- The Washington Times - Wednesday, October 11, 2006

Abstract of title: A historical summary of all the recorded transactions that affect the title to the property. An attorney or a title company will review an abstract of title to determine if there are any problems affecting the title to the property. All such problems must be cleared before the buyer can be issued a clear and insurable title.

Acceleration clause: A loan provision giving the lender the power to declare the entire loan immediately due and payable. This typically occurs upon the violation of a specific loan provision, such as the sale of the property or the failure to make loan payments on time. For instance, a buyer and seller arrange for the buyer to begin making the seller’s mortgage payments but fail to notify the lender of this transaction. The lender discovers that the title to the property has transferred and calls the loan due and payable. The seller then would be liable to pay the lender in full.

Accretion: The addition to land through natural forces such as wind or water (the opposite of erosion).

Acknowledgment: Formal declaration before a public official (typically a notary public) that one has signed a document. Required before recording real estate legal documents, such as a deeds of trust.

Action to quiet title: A court action to establish ownership to real property. Although technically not an action to remove a cloud on a title, the two actions are usually referred to as “quiet title” actions.

Adjustable rate mortgage (ARM): A mortgage for which the interest rate is not fixed but changes during the life of the loan in line with movements in an index rate. You also may see ARMs referred to as variable-rate mortgages (VRM).

Adjustment period: The length of time for which the interest rate is fixed on an ARM. If the adjustment period is six months, the interest rate will remain fixed for six months, after which time it will adjust. One year is the most common adjustment period.

Agency: An agency relationship is one in which one person is empowered to act on behalf of another, subject to the control and consent of the person being represented. Realtors literally are real-estate “agents” working to help buy or a sell a home.

Agent: The person who is acting on behalf of the principal or client. (See “buyer’s agent” and “listing agent.”)

Agreement of sale: A written, signed agreement between the seller and the purchaser in which the purchaser agrees to buy certain real estate and the seller agrees to the terms of the agreement. In different parts of the country, this also is known as contract of purchase, purchase agreement, offer and acceptance, land contract, earnest-money contract or sales agreement.

Alienation clause: Calls for a debt under a mortgage or deed of trust to be due in its entirety upon transfer of ownership of the secured property. (See also “acceleration clause” and “due on sale clause.”) Amortize or amortization: A gradual paying off of a debt by periodic installments that include principal and interest payments. The interest due is recalculated with each month’s principal payment.

Annual percentage rate (APR): A measure of the cost of credit, expressed as a yearly rate. The effective rate of interest may be higher than the note rate because the APR takes into account closing costs. The APR concept makes it easier to compare loan programs offered by different lenders, which may include different charges and loan costs.

Appraisal: An opinion or estimate of the value of a property at a given date.

Appraised value: An opinion of the value of a property at a given time, based on facts regarding the location, improvements, etc., of the property and surroundings. (Compare with “market value.”) Appreciation: The increase in market value of real estate.

ARM: (see “Adjustable Rate Mortgage”)

Arm’s-length transaction: A transaction among parties who each acts in his or her own best interest. A transaction between two brothers would not be an arm’s-length transaction.

Arrears: A payment made after it is due is in arrears. Mortgage interest is paid in arrears, meaning that it is paid for the previous month rather than in advance.

Asking price: The price at which the property has been placed on the market for sale.

Assessor: A municipal or county official who determines the value of properties for the purpose of taxation. (Compare with “appraiser.”)

Assumable mortgage: When a home is sold, sellers may transfer their mortgage to a new buyer. This means the mortgage is “assumable.” Lenders generally require a credit review of the new borrower and may charge a fee for the assumption. Some mortgages contain a due-on-sale clause, which means the mortgage may not be transferable to the new buyer. Instead, the lender may make the seller pay the entire balance that is due when the home is sold.

Sellers should obtain a written release from the lender stating clearly that they are no longer responsible for mortgage payments. Advertising a home with an assumable mortgage can attract buyers who may have difficulty qualifying for a traditional mortgage.

Attorney-in-fact: One who is authorized to act for another under a power of attorney, with powers limited by the signed agreement.

Balloon mortgage: Usually a short-term fixed-rate loan that involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract. Many balloon mortgages are refinanced before the large payment comes due.

Balloon payment: The final payment of a mortgage which is larger than the regular payment; it usually extinguishes the debt.

Bankruptcy: A legal declaration of financial inability to pay one’s debts. The debtor surrenders his assets to the bankruptcy court. An individual typically files for Chapter 7 (all debts wiped out) or Chapter 13 (establishes a payment plan to pay off debts). A bankruptcy stays on an individual’s credit report for seven years, damaging his credit rating and hampering his ability to borrow money during that time.

Binder: Generally a small amount of money from the buyer, accompanying a written offer to buy. (See also “earnest money.”) Also, a report issued by a title insurance company establishing conditions of title and conditions upon which a policy of title insurance will be issued.

Biweekly mortgage: A mortgage that requires half of the normal monthly payment every two weeks. Over the course of a year, 26 half-payments are made the equivalent to 13 full mortgage payments. This results in a faster payoff of the loan.

Blanket mortgage: A mortgage covering more than one piece of property.

Borrower (mortgagor): One who applies for a loan secured by real estate and is responsible for repaying the loan mortgage.

Breach of contract: The failure to perform provisions of a contract without a legal excuse. Example: A contract would be deemed null and void if a buyer lost his job and could no longer qualify for the loan to purchase the house, but this would not be considered a breach of contract. If, however, a borrower was no longer qualified because he ran up excessive credit-card debt, that could be determined to be a breach of contract.

Bridge loan: A short-term loan for borrowers needing more time to acquire permanent financing. This usually is used when borrowers must carry two mortgages between transactions. A loan is held on both properties until the old property is sold.

Broker: A person licensed to represent home buyers or sellers for a fee. Most real estate offices are managed by a broker who employs licensed sales agents to sell the properties.

Buy-down: Obtaining a lower interest rate (literally, “buying down” the interest rate) by paying additional points to the lender. The lower rate may apply for the full duration of the loan or for just the first few years. A buy-down may be used to qualify a borrower who otherwise would not qualify, because a buy-down results in lower payments. One popular temporary buy-down is the “2-1.” If the interest rate on the note is 9 percent, the buy-down results in a rate of 7 percent for the first year, 8 percent for the second year and 9 percent thereafter.

Buyer’s agent or buyer’s broker: An agent hired by a buyer to locate a property for purchase. The agent represents the buyer and negotiates with the seller’s agent (or “listing agent”) for the best possible deal for the buyer.

Buyer’s market: Market conditions that favor buyers. As a result, buyers have ample choice of properties and may negotiate lower prices. Buyer’s markets may be caused by an economic slump or overbuilding.

Cap: An interest cap limits how high the interest rate on an ARM can go, so a borrower will understand the maximum he or she might be required to pay. Payment caps prevent a borrower’s monthly payment from rising above a set limit.

Capital gains: Profit earned from the sale of real estate or other investments.

Caveat emptor: “Buyer beware.” The buyer must examine the property and buy at his own risk. Properties often are sold in “as-is” condition with no expressed or implied guarantee of quality or condition.

CC&Rs (Covenants, Conditions and Restrictions): The basic rules establishing the rights and obligations of owners of real estate within a condominium, town house, planned unit development (PUD) or subdivision. An association (see “homeowners’ association”) typically is organized for the purpose of operating and maintaining property commonly owned by the individual owners and for establishing standards of maintenance and aesthetics for the community. The association normally is made up of property owners.

Certificate of eligibility: The document issued by the Department of Veterans Affairs to those who qualify for a VA loan. Certificates of eligibility may be obtained by sending the form DD-214 to the local VA office along with VA form 1880.

Certificate of reasonable value (CRV): A document certifying appraisal performed by a VA-approved appraiser that establishes the property’s current market value. This value establishes the maximum VA mortgage loan principal.

Certificate of occupancy: A document issued by a local government agency stating that a property meets the local building standards for occupancy and is in compliance with public health and building codes. This document normally is required by a lender before closing the loan.

Certificate of title: An opinion rendered by an attorney as to the status of title to a property according to the public records. This certificate does not provide the same level of protection as title insurance.

Chain of title: The chronological order of conveyance of a parcel of land from the original owner to the present owner. Theoretically, a title can be researched back to the date when the property became part of the United States.

Chattel: Personal property.

Clear title: A marketable title, free of clouds and disputed interests. Most lenders require a clear title prior to closing.

Closing: The act of transferring ownership of a property from seller to buyer in accordance with a sales contract. Also, the time when a closing takes place. (Also known as “settlement” or “escrow.”)

Closing costs: All fees, taxes, charges, commissions and other costs paid by the buyer and/or seller at the closing of a real estate or mortgage transaction.

Closing statement: The statement that lists the financial settlement between buyer and seller and also the costs each must pay. A separate statement for buyer and seller sometimes is prepared.

Cloud on title: An outstanding claim or encumbrance that, if valid, would affect or impair the owner’s title. (Compare with “clear title.”)

Commission: The percentage of the home’s sale price that is paid to the listing and selling agents.

Commitment: A written document provided by a lender agreeing to make a loan on specific terms to a borrower or builder.

Comparables: Properties used as comparisons to determine the value of a specified property. Also called “comps,” properties similar in type, size and price that have been sold recently are used for comparison in an appraiser’s report.

Conditional commitment: A written document provided by a lender agreeing to make a loan provided certain conditions are met prior to closing.

Condominium (condo): Real estate ownership in which a property owner has title to a specific unit but shared interest in the common areas. “Condominium” defines a type of ownership, not a type of home. Most condos are apartment-style homes, but they also can be town-house style residences.

Contingency: Conditions that must be satisfied before the buyer can close on a property. Contingencies generally are outlined in the purchase contract between the buyer and seller. Purchase contingencies are common, requiring that the seller find a home to purchase before settlement. Financing contingencies also are common, requiring the borrower to obtain sufficient financing to purchase the property.

Contract: An agreement between two parties. A valid contract for the sale of real estate typically includes an offer, an acceptance, competent parties, consideration (payment), legal purpose, written documentation, description of the property, and signatures by principals or their attorneys-in-fact.

Contract of sale: Also known as a “land contract” or a “purchase agreement.”

Contract sale or deed: An installment selling arrangement under which the buyer may occupy the property but the seller retains the title until the sales price is paid. Also known as an installment land contract.

Conventional mortgage: A loan insured neither by the FHA nor guaranteed by the VA.

Conversion clause: A provision in some ARMs that allows the borrower to change the adjustable-rate loan to a fixed-rate loan at some point during the term. Usually the conversion is allowed at the end of the first adjustment period. At the time of the conversion, the new fixed rate generally is set at a prevailing rate for fixed-rate mortgages. The conversion feature may cost extra.

Conveyance: The transfer of title of real estate from one party to another. Also, when parts of a home (such as fixtures) are part of the sale, they are said to “convey” to the new owner.

Contract sales price: The full purchase price as stated in the contract.

Convertible ARM: Some adjustable-rate loans come with options to convert them to a fixed loan, based on a predetermined formula, during a given time period. For example, the 1-year Treasury bill ARM may be converted to a fixed-rate loan during the first five years on the adjustment date.

Co-op or cooperative: An apartment building or a group of dwellings owned communally by stockholders who are the residents of the dwellings but do not own individual units. In a cooperative, the corporation or association owns the real estate. A resident purchases stock in the corporation that entitles him to occupy a unit in the building or property owned by the cooperative. Although residents do not own the units, they have absolute rights to occupy them as long as they own the stock.

Counteroffer: An offer made by a buyer or seller to the other party, responding to the asking price or another counter offer.

Credit report: A report detailing a borrower’s credit history, including payment history on revolving accounts (such as credit cards) and installment accounts (such as car loans). A credit report also includes information found from public records, including tax liens and judgments.

Curb appeal: A term used by Realtors for everything a buyer sees from the street, which may induce the shopper to look more closely at the property.

Deed: A legal “instrument” that conveys the title to a property from seller to buyer. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the state where the property is located and should be delivered to the buyer at settlement.

Deed of trust: Used in many states instead of a mortgage to secure the payment of a note. In a deed of trust, there are three parties: the borrower, the trustee and the lender or beneficiary. The borrower transfers legal title for the property to the trustee, who holds the property in trust as security for the payment of the debt to the lender or beneficiary. If the borrower pays the debt as agreed, the deed of trust becomes void. If, however, the borrower defaults on the debt, the trustee may sell the property without a court proceeding.

Deed restriction: A clause in a deed that limits the use of land.

Default: Failure to meet legal obligations in a contract, such as failure to make monthly mortgage payments.

Defective title: Any recorded instrument that would prevent a grantor and/or seller from giving a clear title. Or, title to real property that lacks some of the elements necessary to transfer good title. Tax or mechanics’ liens are common causes of defective title.

Deficiency judgment: Personal claim against the debtor when the sale of foreclosed property does not yield sufficient proceeds to pay off the mortgages, accrued interest or legal fees.

Depreciation: Decline in the value of a house because of wear and tear, obsolescence, adverse changes in the neighborhood or a declining market in general.

Direct-reduction mortgage: An amortized mortgage in which principal and interest are computed on the remaining balance.

Disbursements: Payments made during the course of an escrow or at closing.

Discount: In an ARM with an initial discount, the lender gives up a number of percentage points of interest to give the borrower a lower rate and lower payments for part of the mortgage term. After the discount period, the ARM rate probably will go up, depending on the index rate.

Discount points: Fees paid to a lender to lower the interest rate.

Documentary tax stamps: Stamps affixed to a deed showing the amount of transfer tax.

Down payment: The amount paid for the purchase of a property in addition to the mortgage, but not including any closing costs. The standard down payment at one time was 20 percent, but buyers today can put down as little as 3 percent.

Dragnet clause: A provision in a mortgage that pledges several properties as collateral. A default in the mortgage could lead to foreclosure proceedings on any of the properties in the dragnet.

Due-on-sale clause: A clause stating that the entire loan is due upon the sale of the property. (See also “acceleration clause” or “alienation clause.”)

Earnest money: A deposit made by a buyer of real estate toward the down payment to evidence good faith. This money typically is held by the real estate broker or an escrow company.

Easement: The right to use the land of another for a specific purpose. Easements may be temporary or permanent. Utility companies often use easements to install power lines and utility poles on private land. Or, property may have an easement to allow for road access to another property behind it.

Eminent domain: The right of the government or a public utility to acquire property for necessary public use, with proper compensation to the owner.

Encroachment: A building, part of a building or construction that physically intrudes onto the property of another.

Encumbrance: A legal right or interest in land that affects a good or clear title and diminishes the land’s value. Common examples are zoning ordinances, easement rights, claims, mortgages, liens, pending legal actions, unpaid taxes or restrictive covenants. An encumbrance does not prevent transfer of the property to another. A title search can reveal the existence of such encumbrances, and a buyer must determine whether he wants to purchase with the encumbrance or what can be done to remove it.

Equity: The difference between the market value of the property and the homeowner’s mortgage debt. Put another way, it is the value of the property minus the balance of any loans and liens on the property.

Equity sharing: Joint ownership of a property between the owner/occupant and the owner/investor, that results in tax advantages for both parties. Upon sale of the property, the joint owners split profits based on the percentage they own. Parents sometimes enter into such an arrangement to help their children purchase homes.

Escheat: The reversion of property to the state in the event that the owner dies without leaving a will or legal heirs.

Escrow: A third party that handles all funds in a real estate transaction. The buyer puts his earnest-money deposit into escrow, and the lender funds the loan into escrow. Escrow pays the real estate agents’ commissions, pays off any loans and/or liens against the property, pays real estate taxes and any other fees associated with the transaction and sends the balance of the money to the seller.

Escrow account: A third-party account used to retain funds, including the property owner’s real estate taxes, buyer’s earnest money or hazard insurance premiums. (Note: In some parts of the country, “escrow” is synonymous with “settlement,” meaning delivery of a deed and completion of sale.)

Escrow payment: That portion of a mortgagor’s monthly payment held in trust by the lender to pay for taxes, mortgage insurance, hazard insurance, lease payments and other items as they become due, also know as “impounds” in some states.

Escrow reimbursement: In assumptions or wrap-loan transactions, the buyer reimburses the seller for the current balance of his escrow (or impounded) funds.

Exclusive buyer’s agent: An agent who represents the buyer and owes fiduciary duties to the buyer only and never takes listings or works for a brokerage company that takes listings.

Exclusive right to sell: A written agreement between the agent and the owner, whereby the owner promises to pay a fee or commission to the broker if his or her property is sold during the listing period, whether the broker finds the buyer or not.

Executor (or in the feminine, executrix): A person named in a will to carry out its provisions for the disposition of the estate.

Fannie Mae (FNMA): Federal National Mortgage Association, a privately owned corporation created by Congress to buy mortgage notes from local lenders and provide guidelines for most lenders to use to qualify borrowers.

Federal Housing Administration (FHA): An agency within the U.S. Department of Housing and Urban Development (HUD) that administers loan programs and issues loan guarantees to make more housing available.

Federal tax lien: A lien attached to property for nonpayment of a federal tax.

Fee simple (also fee absolute or fee simple absolute): Ownership of real property. The owner is entitled to the entire property with unconditional power of disposition during the owner’s life. Upon his death, the property descends to the owner’s designated heirs. Most homes are offered for sale as a fee-simple properties.

FHA-insured mortgage: The Federal Housing Administration makes insured mortgages available through banks and other lenders that have low down-payment requirements.

Fiduciary: A person in a position of trust or responsibility with specific duties to act in the best interest of a client. A real estate agent has a fiduciary responsibility to his clients.

Finance charge: Interest payment due to a lender.

First mortgage: A mortgage that has priority as a lien over all other mortgages. In the case of a foreclosure, the first mortgage will be satisfied before other mortgages. (See also “second mortgage.”)

Fixture: Improvements or personal property attached to the land or home so as to become a part of the real estate. Fixtures are transferred to the buyer upon sale of the property. Light fixtures and built-in shelving usually are considered fixtures, but appliances are not. To determine whether an item is a fixture, consider: How is it attached to the property? Is the fixture essential to the property? What was the intent? (Was it intended to be part of the property?)

Flood insurance: An insurance policy that covers property damage caused by natural flooding. Flood insurance may be required on properties in a flood zone.

Foreclosure (or repossession): A legal process by which the lender forces sale of a property because the borrower has not met the terms of the mortgage.

Freddie Mac (FHLMC): Federal Home Loan Mortgage Corp. A federal agency that purchases mortgages, both conventional and federally insured, from members of the Federal Reserve System and the Federal Home Loan Bank Board.

Free and clear: A property that has no liens.

FSBO: A term or abbreviation used to indicate that a property is For Sale By Owner.

Full disclosure: Revealing all known facts that may affect the decision of a buyer or tenant.

Fully indexed rate: The fully indexed rate is the value of the index plus the margin. (See “adjustable-rate mortgage.”)

General lien: A lien such as a tax lien or judgment lien that attaches to all property of the debtor rather than the lien of, for example, a trust deed, which attaches only to a specific property.

General warranty deed: A deed in which the seller agrees to protect the buyer against any other claim to title of the property. (See also “warranty deed.”)

Ginnie Mae (GNMA): Government National Mortgage Association. A federal association working with the FHA to offer special assistance in obtaining mortgages and to purchase mortgages in a secondary capacity.

Graduated payment mortgage (GPM): A mortgage that has lower payments initially (with the potential for negative amortization) that increase each year until the loan is fully amortized or paid off.

Grantee: The buyer or recipient.

Grantor: The seller or giver.

Ground rent: Rent paid for vacant land. If the property is improved, ground rent is the portion attributable to the land only.


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