Glossary - Real Estate Terms
Many real estate investing phrases are the same across the country. For example, “title insurance” always implies “title insurance,” which protects your property against hidden liens or future ownership concerns. However, words used to describe or refer to the same object in different sections of the country frequently differ significantly. In one location, “closing” is frequently referred to as a “settlement” or “escrow” in another.
MyNew Real Estate provides basic definitions in this glossary for some of the most common terminology you'll encounter during the closing process.
This lexicon is not exhaustive, and it is possible that it is not completely accurate in all jurisdictions. These definitions are provided for informational purposes only and should not be construed as legal advice. To find out if these terms apply in your area, contact your local title firm, real estate agent, or lender.
Adjustable Rate Mortgage (ARM)
A mortgage loan that allows the lender to change the interest rate periodically in conjunction with a speciﬁed index. The interest rate applied to the loan payments varies as interest rates in the market change.
Reduction in the amount of principal owed on a loan as payments are made over time. An amortization schedule indicates how much principal remains unpaid after each payment.
Increase in a home’s value over time. Decline in value is called depreciation.
Taking over the borrower’s responsibility on an existing loan when buying the home mortgaged under that loan. The old loan may retain its current interest rate or the lender may have the authority to change the rate. Often, loan assumption relieves the buyer from obtaining new ﬁnancing.
Formal transfer of property ownership from the seller to the buyer. A closing meeting is held on the closing date; at this time all funds are paid and dispersed and a deed of ownership is delivered to the buyer.
A form of property ownership in which the individual homeowner controls the interior of the structure while the exterior plus any common areas are controlled by a homeowners’ association. The homeowner is a voting mem¬ber of the association and is obligated to support its activities through a monthly fee. Bylaws govern use of the common areas.
Contract interest rate
The interest rate that determines the amount of the monthly payment devoted to interest. A monthly mortgage payment has three parts: payment of inter¬est due, a payment to reduce the amount of principal owed and an escrow fund contribution used to pay property taxes and hazard insurance premiums (some loans may carry an additional charge for mortgage insurance). The interest por¬tion is sufﬁcient to pay interest on unpaid principal accrued during the previous month. The principal portion is enough to amortize the amount of the loan during the loan term.
The seller’s response to an offer from a prospec¬tive buyer if that offer is not entirely acceptable. Generally, a counteroffer is made to raise the sales price closer to the original asking price. Through a series of such counteroffers, buyer and seller negotiate the eventual terms of the sale.
Deed of trust
Contract that pledges the home as security on the mortgage loan. Allows the property to be sold by a trustee if the borrower defaults. Sales proceeds are used to repay the loan with back interest and foreclosure costs.
Difference between the cost of the home and the amount of the mortgage loan(s). This difference must be paid in cash by the buyer at the closing.
A housing structure containing two separate dwelling units (a three-unit building is a triplex). Each unit has its own entrance, kitchen and bath facilities.
Money deposited by the buyer to back up an offer to purchase. A sales, or earnest money, contract is used to convey the offer. Earnest money may be forfeited if the buyer decides not to buy after the sales contract is signed by the seller.
The difference between the market value of the home and the amount owed on the mortgage loan. Equity repre¬sents the value of the owner’s interest in the home.
The Federal Housing Administration, a federal agency that insures home mortgage loans. Loans insured by FHA allow the buyer to borrow a higher percentage of the cost of the home, thereby reducing the down payment. The size of an FHA-insured loan has an upper limit.
FICO (credit) Score
A numerical rating based on a borrow¬er’s past use of credit. It is often used to determine if a loan will be approved and what terms will be attached to the loan. Applicants with the highest scores get the lowest interest rates. Those with lower scores may be able to get “subprime” ﬁnancing with a higher interest rate.
The funds necessary to purchase a home. Financ¬ing consists of all mortgage loans plus any down payment made by the buyer.
A mortgage loan for which the interest rate remains unchanged for the life of the loan. The portion of the monthly payment devoted to interest and principal reduction does not change over time, although the escrow payment may vary from one year to the next because of changes in taxes and insurance.
Housing Counseling Agency
An organization that provides counseling services to people seeking to buy a home. The organization may be a consumer credit counseling com¬pany, a nonproﬁt educational group or a department of local government. These agencies are knowledgeable about special ﬁnancing and assistance programs in the area, provide counseling on problems that may develop and also provide educational programs required to get some loans.
A form provided to buyer and seller prior to the closing. The form details all closing expenses to be paid by the buyer and the seller in separate tallies.
The right to buy a home at a given price included in a lease to rent that home. Often used as an interim strategy to sell homes when markets are slow. May of¬fer a way for a prospective homebuyer to accumulate a down payment if the lease applies a portion of rent to the purchase.
The amount of the mortgage loan di¬vided by the appraised value of the home or the sales price, whichever is lower. One criterion used by lenders to indicate the risk associated with a loan. In general, loans with a ratio greater than .80 must be insured.
Multiple Listing Service. A cooperative arrangement among real estate brokers under which any member of the service may sell any property listed on the service. Greatly expands the exposure of properties listed while allowing buy¬ers access to the greater market through any member broker.
When describing a loan, the time period during which the loan is designed to amortize principal. By the end of the term, the entire principal will have been retired. Most mortgage loans have maturities of 25 or 30 years, but shorter terms have become popular.
A lender who originates mortgage loans and sells them to investors.
An agent who arranges mortgage ﬁnancing for a borrower. A broker will represent one or more lenders and is compensated through fees paid by these lenders.
Lender’s pledge to provide a mortgage loan, pending approval of the loan application, at a speciﬁed interest rate. In general, the commitment is granted at the time of application and is good for a limited time, while the loan approval is in process.
An insurance policy that protects the lender against loan default by the borrower. Insurance allows the lender to provide ﬁnancing at a higher loan-to-value ratio than otherwise would be possible, thereby reducing the amount of any down payment required. Not to be confused with mortgage life insurance that protects the loan against nonpayment resulting from the borrower’s death.
Legal agreement that obligates the borrower to repay the loan principal according to a speciﬁed method. The note describes the loan terms and sets out the require¬ments that the borrower must meet.
Private mortgage insurance. Similar to FHA insurance, the policy pays beneﬁts to the lender if the borrower defaults on the loan obligation. PMI allows lenders to make higher ratio loans, thereby reducing the down payment. Unlike FHA, however, no legal limit restricts the size of a privately insured loan.
Points or discount points
Charges attached to a mortgage loan to increase the lender’s proﬁtability. Each point charged requires a cash payment at closing of 1 percent of the loan principal. Becomes an integral part of loan pricing, such as “8 1/2 percent plus two points,” meaning a loan at 8 1/2 percent interest with two points paid at closing.
Process of estimating how much money the buyer may borrow based on income. When submitting a loan application, the borrower knows the amount needed to purchase the home. At prequalifying, borrowers seek to know the largest loan they may be able to obtain and, thereby, the maximum home price they can afford.
A real estate professional who subscribes to a strict code of ethics as a member of the local and state boards or associations and of the National Association of Realtors.
An accurate estimate of all expenses that must be paid at closing. In general, the statement is provided to the buyer and seller shortly before the closing so that they will be prepared to provide a certiﬁed check for the appropriate amounts.
Policy that insures the buyer against legal claims to the title or some ownership interest in the property purchased. Title policies are issued based on a search of the deed records of the property to make sure that the seller has good title (no other persons may claim an interest in the property). Title insurance is required of any property that is ﬁnanced through a lender.
Legal instrument that conveys ownership to the buyer. The deed warrants, or guarantees, that the seller has good title and that all interests are being transferred to the seller. A special warranty deed is a bit weaker because the seller warrants that the title being transferred is as good as the one received by the seller when the property was acquired.