Acceleration Clause – A part of a loan agreement that allows the lender to demand payment in full immediately if certain things happen (such as borrower default).
- Example: If a borrower has an acceleration clause in his or her loan documents, they may be called upon to pay the balance in full if they miss a payment. This is a clause that is beneficial to the lender, it gives them added protection.
Adjustable-Rate Mortgage (ARM) – A mortgage loan that has an interest rate that moves with the market. The rate on this type of loan is tied to an index, typically, US Treasuries or LIBOR.
- Example: A borrower may use an adjustable rate mortgage to keep their monthly payment lower in the short term. A mortgage rate is determined by a spread plus an index. The spread is the lenders “profit”. In an adjustable rate mortgage, the lender has protection against future interest rate increase because the rate of the mortgage floats with the rate of the index. Therefore, the lenders spread does not need to be as high as it would on a fixed rate mortgage.
Amortization – To gradually pay down the principle balance of a loan over time.
- Example: A lender can lend money in different ways. If a borrower does not want to have to pay the loan back as one lump sum, the loan amount will be amortized over the length of the loan. This means that each month part of the monthly payment will go towards paying back the loan amount. The other part will be interest.
Amortization Schedule – A table or schedule that details the payments on an amortizing loan. This shows the total monthly payment, the portion of the payment for interest, the portion of the payment for principle, beginning balance and ending balance.
- Example: If a borrower wanted to know exactly how much principal (loan balance) he is paying down each month, he would refer to an amortization table.
Annual Percentage Rate (APR) – The actual cost of borrowing as a percentage rate. The calculation accounts for all finance charges and interest payments made and is expressed as an annual or yearly rate.
- Example: Interest rates are quoted to the public using annual percentage rates. An annual percentage rate factors in all loan costs, so they can be compared between different lenders and loan products.
Appraisal – A statement of a property’s value by a licensed appraiser. It must also contain the reason for the value and how it was arrived at.
- Example: To determine a value for a certain reason, such as for taxes or for sale, an appraisal can be ordered from a licensed appraiser. The appraisal is done and valued for a specific reason at a specific time.
Appraised Value – The value of a property as stated by a licensed appraiser.
- Example: An appraised value is the end result of an appraisal. An appraised value is a value for a specific purpose at a specific time.
Appraiser – A licensed, trained professional who is qualified to provide appraised values of properties.
- Example: An appraiser is licensed by the state to evaluate properties. Appraisers follow specific protocol outlined by the office of real estate appraisers to come up with a fair value for the specified purpose.
Appreciation – An positive change in value of a property over time, due to normal market functions.
- Example: Speculative real estate buyers buy for appreciation. Appreciation is the gain in value over time due to general market forces.
Assessed Value – The value placed on a property by the local tax assessor for tax reasons.
- Example: The local tax office uses the assessed value, as determined by a local assessor, to determine the amount of property taxes are owed on a property.
Assessor – An person who works for the local government office to provide the taxable value of properties.
- Example: The assessor is the person who works for the government tax office who values your property.
Asset – Any item of value owned by a person or entity.
- Example: Assets are anything of transferable value. Assets can be anything from money, to real estate, to art and much more.
Assignment – When transfer of a loan to another person or entity. This must be allowed by the lender in the loan documents.
- Example: If permitted by the lender, a borrower may transfer a loan to another borrower through an assignment.
Assumable Mortgage – A mortgage loan that can me taken over by another person or entity.
- Example: An assumable mortgage is one that can be transferred through assignment from the original borrower to a different borrower. The lender must always approve of this.
Assumption – When a new borrower takes over a loan from a previous borrower. This must be allowed by the lender in the loan documents.
- Example: When a different borrower takes over a loan from the original borrower the process is called assumption.
Balloon Mortgage – A type of mortgage loan that is not completely amortized over the term of the loan; the balance of which is made in one final payment called a balloon payment.
- Example: Buyers who anticipate real estate values to rise can bet on this using a balloon mortgage. They keep their payments low because the loan is not fully amortizing, but then they have to pay the large lump balance back at the end of the loan. If property values fell drastically, they may own the lender a substantial amount of money.
Balloon Payment – The large payment at the end of a balloon mortgage; its the entirety of the remaining balance of the loan.
- Example: If your loan does not fully amortize, when the loan term ends, you must pay back the full balance owed in the form of one final, large balloon payment.
Bankruptcy – A legal action filed by a person or entity to restructure or alleviate debts.
- Example: In recent years many people have come to a point in their lives where their liabilities (what they owe) outweigh their assets (what they own). To get relief from some of their debts people can file bankruptcy, however, this has a huge negative impact on their credit and can affect their ability to borrow money for many years to come.
Biweekly Mortgage – A type of mortgage that requires payments be made every two weeks, rather than once per month.
- Example: In order to make more frequent, smaller payments a borrower can use a biweekly mortgage and make payments every two weeks, rather than one time per month.
Bond Market – A forum for the buying and selling of government and corporate bonds.
- Example: When a borrower gets a mortgage loan the rate is typically calculated by adding a spread to a US Treasury bond that is traded on the bond market. Therefore when rates in the bond market go up, so will mortgage rates.
Bridge Loan – A short term loan that is designed to allow homeowners to purchase new homes with the equity in a home for sale but prior to its sale.
- Example: If an owner of a home purchases a new home before selling their property and does not have a home sale contingency in the purchase agreement of the new home, they may need to try to get a bridge loan to bridge the gap until they have the funds from their original home.
Broker – A licensed person who acts as an agent for one or both parties in a transaction for a fee.
- Example: When purchasing real estate, inexperienced buyers should always work with an experienced real estate broker who can make the transaction easier and more profitable to the buyer.
Buydown – Paying upfront fees to a lender in exchange for a lower interest rate on a loan.
- Example: If a buyer wants to get a lower interest rate on their loan they can do a buydown where they pay an upfront fee to compensate the lender for the lower interest rate.
Capitalization Rate – A ratio of net operating income to the value of an asset. For real estate investment, it is used as a valuation tool as a required return. Also called “cap rate”.
- Example: Investors determine their required capitalization rate and apply it to the expected net operating income of an investment property to determine what it is worth. If an investor is seeking to buy an investment at a cap rate of 8% and the expected annual net operating income is $100,000, the investor values the property at $1,250,000 ($100,000 ÷ 8% = $1,250,000).
Cash-out Refinance – A refinance of a loan that is larger than the current loan balance.
- Example: If a homeowner wants to take advantage of lower interest rates and use some of the equity in their home, they can get a cash-out refinance. The new loan will be for a greater amount than the current loan, therefore more than paying off the existing loan; giving the rest of the cash to the homeowner.
Certificate of Eligibility – To get a VA loan, the veteran must first obtain one of these documents from the Veterans Administration that proves the veteran is eligible fr a VA loan.
- Example: If you are a veteran and want to purchase a home using a VA loan, the first step should be to get a certificate of eligibility which will show that you are qualified to purchase a home using a VA loan.
Certificate of Reasonable Value (CRV) – The document issued by the Veterans Administration that establishes their benchmark value of a property being purchased using a VA loan.
- Example: When purchasing a home using a VA loan the price must be less than or equal to the certificate of reasonable value issued by the Veterans Administration. If the price exceeds that value, the buyer must cover the cash difference.
Chain of Title – An analysis of the transfers of title to a piece of property over the years.
- Example: When purchasing a property, a buyer should always check the chain of title to make sure the seller is who they say they are and that there are no unidentified liens against the property.
Clear Title – A title that has no liens or pending litigation against it.
- Example: In order to purchase a property it needs to have a clear title or it cannot be transferred.
Closing – The end of a real estate transaction, when the property legally changes hands and the new owner is recorded on title.
- Example: After the closing the new owner or the new owners agent will make arrangements to collect the keys as there is now a new legal owner.
Closing Costs – Costs that are paid at the closing of a real estate transaction. These are things such as prorated taxes, insurance and dues, commissions, recording fees, title insurance, mortgage fees, escrow fees, inspection fees, etc.
- Example: When purchasing a home make sure you are prepared to pay the down payment and closing costs, which can be approximately 3% of the purchase price.
Closing Statement – The document issued at the end of a real estate closing that itemizes the funds in a transaction. It breaks out price, loan amount, down payment, credits, prorations, commissions, closing costs and then shows how much is owed by the buyer and what is owed to the seller. It is also called a “HUD-1 Settlement Statement” because the form is issued by the Department of Housing and Urban Development (HUD). It can also be referred to as a “closing statement” or “settlement statement.”
- Example: After the closing of a home the buyer and seller can review their closing statements to see an itemized breakdown of where every penny in the transaction went.
Cloud on Title – An encumbrance on title of any type that hinders the sale of a property. These can be pending litigation against the property or previous owner or monetary liens.
- Example: When purchasing a property you will have to make sure there are no clouds on title that will have to be resolved or paid before the transaction can close.
Collateral – An item of value put up by a borrower that is used as security for a loan. In a mortgage, the home is the collateral for the loan.
- Example: A lender requires a borrower to put up collateral to protect themselves if the borrower does not repay the loan. In a mortgage, the home serves as collateral and will be taken back by the lender if the borrower defaults.
Commission – A fee earned by a broker, agent, facilitator or salesperson for facilitating a transaction.
- Example: Real estate brokers are paid by commissions they earn when transactions close.
Common Area Assessments – These are fees charged to homeowners who live in common interest developments such as Condominiums, Planned Unit Developments and Master Planned Communities; it is used to maintain and operate the common areas. They are also called “property owners assessments,” “condo owners assessments” or “homeowners assessments.”
- Example: If you live in a condominium development with common area facilities, you will have to pay monthly common area assessments to pay for the maintenance of those areas.
Common Areas – The portions of property that are owned as undivided common interests. These are the parts of condominiums, master plans or planned unit developments that all owners have the right to use and enjoy. They are paid for by all the property owners and maintained by the association.
- Example: One of the biggest draws of living in a condominium are the common areas that are a part of it. These amenities add to the lifestyle of living in a condo while you enjoy the pools, fitness centers and tennis courts.
Community Property – In California, this is property that is owned jointly by a married couple, they each have equal ownership.
- Example: When a husband and wife purchase a property in California it becomes community property and they equally own it, no matter who actually paid for it.
Comparable Sales – These are recent sales of homes that are similar and located in the same area that act towards setting a benchmark value for other similar homes. Also referred to as “comps”.
- Example: When you are buying or selling a property, ask your broker to show you the “comps” or comparable sales so you can see what other similar properties in the area are selling for.
Condemnation – The process the government goes through to take a property without the consent of the owner for public use, through the power of eminent domain.
- Example: – Sometimes governments expand highways or build new utility services in town as cities grow. As a result, they must acquire the land to do so. They use the power of eminent domain to forcibly buy any land they need for public use at fair market value. This process is called condemnation.
Condominium – A type of ownership in real property where owners exclusively own an individual unit space and then also have a common undivided interest in common area amenities.
- Example: A home buyer who wants to enjoy the benefits of amenities such as pool, fitness, tennis and not have to maintain a yard may opt to buy a condominium with the desired amenities.
Construction Loan – A short-term type of loan used to finance construction. These loans are typically repaid using the proceeds from the sale of homes that were constructed. In these loans, the lender makes the payments to the contractor and the developer starts making interest payments to the lender.
- Example: When developers build large developments they typically finance them with construction loans that are quickly repaid using sale proceeds from the home sales.
Contingency – A thing or condition that must occur before a contract becomes legally binding. In real estate contingencies protect buyers and sellers against loans, inspections, appraisals, etc.
- Example: If you are purchasing a home using a loan, you should add a loan contingency to your offer, so if you do not get your loan you can cancel the contract and get your deposit back.
Contract – An agreement, in writing or oral, between two or more parties that specifies the duties of each party.
- Example: If you sell your home you need to do so using a contract to protect yourself and the buyer.
Conventional Mortgage – Loans that conform to secondary loan markets (those purchased by Fannie Mae and Freddie Mac) but are not guaranteed by government entities.
- Example: When loan specifics do not conform to loans that are backed by government entities but do conform to specific secondary market regulations, they are conventional mortgages.
Convertible ARM – A mortgage that starts out as an adjustable rate mortgage but allows the borrower to convert it to a fixed rate loan for a specified period of time.
- Example: A borrower who wants to take advantage of lower initial payments but still have the long term protection of a fixed rate loan can use a convertible ARM.
Cooperative (co-op) – A type of multiple ownership in which the owners own stock in a corporation that gives them the right to occupy their specific share of the development. It is an alternative to a condominium.
- Example: In areas where cost of living is high cooperatives are sometimes used instead of condominiums because it keeps costs down; bills are paid by sending the shareholders their bill for their portion.
Credit Repository – An organization that collects, records, analyzes and reports on the credit histories of people and entities. Also known as credit bureaus.
- Example: Everyone should know their own credit report, so check with the major credit repositories to check up on your report.
Creditor – A person who has a monetary claim.
- Example: In a mortgage situation, the lender is the creditor.
Credit Report – A third party report that details a borrower’s credit history and rates his or her credit worthiness.
- Example: When applying to for a loan, bring a copy of your credit report, as it will be required by your lender.
Debt – An amount owed to some other person or entity.
- Example: In a mortgage, the balance owed is the debt.
Deed – A document that gets recorded in county records that conveys ownership from one person or entity to another.
- Example: When purchasing a property, the seller will transfer ownership to you using a deed.
Deed of Trust – A document that transfers ownership in property from a borrower to a trustee who retains ownership until the loan is repaid to the lender.
- Example: If you took a loan to purchase property in California, you most likely did it using a deed of trust not a mortgage as the typical nomenclature would indicate.
Deed-in-Lieu – A process whereby a property owner returns ownership and possession of a property to the lender instead of going through foreclosure proceedings. This process avoids foreclosure. Recently, many developers who have fallen delinquent on large commercial loans have gone with a deed-in-lieu to prevent the bank from taking the time and money to foreclose in exchange for being released from a personal guarantee.
- Example: In recent years, many homeowners and development owners have avoided the foreclosure process with their lenders by opting for a deed-in-lieu.
Default – When a borrower fails to uphold their responsibilities under loan documents. Most of the time this is missing or being late on a mortgage payment.
- Example: When the economy collapsed and homeowners lost their jobs, many of them had no choice but to default on their mortgages.
Delinquency – Being late or missing a payment.
- Example: The borrower who could not keep up with his mortgage payments stopped paying and threw his mortgage into delinquency.
Deposit – The amount of money paid upfront as a down payment on a larger future some. This is sometimes called an “earnest money deposit” and is given to a seller to demonstrate a buyers intention to purchase a property.
- Example: When a buyer breaches a purchase agreement by not going through with a transaction, the seller will keep the buyers deposit.
Depreciation – A decrease in the value of something due to natural market forces and use. It is the opposite of appreciation.
- Example: Starting in 2005 prices started to depreciate to the point where they got so low that people no longer felt it was worth it to keep paying on loans that were far larger than the new value of the property.
Discount Points – Upfront fees above origination fees that are paid to a lender in exchange for a lower interest rate on a loan. One “point” is one percent.
- Example: A borrower who desires to keep their interest rate lower than normal can pay discount points upfront to the lender.
Down Payment – The cash that a buyer puts down on a property that is not financed in their loan.
- Example: Since properties can no longer be purchased using 100% financing, home buyers must come up with a down payment in addition to the proceeds from their loan.
Due-on-Sale Provision – A clause in loan documents that requires a buyer repay the loan in full upon sale of the property.
- Example: When a buyer sells his home prior to the end of his loan term, he typically must use the sale proceeds to repay the loan due to a due-on-sale provision in the loan documents.
Earnest Money Deposit – The amount of money paid upfront as a down payment on a larger future some. This is sometimes called simply a “deposit” and is given to a seller to demonstrate a buyers intention to purchase a property.
- Example: When a buyer breaches a purchase agreement by not going through with a transaction, the seller will keep the buyers earnest money deposit.
Easement – An interest that one person or entity has in the property of another owner. It is for a specific use.
- Example: If you buy a property there is always an easement that allows the utility companies access to the property to service and maintain the lines.
Effective Age – The age of a property in terms of its physical condition and level of maintenance.
- Example: A property that is well maintained will have a younger effective age than that of a property which is not properly maintained.
Eminent Domain – The power of government to force the sale of private land for the greater good public use. They must pay fair market value for the property.
- Example: As cities expand, governments expand interstates and freeways. In order to acquire the necessary land to do so, they can call upon their power of eminent domain to induce a fair market value sale.
Encroachment – Anything that extends over the property line, illegally onto another property owners property. This can be something like a roof overhang, fence, driveway or tree branch.
- Example: A neighbor may build a fence without checking the property lines and in doing so create an encroachment on your property. To fix it, if the neighbor is unreasonable, you may have to take legal action.
Encumbrance – Something that limits or affects a property owners use of their property.
- Example: When you put a mortgage on your home to purchase it you are creating an encumbrance because you now must pay off that mortgage in order to sell your home.
Equal Credit Opportunity Act (ECOA) – A federal law that made it illegal for creditors and lenders to discriminate based on religion, color, race, sex, age, martial status or national origin.
- Example: The Equal Credit Opportunity Act made it illegal to discriminate based on a multitude of reasons when lending money to borrowers.
Equity – The difference between a property’s value and the debt on the property.
- Example: One of the primary benefits of homeownership is that as you pay your mortgage you are building equity.
Errors and Omissions Insurance (E&O Insurance) – Insurance that protects a real estate broker or salesperson from mistakes, errors or omissions that may occur during a transaction.
- Example: If a real estate broker mistakenly fails to disclose that a roof is leaking and the buyer brings a suit against the broker, the broker will be protected by his errors and omissions or E&O insurance.
Escrow – During a real estate transaction escrow coordinates the transfer of the property deed and purchase money.
- Example: In order to make sure the buyer gets the deed and the seller gets the money during a real estate transaction escrow makes the exchange and records the documents.
Estate – A property owners interest in their property.
- Example: If you are a homeowner your ownership rights are an estate in the property.
Eviction – The legal process of removing inhabitants from your property.
- Example: If a tenant in your rental property stops paying rent and will not leave willingly, you may be forced to go the eviction route to get the property empty.
Exclusive Listing – A contract for a real estate broker to list a property for sale for a fixed period of time, during which they will have the exclusive right to sell the property.
- Example: Most listing brokers work with exclusive listings because it makes the process more organized to have all offers going through one broker only.
Executor – The person who is responsible for administering the terms of a deceased’s will. The feminine of the word is Executrix.
- Example: After the death of a person, the executor of the deceased’s will facilitates the distribution of the estate.
Fair Credit Reporting Act – A law enacted to protect consumers and regulates consumer credit reporting by reporting agencies and establishes procedures to correct mistakes.
- Example: The Fair Credit Reporting Act makes the storage, dissemination and reporting of credit more fair for all people.
Fair Market Value – The price that a property should sell it given normal market conditions, with ready, willing and able buyer and seller, when neither party is compelled to act.
- Example: When you get a loan to purchase real estate the lender will get an appraisal to determine the fair market value of the property and they will use that for the basis of the amount of the loan.
Fannie Mae (FNMA) – The Federal National Mortgage Association (FNMA or Fannie Mae) is a government chartered, publicly traded company that purchases home loans on the secondary market, and in doing so funds more home loans.
- Example: Fannie Mae is one of the primary reasons most home buyers are able to get loans to purchase real estate. When lenders lend you money to purchase a home, they turn around and sell them home to companies like Fannie Mae on the secondary market.
Fannie Mae’s Community Home Buyer’s Program – A program under which mortgage insurers and Fannie Mae offer more flexible underwriting rules to make it possible for more low to moderate income families to purchase homes.
- Example: The Fannie Mae Community Home Buyer’s Program was designed to help people purchase homes, they want to help so much, they even require the borrowers to take classes on homeownership.
Federal Housing Administration (FHA) – A part of the US Department of Housing and Urban Development that insures certain home loans and establishes the guidelines for approving those loans.
- Example: The Federal Housing Administration makes it possible for many low to moderate income families to get home loans by insuring their loans.
Fee Simple Estate – An unlimited and perpetual form of ownership in property.
- Example: When you own a fee simple estate you own it for your entire life and can will it to your heirs.
FHA Mortgage – A home loan that is insured by the FHA or Federal Housing Administration. Also called a government loan.
- Example: FHA Mortgages are those that can be given to buyers with lower credit than would typically be accepted by a lender because the FHA insures the loan.
Firm Commitment – When a lender agrees and commits to loan money to a borrower to purchase a specific property.
- Example: When purchasing real estate its important to get a pre approval and firm commitment from your lender so you can demonstrate your ability to close to the seller.
First Mortgage – The first loan as per the recording dates of the liens. Also called the senior mortgage.
- Example: When a property is foreclosed and sold at auction the first loan to be paid back with the proceeds is the First Mortgage.
Fixed-Rate Mortgage – A loan where the interest rate is fixed for the duration of the loan.
- Example: When interest rates are low buyers take advantage of the low rates by locking into long term fixed-rate mortgages.
Fixture – When personal property is permanently attached to real property it becomes a fixture and is considered real property.
- Example: When you install chandeliers or other light fixtures in your home you need to be careful when selling the property as to what goes with it, because those chandeliers will be looked at as fixtures.
Flood Insurance – Insurance purchased to compensate the damaged property owner in the event of a flood.
- Example: If your home is downgrade in your neighborhood and you live in an area that is subject to sudden down pours, you should get flood insurance to protect your home and personal property.
Foreclosure – The process by which a lender takes ownership of a property where the borrower is delinquent on their loan payments.
- Example: If you fall behind on your mortgage the lender will initiate a foreclosure to take the property back and sell it to recoup their loan.
Government National Mortgage Association (Ginnie Mae) – One of the big players on the secondary loan market, functions like Fannie Mae and Freddie Mac; purchases mortgages on the secondary market, providing funds for the primary mortgage market. The difference between Ginnie Mae and Freddie/Fannie is that Ginnie Mae is wholly owned by the US Government.
- Example: The secondary mortgage market is made up of corporations who securitize, buy and sell mortgages. In addition to the widely known Freddie Mac and Fannie Mae, another one of the big players in the secondary mortgage market is Ginnie Mae or the Government National Mortgage Association.
Grantee – The person or party on the receiving side.
- Example: The grantee is the buyer in a real estate transaction.
Grantor – The person or party who is transferring.
- Example: The grantor is the seller in a real estate transaction.
Hazard Insurance – Insurance that covers a property owner for damage caused by fire, wind, vandalism, or other hazards.
- Example: If you own your home you should purchase hazard insurance to protect your home and property from damage due to various hazards.
Home Equity Conversion Mortgage (HECM) – Typically called a reverse mortgage, the lender makes payments to the homeowner and then is repaid when the home is sold because the homeowner no longer occupies the property.
- Example: Some senior citizens use a home equity conversion mortgage to retire if they own their home.
Home Equity Line of Credit – A loan against the equity in a borrowers home.
- Example: A home owner can use a home equity line of credit to borrow money against the value of their home.
Home Inspection – A detailed inspection of a home by a professional property inspector.
- Example: When purchasing a home, make sure to get a home inspection to make sure there are no hidden defects in the home.
Homeowners’ Association – A not for profit organization that manages, maintains and operates the common areas of a community.
- Example: If you purchase a home in a condominium development be sure to check on the homeowners association which would govern your property.
Homeowner’s Warranty – A warranty that covers the appliances and systems of a home, this is purchased by the homeowner and can be for a variety of different lengths and cover a variety of different items.
- Example: When you purchase a home, it may be a good idea to also purchase a homeowners warranty in case the appliances or systems break down.
Joint Tenancy – A way to take title to a property where both owners own it together, there is no division of ownership. However, when one owner dies, the surviving owner becomes the full owner. It cannot be willed.
- Example: Married couples typically hold property using joint tenancy so that if one spouse dies it automatically goes to the surviving spouse.
Judgment – Any decision made by a court of law.
- Example: When a lender forecloses on a borrower, they can also go to court to seek a judgment for any loan amount that cannot be recouped through a foreclosure sale.
Jumbo Loan – A loan that is larger than the limit as set by Fannie Mae and Freddie Mac; can therefore not be sold on the secondary market. Here is a link where you can find up to date loan limits in California by county, these change.
- Example: If you purchase a home and need a loan that is too large to conform with Fannie Mae and Freddie Mac’s loan requirements you must get a jumbo loan, which in Southern California is between the low $400s and low $600s depending on county.
Lease – A verbal or written agreement between a landlord and a tenant that specifies a payment agreement for possession of a piece of property.
- Example: In the State of California, if you have a lease to rent a property from a landlord for more than one year it must be in writing.
Lease Option – A different form of financing where a lease is entered into and the tenant has the option to purchase the home at the end of the lease. Extra rent may be paid to have it applied to the down payment.
- Example: If there is a willing seller, sometimes a buyer can use a lease option to purchase a property if they are low on cash. They will pay a little more rent each month, which will be applied to the down payment.
Leasehold Estate – A way of possessing property for a long period of time under the terms of an agreement whereby the possessing party does not actually own the property but rather owns the rights to possess the property for a period of time.
- Example: Sometimes people buy properties with 99 year ground leases, these are leasehold estates. The owner can do whatever they want, so long as it does not violate the terms of the lease, for 99 years, but then the property reverts back to the party who leased it.
Legal Description – The description of a property used in county records and title reports which are the written words that describe the property. Typically this is the lot and block system.
- Example: The legal description will appear in the title report to ensure there is no confusion about the property being sold.
Lien – A claim against a property that is financial in nature. It must be paid before the property can be sold.
- Example: A mortgage is a lien.
Liabilities – Obligations of a financial nature. Amounts owed to another person or party.
- Example: Amounts you owe are liabilities, such as mortgages and car loans.
Line of Credit – An agreement by a financial institution or bank to offer a certain amount of credit to a person or entity.
- Example: To make purchasing quick and easy most people use a line of credit, such as a credit card, for everyday purchases.
Loan Officer – The representative of a financial institution or bank who works with borrower to issue loans.
- Example: A good loan officer can fund a mortgage in a quick, easy manner and make the transaction better for all parties; choose wisely.
Loan Origination – Obtaining and issuing new loans.
- Example: The beginning of the mortgage process is with the loan origination team who issues new loans.
Loan Servicing – The process of handling a loan from its issuance through the end of the term. This consists of collecting payments, sending notices, and foreclosures. Most often, this function is not done by the same company who lent you the money.
- Example: One of the big businesses that has boomed in recent years is loan servicing because that is the function of seeing a loan through the end of the term. Loan servicers collect monthly payments, and initiate foreclosure proceedings.
Loan-to-Value (LTV) – The ratio of loan amount to value of property a lender is willing to lend.
- Example: When you purchase your home, you need to be careful about the price you pay because your lender will not lend you the full purchase price to get the home. They will lend you only a portion of the value of the home as determined by a loan-to-value ratio. If a property worth $100,000 on an appraisal, which sold for a $125,000 purchase price and the lender will fund an 80% loan-to-value means they will lend $80,000 and the buyer must pay the other $45,000.
Margin – The spread between a rate on a loan and the index it is tied to. As the index moves, the rate moves, while maintaining a constant spread for the lender.
- Example: If you have a good relationship with a bank they may be willing to take a smaller margin on a loan with you which will save you money.
Maturity – The date when a loan becomes due in full.
- Example: The loan is due at the maturity date.
Modification – When a lender agrees to change the terms of your loan.
- Example: Lately, many people have been trying to get loan modifications to reduce their loan payments.
Mortgage – A document that offers a property as collateral for a loan.
- Example: If you are seeking to purchase a property but do not have enough money to do so you can use a mortgage to finance part of the price.
Mortgage Banker – A banker who originates and funds their own loans.
- Example: If you are seeking a loan for a home and do not have a good relationship with a bank you can try to work with a mortgage banker who can originate, fund and service the loan for you.
Mortgage Broker – A company or person who represents lending institutions and banks in facilitating the lending of home loans.
Example: If you need help with a loan a mortgage broker can shop several different loans for you.
Mortgage Insurance (MI) – Insurance that protects the lender in the event of a borrower default.
- Example: If you get a high loan-to-value loan you will probably have to pay mortgage insurance to provide additional security to the lender.
Mortgagee – The person or party who lends money for a mortgage.
- Example: The lender is the mortgagee.
Mortgagor – The person or party who borrows money in a mortgage.
- Example: The borrower is the mortgagor.
Multidwelling Units – A property that has more than one unit on the same lot.
- Example: As a real estate investment, multidwelling units work well because you can rent out several units in the same property.
Negative Amortization – Some adjustable loans only require a borrower to pay a monthly minimum payment, even if the interest rate rises. If the rate rates and the borrower pays only the minimum payment, they did not pay the full interest amount owed to the lender. The difference is added to the balance of the loan, causing the loan balance to increase, rather than decrease.
- Example: If a borrower fails to pay the full interest amount and principal amount in a monthly payment, the difference is added back onto the balance of the loan. The result is a higher balance and shows how negative amortization has an adverse affect on a borrower.
No Cash-Out Refinance – A refinance loan where the borrower does not pull out any equity. The new loan and original loan have the same balance.
- Example: The opposite of a cash out refinance. In a no cash-out refinance the borrower refinances their original loan but pulls no equity out. The new loan and old loan have the same balance.
No-Cost Loan – A loan with no costs or fees charged directly by the lender. In some situations there are still other fees such as recording fees, but none of them are directly charged by the lender.
- Example: If you do not have extra cash, you should consider a no-cost loan where you would have to pay no costs or fees to the lender.
Non-Performing Loan – A mortgage loan that is delinquent.
- Example: Investors are purchasing non-performing loans from banks as a way to acquire properties. They purchase the non-performing loans at a discount from the lender, then foreclose on the borrower to take ownership of the property.
Note – A document that sets forth the terms, interest rate, loan amount, payment terms, etc, of a loan and obliges the borrower to repay it.
- Example: In order to purchase a home, many buyers have to borrower money and must therefore sign a note stating the terms of the loan.
Note Rate – The interest rate being charged on a loan and stated in the note.
- Example: The interest rate charged on a loan is also referred to as a note rate.
Notice of Default – A written notice from a lender to a borrower that a default has taken place. It is the first step in the foreclosure process and notifies the borrower that further legal action may be taken.
- Example: The first step in the foreclosure process is for the lender to file a notice of default, notifying the borrower of the missed payment and that the foreclosure process is beginning.
Origination Fee – Fees charged up front by lenders to originate loans.
- Example: In order to generate income and cover the costs of doing a loan, lenders charge origination feesto borrowers that are paid in order to fund loans.
Original Principal Balance – The original amount borrowed.
- Example: The original principal balance is the original amount borrowed.
Owner Financing – A type of financing where the seller takes a note from the buyer and finances the sale on their own with no outside lender.
- Example: If a buyer is unable to qualify for normal financing through a lender, a seller can still sell them the home using owner financing and start collecting payments from the buyer.
Partial Payment – A payment that is less than the required monthly minimum payment. Most lenders will not accept partial payments.
- Example: If you do not have enough funds to cover the minimum monthly payment on your loan you can try to arrange a partial payment if the lender will allow it.
Personal Property – Any property that can be moved freely and readily that is not real property.
- Example: Your car, clothes, and computers are all examples of personal property.
P.I.T.I. – An acronym for principal, interest, taxes and insurance. These are the components a lender uses when calculating a housing expense ratio.
- Example: The basic components of a housing payment are P.I.T.I., principle, interest, taxes and insurance.
P.I.T.I. Reserves – Cash reserves that a buyer is required to have on hand after their down payment is made. These are funds to protect a lender against default and are a set number of months of housing payments.
- Example: Some types of higher leverage loans require a borrower to have a set number of months of housing payments saved away called, P.I.T.T. reserves, which give extra protection to the lender that the borrower will make the payments.
Planned Unit Development (PUD) – An ownership type where owners own their individual unit or home but jointly own the common areas together with the rest of the owners.
- Example: A planned unit development is very much like a condo. Individuals own their units but then own the common areas together with the rest of the owners of the community.
Point – 1 percent of the loan balance.
- Example: A lender may charge additional points up front in exchange for a lower long term interest rate.
Power of Attorney – A document that grants authority for someone to act on someone else’s behalf. This can be complete power or just for a limited situation(s).
- Example: When buyers have good working relationships with their agents, sometimes they give power of attorney so they can sign documents on their behalf.
Pre-Approval – A preliminary approval for a lender to loan money to a borrower. This generally means a borrower has provided full income and expense verification and has been approved for a loan. A pre-approval is always based on property approval and several other conditions such as an appraisal.
- Example: The first thing you should do when starting a home search is to get a pre-approval from a lender so the sellers will know you can get a loan to purchase the home.
Prepayment Penalty – A fee charged to a borrower for paying off a loan early.
- Example: Due to the way mortgages are sold to investors as a stream of cash flow, there are some mortgages that come with prepayment penalties to protect the investment.
Pre-Qualification – A lenders written opinion that a borrower will qualify for a loan. This is usually based on the borrower answering questions and they are not verified by the lender. This is not as good as a pre-approval and will come with many other conditions and verifications before an approval can be obtained.
- Example: At a minimum, when purchasing a home, you should get a pre-qualification with a lender, although a pre-approval is more desirable.
Prime Rate – The interest rate applied to the best qualified, preferred borrowers.
- Example: If you have good credit and qualify properly, you can get the prime rate from your lender on your loan.
Principal – The amount of unpaid or remaining loan balance.
- Example: The amount you still owe on your loan is the principal balance.
Private Mortgage Insurance (MI) – Insurance that provides coverage to the lender in the event of a borrower default.
- Example: If you get an FHA or other high leverage loan, you may be required to get private mortgage insurance to protect the lender in the event of default.
Promissory Note – A document stating the terms of a loan and the borrowers promise to repay it.
- Example: A borrower is required to sign a promissory note in order to document the loan and the buyers promise to repay it.
Public Auction – An auction style sale of a bank owned, foreclosed or distressed home that is open to the public.
- Example: Since the housing collapse, many buyers have been buying homes from banks at public auction to get a great deal.
Purchase Agreement – A written agreement to purchase a property that is signed by the buyer and seller and outlines the terms of the sale.
- Example: When writing up an offer use the standard C.A.R. purchase agreement as this is the approved form that most brokers and sellers use.
Purchase Money Transaction – The acquisition or disposition of a property using money or other funds.
- Example: Transactions that are no refinances and are actually to acquire or dispose of a property are purchase money transactions.
Qualifying Ratios – Ratios of a borrowers expenses to income; they must hit a certain level to qualify for a loan. The primary ratios are housing expenses to income and total expenses to income.
- Example: Borrowers must qualify not only on a gross income basis but also through several qualifying ratios as well in order to provide the lender with the comfort they need to feel confident that the borrower will repay the loan.
Quitclaim Deed – A deed that transfers ownership interest, without warranty, from one person or entity to another.
- Example: When a parent wants to give a property to a child they often do so using a quitclaim deed.
Rate Lock – An agreement from a lender to hold a specified interest rate for a borrower for a specified period of time for a fee.
- Example: Managing an escrow is very important, if the borrower is getting a loan, too many delays could cause the rate lock to expire and therefore the loan process would be started over.
Real Estate Agent – A licensed professional who is authorized to represent a principal in a transaction.
- Example: Working with a real estate agent who is experienced can make transactions run much smoother for you, they know all the red flags to look for and can put out fires before they start.
Real Estate Investment Trust (REIT) – A corporate entity that exists for the sole purpose of investing in real estate.
- Example: REIT’s or Real Estate Investment Trusts can be privately or publicly held companies and they must distribute 90% of their taxable income to their investors. Therefore they are popular investment vehicles for investors who want to invest in real estate.
Real Estate Owned (REO) – Following an unsuccessful foreclosure sale, a property is returned back to the lender and it becomes real estate owned.
- Example: During the housing collapse, many homes went to foreclosure sale and did not sell at auction. As a result, all of these homes became real estate owned or REO.
Real Estate Settlement Procedures Act (RESPA) – A law that protects consumers, bans illegal kickbacks or commissions and requires lenders to disclose closing costs.
- Example: The Real Estate Settlement Procedures Act (RESPA) was designed to protect consumers from unfair closing practices. Prior to RESPA some closing costs were undisclosed and several parties may have been taking commissions or fees that the buyer or seller was unaware of.
Real Property – Land and anything permanently attached to it.
- Example: The land on which your home sits and the home that is permanently attached to that land is real property.
Realtor® – A real estate broker, agent or salesperson who is a member of the National Association of Realtors.
- Example: Working with a realtor who is experienced can make transactions run much smoother for you, they know all the red flags to look for and can put out fires before they start.
Recorder – The public officer who records and keeps track of all real property transactions.
- Example: The last task of an escrow office is to send the deed to the office of the recorder to have the document recorded into public records and make the transfer official.
Recording – A permanent noting of something that affects a property’s title or ownership in government records.
- Example: A property transaction closing following the recording of the deed in county records. Once this happens, the buyer is the owner of the property.
Repayment Plan – An agreement between a creditor and debtor to repay delinquent payments on a specified schedule.
- Example: If you are going to fall behind on your mortgage, its best to call the lender ahead of time to try to wok out a repayment plan to try to prevent foreclosure actions from taking place.
Replacement Reserve Fund – A funds set aside for the long term replacement of major capital expenditure projects such as roof replacement, repaving, elevator replacement, etc.
- Example: When purchasing a home in a condo or PUD, make sure and check on the HOA’s financial standing, particularly its replacement reserve fund because if that is not properly funded, the property owners could be looking at a large special assessment in the future when large systems need to be replaced.
Refinance Transaction – A transaction where an existing loan is replaced with a new loan.
- Example: A refinance transaction is one in which the property does not change hands, rather an existing loan is paid off and a new loan is placed.
Remaining Balance – The amount of loan principal that has not yet been paid back.
- Example: When you get an amortizing loan, the remaining balance goes down slightly with each monthly payment.
Remaining Term – The amount of time left before a loan becomes due.
- Example: If a borrower has a 30 year loan with 360 equal monthly payments, once they make the 120th payment, at the end of year 10, the remaining term is 20 years or 240 months.
Rent Loss Insurance – Insurance that protects a property owner in the event a loss or casualty prevents the property from collecting rent.
- Example: Some landlords purchase rent loss insurance to protect themselves in the event something damages the property and they cannot collect rent.
Revolving Debt – A credit arrangement, that allows a borrower to borrow money against a line of credit and then repay it along with interest.
- Example: A credit card is an example of revolving debt, it can be drawn on and paid off on a revolving basis.
Right of First Refusal – An agreement that gives one party the first opportunity to purchase something should it become available for purchase.
- Example: Sometimes when a condo gets foreclosed on, the HOA has right of first refusal to purchase the home from the bank. This is to allow the HOA an opportunity to buy the home first.
Right of Ingress or Egress – The right to enter or leave a property.
- Example: If a property is completely landlocked, so that it does not have a way to access roads, the local planning office will grant a right of ingress or egress to allow the owner the right to enter and exit their property.
Right of Survivorship – In joint tenancy, this is the right of owners to acquire the rights of deceased owners.
- Example: If two buyers purchase a property together as joint tenants and one buyer dies, the remaining buyer becomes the sole owner of the property due to the right of survivorship.
Sale-Leaseback – A transaction where a seller sells a property to a buyer only to have the buyer immediately lease it back to the seller so they do not have to move out.
- Example: Sometimes, like in recession periods, sellers need to sell homes before they can vacate them. In these situations a possible solution to the problem is to do a sale-leaseback so that the new buyer can rent the home to the current buyer.
Secondary Market – The buying and selling of mortgages that are already in place. Typically, they are pooled with other similar mortgages.
- Example: Conventional and FHA mortgages are sold on the secondary market to raise funds to give out more mortgages.
Second Mortgage – A mortgage that is on top of a larger, primary mortgage. The second mortgage is junior (will be repaid after) the first mortgage.
- Example: In previous times, when buyers did not have cash on hand for a down payment, they could get a second mortgage to finance the down payment.
Secured Loan – A loan that is protected by collateral of equal or greater value.
- Example: A mortgage is a secured loan where the home acts as collateral for the loan.
Security – The item that acts as collateral for a loan.
- Example: In the case of a mortgage, the home itself is the security.
Seller Carry-Back – An type of financing where the seller takes a note from the buyer and finances it on their own.
- Example: When buyers cannot qualify for conventional financing, one alternative is for the seller to finance it for the buyer through a seller carry-back.
Servicer – An company that provides services to mortgage holders such as collecting payments, tracking balances and starting foreclosure proceedings.
- Example: Once a loan is given to a buyer, its typically sold to an investor, therefore, servicers are hired to service the loans such as collecting payments, sending out notices, tracking balances and starting foreclosure proceedings.
Servicing – The tracking of loan balances, collecting of payments and filing of notices for a mortgage.
- Example: The process of collecting payments, tracking balances and sending out notices to mortgage holders is referred to as servicing.
Setback – The minimum required distance improvements must be from a property line.
- Example: – When building a shed in your backyard be sure and check the setback requirements first. If you build too close to the property line and violate the setback you could be subject to fines or worse.
Settlement Statement – The document issued at the end of a real estate closing that itemizes the funds in a transaction. It breaks out price, loan amount, down payment, credits, prorations, commissions, closing costs and then shows how much is owed by the buyer and what is owed to the seller. It is also called a “HUD-1 Settlement Statement” because the form is issued by the Department of Housing and Urban Development (HUD). It can also be referred to as a “closing statement”.
- Example: After closing of a real estate transaction the buyer and seller are given settlement statements that show where every penny in the transaction went.
Short Sale – When a borrower is delinquent on their mortgage and the home is worth less than is owed on it, sometimes there is an opportunity to sell the home on the open market before a foreclosure. The home is sold for short of what is owed on the loan. Both borrower and lender are able to avoid the foreclosure process.
- Example: A short sale is an alternative to the foreclosure process whereby a delinquent, underwater borrower sells a home for a value short of what is owed on the loan and the lender agrees to take the net amount.
Subdivision – A housing development or neighborhood created by breaking a large tract of land into smaller individual lots.
- Example: A lot of neighborhoods are subdivisions where a builder bought a huge tract of land and broke it up into many smaller lots to build homes on.
Survey – A map or drawing that shows a property in detail; it has the property lines, improvements, easements and encroachments.
- Example: When property line disputes occur between neighbors, the best solution to the problem is to order a survey to determine exactly where the property line is.
Sweat Equity – Contribution to a property in the form of services or labor, not cash.
- Example: Value is added to properties in ways other than spending money. When laborers clean up a property using no money, its considered sweat equity.
Tenancy in Common – When two or more buyers own a property together, in a situation where it is possible to will the property to heirs.
- Example: Typically, when multiple buyers purchase property together, they purchase it using tenancy in common, so they can will it to their heirs.
Third-Party Origination – A process when a lender uses a different company to perform all or part of their origination, underwriting and funding processes.
- Example: Sometimes small shop lenders use third-party origination to speed up the process and enable them to do more loans.
Title – A document that shows the legal owners of the property throughout history.
- Example: When purchasing a home, a buyer should always check title to make sure the seller is actually the owner of the property.
Title Company – A company that insures, examines and advises on title reports and issues.
- Example: It is important to work with a good title company who can get title reports quickly and can advise on any title issues.
Title Insurance – Insurance that protects buyer or lenders against defects in a property’s title.
- Example: When purchasing a home a buyer should always purchase title insurance to protect against possible defects on title.
Title Search – Checking the title records of a property to ensure the seller is who they say they are and that there are no defects on title that would affect the transfer-ability of a property.
- Example: When purchasing a home, a buyer should always do a title search to make sure the seller is actually the owner of the property.
Transfer Tax – State, county or city taxes that are charged to transfer a property from one owner to another.
- Example: When a property is sold in LA county there is a transfer tax of $1.10 for every $1,000 of purchase price or 0.11% that is charged by the county. Some cities also charge a transfer tax on top of the county transfer tax.
Treasury Index – An index based off of US Government Treasuries that is used to set interest rates on adjustable and fixed rate mortgages.
- Example: The treasury index is an index of interest rates that are used to set mortgage interest rates.
Trustee – A fiduciary who holds the deed to a property in a deed of trust purchase loan situation. The trustee is the one who handles the foreclosure sale for the lender if needed.
- Example: In California, where most purchase loans are deeds of trust, a trustee is appointed by the lender to hold the deed and handle the foreclosure sale if necessary.
Truth-in-Lending – A federal law that requires lenders to disclose certain items on a loan. These include but are not limited to annual percentage rate, term, number of payments, etc.
- Example: All lenders must follow the truth-in-lending law when loaning money, which requires them to disclose the terms, conditions and rate on a loan.
Two-Step Mortgage – An adjustable-rate mortgage in which the interest rate is set at one level for the beginning of the loan and then it adjusts to a different rate later on.
- Example: When a buyer predicts his future income will rise, he can go after a two-step mortgage to keep his rate lower in the short term and higher in the future.
Two-to-Four-Family Property – A property that consists of two-to-four dwelling units on the same lot.
- Example: Many investors gravitate towards purchasing two-to-four-family properties so that they can live in one and rent out the others to get some positive cash flow.
Underwriting – The process a lender goes through in order to qualify a borrower and determine the risk of the loan. Also is used by investors to mean the process of valuating a property.
- Example: If you are using a loan to purchase home, once you get escrow open and an executed contract, your lender will begin the underwriting process to determine if you will indeed repay the loan.
VA Mortgage – A purchase mortgage that is insured by the Department of Veterans Affairs (VA). The buyer and property must both qualify with the VA.
- Example: Veterans of the military can sometimes qualify for a VA mortgage which allows them to purchase a property with 100% financing should the VA approve the property and the buyer.
Veterans Administration (VA) – A federal agency that insures mortgage loans to military veterans.
- Example: The Veterans Administration works with military veterans to qualify them for loans that are insured by the Veterans Administration.
Voluntary Lien – A monetary encumbrance that a homeowner willingly places on their property.
- Example: A mortgage or deed of trust is a voluntary lien.
Walk Through – A visual inspection performed by a real estate buyer; buyer walks through the home to check for needed repairs and condition.
- Example: When purchasing a home a buyer needs to schedule a walk through before they close to make sure the property is in the same condition at the close of escrow as it was at the start of it.
Zoning – Government regulations that control and regulate land use.
- Example: Always check the zoning of a property before purchasing it. Sometimes people build additional units on a property without the proper approvals. If this is a violation of the zoning when the government finds out, you could be required to tear it down on your on dollar.