Home Buyer's Glossary
Abstract (of title)
A summary of the public records relating to the title of 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 a clear, marketable and insurable title.
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.
Adjustable-rate mortgage (ARM)
A mortgage in which the interest rate increases or decreases over the life of the loan based on market conditions, resulting in possible changes in monthly payments. Some plans have rate caps that limit the amount your interest rate may change. This loan, which has many variations, generally carries a lower initial rate than a fixed-rate loan because the borrower assumes the risk of the rising or falling market.
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.
A payment plan which enables the borrower to reduce his or her debt gradually through monthly payments of principal.
Annual percentage rate (APR)
The cost of your loan, expressed as an annual percentage. Lenders are required by law to provide you with the APR calculation. The lender must calculate all the financing charges paid by the borrower, including the interest paid on the loan, the loan origination fee and mortgage insurance you may be required to pay.
An expert judgment or estimate of the quality or value of real estate as of a given date.
Binder or "offer to purchase"
A preliminary agreement to buy real estate that is secured by the payment of earnest money. A binder secures the right to purchase real estate upon agreed terms for a limited period of time. If the buyer changes his or her mind or is unable to purchase, the earnest money is forfeited unless the binder expressly provides that it is to be refunded.
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 offered 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 to a homeowner under a certificate of title is not as great as that offered in a title insurance policy.
The expenses that buyers and sellers normally incur while transferring the ownership of a piece of real estate. These costs are in addition to price of the property and are prepaid on the closing day. This is a typical list:
- Documentary stamps on notes
- Recording deed and mortgage
- Escrow fees
- Attorney's fee
- Title insurance
- Appraisal and inspection
- Survey charge
- Cost of abstract
- Documentary stamps on deed
- Real estate commission
- Recording mortgage
- Survey charge
- Escrow fees
- Attorney's fee
The agreement of sale negotiated previously between the buyer and the seller may state in writing who will pay each cost.
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 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.
Money paid to a real estate agent or broker by the seller as compensation for finding a buyer and completing the sale. Usually it's a percentage of the sale price: six to seven percent on houses, 10 percent on land.
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.)
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 (seller) and the grantee (buyer).
Failure to make mortgage payments as set forth in the mortgage or deed of trust. It is the responsibility of the buyer--the mortgager-to remember the due date and send the payment prior to the due date, not after. Generally, if the payment is not received by thirty days after the due date, 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 failure to observe other conditions in the mortgage or deed of trust.
Decline in the value of a house due to wear and tear, adverse changes in the neighborhood or any other reason.
A state tax, in the forms of stamps, required on deeds and mortgages when a real estate title passes from one owner to another. The amount of stamps required varies with each state.
The amount of money the purchaser pays 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 or she should insert a clause in the agreement of sale specifying the conditions under which the deposit will be refunded. 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.
The deposit money given to the seller or his agent by the potential buyer upon the signing of the offer to purchase to show that he or she 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.
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.
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.
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 to purchase with the encumbrance, or to find a way to remove it.
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 percent equity in the property.
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 borrower 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.
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 (borrower) of possession.
General warranty deed
A deed which 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.
Protects against damages caused to property by fire, windstorms and other common hazards.
U.S. Department of Housing and Urban Development. The Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes.
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.
A title free and clear of objectionable liens, clouds or other title defects. A marketable title enables an owner to sell his or her property freely to others and allows others to accept without objection.
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.
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.
A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of 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 borrower personally responsible for repayment.
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 what would raise the balance to the original loan figure.
A map or chart, drawn by a surveyor, of a lot, subdivision or community; it shows boundary lines, buildings, improvements on the land and easements.
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 the 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 the buyer or seller or split between them.
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.
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.
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.
A guarantee the interest rate will remain the same for a specified period of time. Whether the loan's interest rate index rises or falls during that period, the borrower pays the rate which was current at the time of the lock-in agreement.
The process of the same person paying off one loan with the proceeds from another loan.
A special tax imposed on property, individual lots, or all property in the immediate area, for road construction, sidewalks, sewers, street lights, etc.
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.
Protects lenders or homeowners against loss of their interest in property due to legal defects in the title. Title insurance may be issued to a "mortgagee's title policy." Insurance benefits will be paid only to the "name insured" in the title policy, so it is important that an owner purchase an "owner's title policy," if he or she 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 the title.
Seller keeps original mortgage. Buyer makes payments to seller, who forwards a portion to the lender holding the original mortgage.
Adapted from material published by the U.S. Department of Housing and Urban Development and Windermere Real Estate.
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