The HUD1 statement is also known as the
"closing statement" or "settlement sheet."

judgment
A decision made by a court of law. In judgments that require the
repayment of a debt, the court may place a lien against the debtor's
real property as collateral for the judgment's creditor.[Top]

jumbo loan
A loan that exceeds Fannie Mae's and Freddie Mac's loan limits,
currently at $227,150. Also called a nonconforming loan. Freddie Mac
and Fannie Mae loans are referred to as conforming loans.

lien
A legal claim against a property that must be paid off when the
property is sold. A mortgage or first trust deed is considered a lien.

loan origination
How a lender refers to the process of obtaining new loans.

loan-to-value (LTV)
The percentage relationship between the amount of the loan and the
appraised value or sales price (whichever is lower).

modification
Occasionally, a lender will agree to modify the terms of your mortgage
without requiring you t refinance. If any changes are made, it is
called a modification

mortgage broker
A mortgage company that originates loans, then places those loans with
a variety of other lending institutions with whom they usually have
pre-established relationships.

mortgagee
The lender in a mortgage agreement.

mortgage insurance (MI)
Insurance that covers the lender against some of the losses incurred
as a result of a default on a home loan. Often mistakenly referred to
as PMI, which is actually the name of one of the larger mortgage
insurers. Mortgage insurance is usually required in one form or
another on all loans that have a loan-to-value higher than eighty
percent. Mortgages above 80% LTV that call themselves "No MI" are
usually a made at a higher interest rate. Instead of the borrower
paying the mortgage insurance premiums directly, they pay a higher
interest rate to the lender, which then pays the mortgage insurance
themselves. Also, FHA loans and certain first-time homebuyer programs
require mortgage insurance regardless of the loan-to-value.

mortgage insurance premium (MIP)
The amount paid by a mortgagor for mortgage insurance, either to a
government agency such as the Federal Housing Administration (FHA) or
to a private mortgage insurance (MI) company.


origination fee
On a government loan the loan origination fee is one percent of the
loan amount, but additional points may be charged which are called
"discount points." One point equals one percent of the loan amount. On
a conventional loan, the loan origination fee refers to the total
number of points a borrower pays.

owner financing
A property purchase transaction in which the property seller provides
all or part of the financing.

PITI
This stands for principal, interest, taxes and insurance. If you have
an "impounded" loan, then your monthly payment to the lender includes
all of these and probably includes mortgage insurance as well. If you
do not have an impounded account, then the lender still calculates
this amount and uses it as part of determining your debt-to-income
ratio.

pre-approval
A loosely used term which is generally taken to mean that a borrower
has completed a loan application and provided debt, income, and
savings documentation which an underwriter has reviewed and approved.
A pre-approval is usually done at a certain loan amount and making
assumptions about what the interest rate will actually be at the time
the loan is actually made, as well as estimates for the amount that
will be paid for property taxes, insurance and others. A pre-approval
applies only to the borrower. Once a property is chosen, it must also
meet the underwriting guidelines of the lender. Contrast with
pre-qualification

prepayment penalty
A fee that may be charged to a borrower who pays off a loan before it is due.

pre-qualification
This usually refers to the loan officer's written opinion of the
ability of a borrower to qualify for a home loan, after the loan
officer has made inquiries about debt, income, and savings. The
information provided to the loan officer may have been presented
verbally or in the form of documentation, and the loan officer may or
may not have reviewed a credit report on the borrower.

prime rate
The interest rate that banks charge to their preferred customers.
Changes in the prime rate are widely publicized in the news media and
are used as the indexes in some adjustable rate mortgages, especially
home equity lines of credit. Changes in the prime rate do not directly
affect other types of mortgages, but the same factors that influence
the prime rate also affect the interest rates of mortgage loans.

principal
The amount borrowed or remaining unpaid. The part of the monthly
payment that reduces the remaining balance of a mortgage.
principal balance
The outstanding balance of principal on a mortgage. The principal
balance does not include interest or any other charges. See remaining
balance.

principal, interest, taxes, and insurance (PITI)
The four components of a monthly mortgage payment on impounded loans.
Principal refers to the part of the monthly payment that reduces the
remaining balance of the mortgage. Interest is the fee charged for
borrowing money. Taxes and insurance refer to the amounts that are
paid into an escrow account each month for property taxes and mortgage
and hazard insurance.

private mortgage insurance (MI)
Mortgage insurance that is provided by a private mortgage insurance
company to protect lenders against loss if a borrower defaults. Most
lenders generally require MI for a loan with a loan-to-value (LTV)
percentage in excess of 80 percent.

purchase agreement
A written contract signed by the buyer and seller stating the terms
and conditions under which a property will be sold.

rate lock
A commitment issued by a lender to a borrower or other mortgage
originator guaranteeing a specified interest rate for a specified
period of time at a specific cost.

real estate agent
A person licensed to negotiate and transact the sale of real estate.

Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers
advance notice of closing costs.

Realtor®
A real estate agent, broker or an associate who holds active
membership in a local real estate board that is affiliated with the
National Association of Realtors.

title
A legal document evidencing a person's right to or ownership of a property.

title company
A company that specializes in examining and insuring titles to real estate.

title insurance
Insurance that protects the lender (lender's policy) or the buyer
(owner's policy) against loss arising from disputes over ownership of
a property.

title search
A check of the title records to ensure that the seller is the legal
owner of the property and that there are no liens or other claims
outstanding.

transfer tax
State or local tax payable when title passes from one owner to another.

VA mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).

vested
Having the right to use a portion of a fund such as an individual
retirement fund. For example, individuals who are 100 percent vested
can withdraw all of the funds that are set aside for them in a
retirement fund. However, taxes may be due on any funds that are
actually withdrawn.