Abstract
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 which must be cleared
before a buyer can purchase clear, marketable, and insurable title.
Acceleration Clause
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.
Amortization
A payment plan which enables the borrower to reduce his debt gradually
through monthly payments of principal.
Appraisal
An expert judgment or estimate of the quality or value of real estate as of
a given date.
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. 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 mortgagor 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. Both
"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.
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 which he is offering for sale. A
certificate of title offers no protection against any
hidden defects in the title which 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.
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:
BUYER'S EXPENSES SELLER'S EXPENSES Documentary Stamps on
Notes Cost of Abstract Recording Deed and Mortgage
Documentary Stamps on Deed Escrow Fees Real Estate
Commission Attorney's Fee Recording Mortgage Title
Insurance Survey Charge Appraisal and Inspection Escrow
Fees 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
The day on which the formalities of
a real estate sale are concluded. The certificate 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
which 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.
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 which serve the multi-unit project.
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 Veterans' Administration. 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.)
Cooperative Housing
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 which 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.
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.
Depreciation
Decline in value of a house due to
wear and tear, adverse changes in the neighborhood, or
any other reason.
Documentary 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.
Downpayment
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 downpayment amount and will acknowledge receipt of
the downpayment. Downpayment is the difference between
the sales price and maximum mortgage amount. The
downpayment may not be refundable if the purchaser fails
to buy the property without good cause. If the purchaser
wants the downpayment 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
downpayment and to pay interest and expenses incurred by
the purchaser.
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
downpayment. 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 Rights
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 convenants. 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.
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.
Escrow
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.
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.
Grantee
That party in the deed who is the
buyer or recipient.
Grantor
That party in the deed who is the
seller or giver.
Hazard Insurance
Protects against damages caused to
property by fire, windstorms, and other common hazards.
HUD
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.
Interest
A charge paid for borrowing money.
(See mortgage note)
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)
Marketable Title
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.
Mortage 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.
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 (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.
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
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.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage
agreement.
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.
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 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.
Prepayment
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.
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.
Purchase Agreement
See agreement of sale.
Quitclaim Deed
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 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.
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 latter discriminatory covenant is
unconstitutional and has been declared unenforceable by
the U.S. Supreme Court.)
Sales
Agreement
(See agreement of sale)
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 which 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.
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 Insurance
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 convenants filed
in the record, which would adversely affect the
marketability or value of title.
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)
Zoning Ordinances
The acts of an authorized local
government establishing building codes, and setting
forth regulations for property land usage. The potential
home buyer will find this Vocabulary helpful for
understanding words and terms used in real estate
transactions. There are, however, some factors that may
affect these definitions:
- Terms are defined as they are
commonly understood in the mortgage and real estate
industry. The same terms may have different meanings
in another context.
- The definitions are intentionally
general, non-technical and short. They do not
encompass all possible meanings or nuances that a
term may acquire in legal use.
- State laws, as well as custom and
use in various States or regions of the country, may
modify or completely change the meanings of certain
terms defined.
- Before signing any documents or
depositing any money preparatory to entering into a
real estate contract, the purchaser should consult
with an attorney of his choice to ensure that his
rights are properly protected.
