REAL ESTATE GLOSSARY
Adjustable Rate Mortgage (ARM): A mortgage loan with payments usually lower than a fixed rate initially, but is subject to changes. An ARM usually starts out with a low interest rate that lasts three to five years, but the interest rate will rise significantly thereafter.
The American Land Title Association (ALTA): is a trade association representing the title insurance industry. When buying a home, A new title search and title policy are needed each time a property is sold or the loan is refinanced to determine if there are any liens or other encumbrances on the property. An ALTA Statement is provided to the buyer at settlement.
Amortization: Repayment of a mortgage loan through regular monthly installments of principal and interest. At the end of the scheduled payments (e.g., monthly payments for 15 or 30 years), you will own your home.
Annual Percentage Rate (APR): Calculated by using a standard formula, the APR is expressed as a yearly rate (e.g., 8.107% APR) and includes the interest, points (discount and origination), mortgage insurance, and other fees. The APR on a mortgage will usually be higher than the stated interest rate because the APR includes fees and the interest rate doesn’t.
Appraisal: Prepared by a qualified professional (an appraiser), it is an estimation of a property’s fair market value. A lender usually requires an appraisal before loan approval to ensure that the mortgage loan amount is not more than the value of the property. VA and FHA loans require an appraiser certified by the VA/FHA who does an additional level of inspection during the appraisal. VA/FHA appraisers inspect for “life and safety” issues that can be anything from a wobbly handrail to inoperable windows or peeling paint. These items become conditions of the loan and must be corrected prior to closing.
Automated Valuation Models (AVM): Computer programs that use data to provide real estate market analysis and estimates of value. Real estate professionals use AVMs to support their work in determining an estimated market value of a property.
Balloon mortgage: A mortgage that typically offers low rates for the first 5 to 10 years, at which point the principal balance needs to be paid in full. Borrowers usually sell the home before the balance is due, or refinance the property before the balloon payment is due.
Binder: An informal contract between a buyer and seller in purchasing real estate. It could include earnest money which would be forfeited if the buyer changes his or her mind.
Borrower: A person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
Buyer’s agent: A real estate professional representing the buyer in the purchase of real estate.
Buyer’s market: When the supply of homes on the market exceeds the demand provided by buyers in the market.
Cap: A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
Caveat emptor: From Latin, it means “buyer beware.” In other words, it is up to the buyer to investigate the property and purchase at his or her own risk.
Certificate of title: A document stating a property legally belongs to the current owner. Before the title is transferred at closing, it must be free and clear of all liens or other claims.
Closing: Also known as settlement, this is the final phase of a real estate transaction when the property is formally transferred from the seller to the buyer.
Closing costs: Customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing. These fees could include: Loan Fees, Cost of Abstract, Recording Deed and Mortgage, Documentary Stamps on Deed, Escrow Fees, Real Estate Commissions, Attorney’s Fees, Title Insurance, Survey Charge, Appraisal Fees, and Inspection Fees.
Closing Disclosure (CD): A five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs, such as closing costs.
Collateral: In real estate, property offered to secure [or offered as security for] repayment of a loan, though not with the intention of transferring property ownership.
Commission: An amount, usually a percentage of the property sales price, collected by a real estate brokerage as a fee for negotiating the transaction. It can also be a fee for other services such as showing a house, pricing a house, or advising on other real estate needs.
Comps or comparables: Comps are recently sold properties that are similar in size, location and amenities to the home for sale. Appraisers use comps to determine market value for the bank.
Comparative Market Analysis (CMA): Using comps, an analysis done to establish a home’s real estate market value.
Conditions: Provisions in the contract that some or all terms of the contract will be altered or cease to exist upon a certain event.
Conforming loans: A “conforming loan” is a loan under a certain dollar amount, set by the Federal Housing Finance Agency (FHFA). A conforming loan is under $424,100, nationally, but higher in the DC Metro area. Conforming loans are considered the industry standard, with easier terms and generally lower interest rates, appealing to many borrowers. Loans over this amount are considered jumbo loans.
Covenant: Also referred to as a “restrictive covenant,” it is an agreement, promise or obligation made in a deed that is inseparable from the property. The restrictions must be enforced by subsequent buyers of the property. Examples include: Maintaining a property in a reasonable state of repair; preserving a sight-line for a neighboring property; and not building on parts of the property.
Credit report: A detailed history of an individual’s credit worthiness. This is used by lenders to gauge a potential borrower’s ability to repay a loan.
Deed: The document that transfers ownership of a property.
Down payment: The portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan. Traditionally, it is 20% of the home’s purchase price. A qualified mortgage lender can advise on qualifying for an alternate down payment amount.
Earnest money: Money deposited by a potential buyer to show that he or she is serious about purchasing the home. Depending on the agreement, it becomes part of the down payment if the offer is accepted, or returned if the offer is rejected.
Easement: A right-of-way giving individuals other than the owner permission to use a property for a specific purpose.
Equity: The dollar amount still owed on a mortgage loan, and any liens from the fair market value of the property. Equity grows as the mortgage is paid down and the property appreciates in value.
Escalation Clause: In competing offer situations, buyers will include an escalation clause to increase their offer against competing officers, absent the buyers and their agents. Escalation clauses include a factor, a cap and a mortgage adjustment. In plain language, the escalation clause tells the listing agent and her seller that your offer will pay XX dollars more (factor, increment or escalator) than the next highest offer, up to XX dollar purchase price (or cap). There is then a provision to indicate how that additional money will be paid, either increasing the loan amount or out of pocket.
Escrow account: A neutral third-party account holding documents and money during a real-estate transfer until the sale is finalized. Also, Escrow is the bank account in which money for property taxes, homeowners insurance, and mortgage insurance is paid.
FICO: An acronym for the Fair Isaac Corporation, the company that developed the most commonly used credit scoring system. Credit reporting agencies issue FICO scores to lenders who in turn use them to calculate the risk on a loan (such as a mortgage).
Fixed-rate mortgage: A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms do not change.
Flood insurance: Covers a homeowner for property damage from natural flooding. If a home is located in an area prone to flooding, the lender will require flood insurance before approving a loan.
Foreclosure: The legal process by which a bank or lender sells or repossesses a mortgaged property because the borrower could not pay the loan.
Good faith estimate (GFE): A written estimate of all expected closing fees including pre-paid and escrow items as well as lender charges. It must be given to the borrower, by the mortgage lender, within three days after submission of a mortgage loan application. By law, brokers and lenders are required to make as accurate an estimate as possible.
Graduate, Real Estate Institute (GRI): A designation provided by the National Association of Realtors to real Estate Agents who successfully complete a rigorous educational program.
Home inspection: An examination of the structure and mechanical systems by a professional to determine a home’s safety, defects, and potential repairs.
Home warranty: Insurance offering protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner’s insurance. Coverage extends over a specific time period and does not cover the home’s structure.
Homeowner’s association dues: Monthly or annual fees owners of homes — usually condos, townhouses or co-ops — pay to their homeowner’s association for services it supplies to common areas such as lawn care, pool maintenance, snowplowing, and general building maintenance.
Homeowner’s insurance: Provides damage protection for your home and personal property from a variety of events, including fire, lightning, burglary, vandalism, storms, explosions, and more. All homeowner’s insurance policies contain personal liability coverage, which protects against lawsuits involving injuries that occur on and off your property. It is required by most lenders.
HUD: The U.S. Department of Housing and Urban Development. Established in 1965, HUD works to create a decent home and suitable living environment for all Americans by addressing housing needs, improving and developing American communities, and enforcing fair laws.
HUD-1 Statement: Also known as the “settlement sheet,” it is an itemized listing of closing costs. The closing costs can include a commission, loan fees and points, and sums set aside for escrow payments, taxes and insurance. It is signed by both the buyer and the seller. This document has largely been replaced by the Closing Disclosure, now required for all mortgaged sales. You may see the HUD-1 on a cash purchase though.
Index: A measurement used by lenders to determine changes to the interest rate charged on an adjustable rate mortgage.
Interest: A rate or fee charged for the use of borrowed money.
Interest rate: The amount of interest charged that determines a monthly loan payment. It is usually expressed as a percentage.
Jumbo Loan: Higher loan amounts not allowed for standard conforming programs (set by Fannie Mae and Freddie Mac).
Leaseback: Also referred to as “Rent Back,” when one party sells a property to a buyer and the buyer immediately leases the property back to the seller. This usually occurs when the seller has not yet completed settlement on their new home.
Lien: A legal claim against a property that must be satisfied. A lien holder has the right to sell the property to obtain the money, or to recover the money when the property is sold.
Lender: An institution, such as a bank or broker, which loans money to be repaid with interest.
Loan: Money borrowed that is usually repaid with interest.
Loan application: The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Loan-To-Value ratio (LTV): The loan amount divided by either the lesser of the sales price of a property, or its appraised value. The LTV ratio is used during the loan approval period to gauge risk: the higher the LTV ratio, the higher the interest rate, and vice versa.
Lock-in: A guarantee of an interest rate if a loan is closed within a specific time.
Market assessed value: It is the price the government tax assessor determines the property would sell for on the open market. This is based on the actual sales of similar properties.
Margin: Expressed in percentage points, the amount a lender adds to an index to determine the interest rate on an adjustable rate mortgage.
Mortgage: A loan provided for the purposes of purchasing a property.
Mortgage banker: A company that originates a mortgage loan, and collects the monthly mortgage payment form the borrower. The Mortgage Banker usually resells them to secondary mortgage lenders such as Fannie Mae or Freddie Mac.
Mortgage broker: A firm that originates and processes loans for a number of lenders.
Mortgage insurance: A policy protecting lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price. Also known as PMI (Private Mortgage Insurance).
Mortgage Insurance Premium (MIP): Also known as Private Mortgage Insurance (PMI), a monthly payment by a borrower for mortgage insurance. This protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. Mortgage insurance usually is required if the down payment is less than 20 percent of the sale price.
MLS: A service used by a group of real estate brokers. They band together to create an MLS that allows each of them to see one another’s listings of properties for sale. Under this arrangement, both the listing and selling broker benefit by consolidating and sharing information, and by sharing commissions. The MLS data provides information and photos of homes for sale to consumer-facing websites such as Zillow and realtor.com.
MRIS: The electronic real estate database used in Maryland, Virginia, Washington DC and other Mid-Atlantic States.
Negative amortization: When the payment on a loan is less than the interest that accrues on the principal. The balance of interest owed is added to the total loan.
Offer: Usually in writing, a potential buyer’s expression of willingness to purchase a home at a specific price. If the offer is accepted as written, it becomes a contract.
Origination: The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
Origination fee: The fee a lender charges for processing a loan. This includes the cost to prepare loan documents, check a borrower’s credit history, and inspect the property.
Plat: A map of a specific area of land (such as a town or subdivision) showing the boundaries of individual parcels, and usually showing parks, streets, and easements. Plats are mapped out by surveyors when land is subdivided and then filed with the county recorder’s office. Individual parcels are identified in the county records by the name of the plat, and the block number and lot number shown on the plat map.
Points: A point equals 1 percent of a mortgage. Lenders sometimes charge “origination points” to cover expenses of making a loan. Also, borrowers sometimes pay “discount points” to reduce the loan’s interest rate.
Post settlement occupancy agreement (PSOA): Also known as a “rent-back,” allows the seller to remain in the property they have sold to the buyer for a specified period of time as a renter. A PSOA is often used when the seller needs to sell the property to obtain the equity/cash needed to settle on their new property.
Pre-Approval: A commitment in writing from a lender that a borrower would qualify for a particular loan amount
Principal: The original amount of a debt; a sum of money agreed to by the borrower and the lender to be repaid on a schedule. Interest is calculated as a percentage of principal.
Principal, Interest, Taxes, and Insurance (PITI): The four elements that make up a monthly mortgage payment. The principal and interest payments go towards repaying the loan, while taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
Principal: The amount of money borrowed from a lender, not including interest or additional fees.
Radon: A colorless, odorless, carcinogenic gas that comes from the natural breakdown of uranium in soil. It is Radon can enter homes through cracks in the foundation MD. The EPA Law now requires that the buyer is provided with a radon test report. If the buyer does not choose this contingency allowing the buyer to test the home, the seller must pay for the testing to be done and provide the results to the buyer, prior to closing.
Ratification: Once the buyer(s) and seller(s) have agreed on the terms of their contract, the sales contract is signed at terms agreeable to all parties. The signed sales contract is “ratified.”
Real property: Also known as real estate. It is land, including all the natural resources and permanent buildings on it.
Real Estate Agent: An individual who has a current real estate license and is able to represent buyers and sellers in the purchase and sale of real property. An agent must be affiliated with a licensed real estate broker in order to practice as an agent.
Real Estate Broker: An individual who holds a real estate broker’s license, and who may act as an associate broker representing buyers and sellers in the purchase and sale of real property.
Realtor®: A real estate agent or broker who is a member of the National Association of Realtors and its local and state associations.
Refinancing: The act of paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms, such as a lower interest rate.
Rent-Back: Also known as Post settlement occupancy agreement (PSOA) – allows the seller to remain in the property they have sold to the buyer for a specified period of time as a renter. Rent-back is often used when the seller needs to sell the property to obtain the equity/cash needed to settle on their new property.
RESPA: The Real Estate Settlement Procedures Act is a 1974 law aimed at protecting consumers by requiring disclosures and a Good Faith Estimate. It also forbids kickbacks for referrals among the service providers involved in the sale of a home. For example, a real estate agent may not receive a payment for referring the client to a particular title insurance company.
Seller’s market: When the demand for homes in a given marketplace exceeds the supply of properties on the market.
Settlement: The final phase of a real estate transaction when the property is formally transferred from the seller to the buyer.
Square footage: Generally, only finished, heated space counts, such as the main finished floors, a finished basement, and/or a finished attic. Square footage is computed by multiplying the length and width dimensions of a finished area.
Survey: A precise measurement of a parcel’s legal boundaries, easements, encroachments, rights of way, improvement locations, contours.
Title: The lawful ownership of particular property. The document is referred to as Certificate of Title.
Title company: A company that examines and verifies titles to real estate and also may issue title insurance.
Title insurance: Insurance protecting the lender (or a homeowner) against any claims that could arise from arguments about ownership of the property. Should a problem arise, the title insurer pays any legal damages.
Title search: A check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.
Truth-in-Lending: A federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan’s initial period and any adjustments to the remaining term of the loan.
Underwriting: The process of analyzing a loan application to determine the amount of risk involved in making the loan. It includes a review of the potential borrower’s credit history and a judgment of the property value.
VA Loan: A mortgage loan offered by an approved, private lender that has a government guaranty, protecting the lender against total loss should the buyer default. The government guaranty provides incentive for private lenders to offer loans with better terms for veterans.
Valuation: The process of estimating the value of real property in order to determine the asking price for the property, as well as the investment analysis undertaken by the mortgage lender. The municipality that determines property tax rates will also perform a valuation for the purposes of taxing the property.
Walkthrough: The buyer of a property will “walk though” the home, just before the closing, to ensure that the property is being delivered in the same condition that it was in when the offer was made. It is a also an opportunity to confirm that any repairs made after the home inspection have been completed satisfactorily.
Warranty: a service contract that covers essential appliances and home system components when they break down due to normal wear and tear. A home warranty is sometimes added by the seller as an incentive to the buyer.
Warranty Deed: After a title search is performed, the warranty deed is created- it is document that guarantees guarantees a clear title to the buyer of real property – that there are no outstanding debts a creditor can claim against that property.
X, Y, Z
Yield Spread Premium: A percentage of the loan amount, the YSP is what a lender pays a broker for a loan with a higher interest rate, and lower fees.
Year built: The year a residence was built. Any work done to a residence would be considered remodeling unless the house was torn down completely.