Glossary of Real Estate Terms
Acceptance: Agreeing to the terms of an offer which creates a contract. As soon as the seller signs on to agree to your purchase offer, you are in contract for the sale of the house. If either of you back out you will have consequences -- in your case, losing your earnest money deposit and, in the seller's case, a potential lawsuit.
Adjustable Rate Mortgage: A mortgage loan with an interest rate that fluctuates in accordance with a designated market over the life of the loan. To avoid constant and drastic fluctuations, adjustable rate mortgages typically limit how often and by how much the interest rate can vary.
Annual percentage rate (APR): A yearly interest rate that includes up front fees and costs paid to get the loan. This is calculated by taking the average compound interest rate over the term of the loan. Mortgage lenders are required to disclose the APR so that borrowers can more accurately compare the actual cost of different loans with different fees.
Appraisal: A determination of the value of something, such as the house you plan to buy. A professional appraiser makes an estimate by examining the property, looking at the initial purchase price, and comparing it with recent sales of similar property. Your bank or other lender will require the appraisal in order to ascertain the worth of the house for lending purposes. And, unfortunately, the lender may refuse to fund the loan if the appraisal comes in lower than the loan amount. In such situations, if you can't come up with additional down payment money or a better appraisal, deals have been known to fall through.
Appreciation: An increase in the value or worth of an asset or piece of property that's caused by external economic factors occurring over time, rather than by the owner having made improvements or additions. For example, increased market demand or inflation can cause property to appreciate.
Assumable mortgage: A home mortgage that allows the buyer to take over the seller's mortgage; make mortgage payments, and comply with other terms of the existing loan. Most lenders require the borrower to qualify for the mortgage in order to assume the mortgage.
Balance Sheet: A financial statement that shows assets, liabilities, and net worth as of a specific date.
Balloon mortgage: A mortgage that is not fully paid off over the loan term, leaving a balance at the end. The borrower must either pay off the remaining mortgage or refinance the loan.
Closing costs: All settlement or transaction charges (above and beyond the actual cost of the property) that home buyers (or sellers, depending on what you negotiate with the seller) need to pay at the close of escrow when the property is transferred. These typically include lender's fees and points or prepaid interest, a prorated share of the property taxes, transfer taxes, credit check fees, homeowners' and title insurance premiums, deed filing fees, real estate agent commissions, inspection and appraisal fees, and attorneys' fees.
Co-borrower: Any borrower other than the first borrower whose name appears on the application and mortgage note, even when that person owns the property jointly with the first borrower and shares liability for the note.
Collateral: An asset that is pledged as security for a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan agreement. In the case of a mortgage, the collateral would be the house and real property.
Commission: The fee charged for services performed, usually based on a percentage of the price of the items sold (such as the fee a real estate agent earns on the sale of a house).
Common area: Facilities and space, such as recreation facilities, parking, laundry rooms, or a courtyard in condominiums, apartment buildings, and some cooperative housing projects. Common areas in condominiums are not individually owned by the residents, but shared by percentage interest or owned by the management organization.
Common interest development: A type of housing, composed of individually owned units, such as condominiums, townhouses, or single-family homes, that share ownership of common areas, such as swimming pools, landscaping, and parking. Common interest developments and managed by homeowners' associations. Members typically pay monthly association dues.
Condominium: A type of real property ownership in which each owner holds title to his or her individual unit and shares ownership jointly of common areas such as driveways, parking, elevators, outside hallways, and recreation and landscaped areas. A homeowners' association typically manages the common areas. Condominiums are often referred to as a common interest development.
Concession: Something given up or agreed to in negotiating the sale of a house. For example, the sellers may agree to help pay for closing costs.
Construction Loan: A loan for financing the cost of construction or improvements to a property; the lender disburses payments to the builder at periodic intervals during construction.
Contingency: A provision in a contract stating that some or all of the terms of the contract will be altered or voided by the occurrence of a specific event, usually by specific dates leading up to the closing. For example, a contingency in your home purchase contract might state that, if the buyer does not approve the inspection report of the physical condition of the property, the buyer does not have to complete the purchase.
Counteroffer: The rejection of an offer to enter into a contract, where the rejecting party includes a different offer that changes the terms of the original offer in some way. The legal significance of a counteroffer is that it completely voids the original offer.
Conventional Mortgage: A mortgage loan that is not insured or guaranteed by the federal government or one of its agencies, such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or the Rural Housing Service (RHS). Contrast with “Government Mortgage.”
Credit report: A written account of a consumer's credit history prepared by a credit reporting agency. Credit reports generally include information on loans, credit cards, and other bills and accounts, as well as a record of the consumer's addresses and employers.
Credit reporting agency: A private company that collects and sells information about a person's credit history. Banks and mortgage lenders are among those who use the information to screen applicants. There are three major credit reporting agencies -- Equifax, Experian, and TransUnion -- and they are regulated by the federal Fair Credit Reporting Act.
Credit score: A calculation that creditors use to evaluate the creditworthiness of someone applying for credit, such as a mortgage. High credit scores (over 700) indicate less risk that you will default on payments, and low scores (under 400) indicate potential problems.
Debt-to-Income Ratio: The percentage of gross monthly income that goes toward paying for your monthly housing expense, alimony, child support, car payments and other installment debts, and payments on revolving or open-ended accounts, such as credit cards.
Deed: The legal document transferring ownership or title to a property
Depreciation: The gradual loss of value of property that occurs through external economic conditions, the property's age, natural wear and tear, or deterioration.
Disclosure: The making known of a fact that had previously been hidden; a revelation. In many states, a home seller must disclose major physical defects in the house within his or her knowledge, such as a leaky roof or potential flooding problem; and, in all states, sellers must disclose the presence of lead-based paint hazards in buildings constructed before 1978.
Down Payment: A portion of the price of a home, usually between 3-20%, not borrowed and paid up-front in cash. Some loans are offered with zero down-payment.
Earnest money deposit: A deposit demonstrating commitment in a contractual relationship, and commonly made in real estate transactions at the time of making the purchase offer. The remainder of the payment is due on the closing date. The seller keeps the earnest money if the buyer fails to make timely payment in full (or if there is a similar breach of the agreement).
Easement: A right to the use of, or access to, land owned by another.
Employer-Assisted Housing: A program in which companies assist their employees in purchasing homes by providing assistance with the down payment, closing costs, or monthly payments.
Encroachment: The intrusion onto another’s property without right or permission.
Encumbrance: Any claim on a property, such as a lien, mortgage or easement.
Equal Credit Opportunity Act (ECOA): A federal law that requires lenders to make credit equally available without regard to the applicant’s race, color, religion, national origin, age, sex, or marital status; the fact that all or part of the applicant’s income is derived from a public assistance program; or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. It also requires various notices to consumers.
Equity: The value in your home above the total amount of the liens against your home. If you owe $100,000 on your house but it is worth $130,000, you have $30,000 of equity.
Escrow: The holding of funds or documents by a neutral third party prior to closing your home sale.
Escrow Account: An account that a mortgage servicer establishes on behalf of a borrower to pay taxes, insurance premiums, or other charges when they are due. Sometimes referred to as an “impound” or “reserve” account.
Fair Credit Reporting Act (FCRA): A consumer protection law that imposes obligations on (1) credit bureaus (and similar agencies) that maintain consumer credit histories, (2) lenders and other businesses that buy reports from credit bureaus, and (3) parties who furnish consumer information to credit bureaus. Among other provisions, the FCRA limits the sale of credit reports by credit bureaus by requiring the purchaser to have a legitimate business need for the data, allows consumers to learn the information on them in credit bureau files (including one annual free credit report), and specifies procedure for challenging errors in that data.
Federal Housing Administration (FHA): An agency within the U.S. Department of Housing and Urban Development (HUD) that insures mortgages and loans made by private lenders.
FHA-Insured Loan: A loan that is insured by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD).
First Mortgage: A mortgage that is the primary lien against a property.
First-Time Home Buyer: A person with no ownership interest in a principal residence during the three-year period preceding the purchase of the security property.
Fixed rate mortgage: A mortgage loan that has an interest rate which remains constant throughout the life of the loan. These loans are usually 15 or 30 years.
Gross Monthly Income: The income you earn in a month before taxes and other deductions. It also may include rental income, self-employed income, income from alimony, child support, public assistance payments, and retirement benefits.
Home Inspection: A professional inspection of a home to determine the condition of the property. The inspection should include an evaluation of the plumbing, heating and cooling systems, roof, wiring, foundation and pest infestation.
Homeowners' association: An organization made up of neighbors concerned with managing the common areas of a subdivision or condominium complex. These associations collect monthly dues and take on issues such as garden, pool, and fence maintenance, noise abatement, snow removal, parking area upkeep, repairs, and dues. The homeowners' association is also responsible for enforcing any covenants, conditions, and restrictions that apply to the property.
Homeowner’s Warranty (HOW): Insurance offered by a seller that covers certain home repairs and fixtures for a specified period of time.
House closing: The final transfer of the ownership of a house from the seller to the buyer, which occurs after both have met all the terms of their contract and the deed has been recorded.
HUD-1 Settlement Statement: A final listing of the closing costs of the mortgage transaction. It provides the sales price and down payment, as well as the total settlement costs required from the buyer and seller.
Lease-Purchase Option: An option sometimes used by sellers to rent a property to a consumer, who has the option to buy the home within a specified period of time. Typically, part of each rental payment is put aside for the purpose of accumulating funds to pay the down payment and closing costs.
Liabilities: A person’s debts and other financial obligations.
Lien: A claim or charge on property for payment of a debt. With a mortgage, the lender has the right to take the title to your property if you don’t make the mortgage payments.
Lifetime Cap: For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate or monthly payment can increase or decrease over the life of the loan.
Listing: A term for any kind of single family home, condominium, townhouse, or piece of land that is listed for sale by a Real Estate Agent.
Market Value: The current value of your home based on what a purchaser would pay. An appraisal is sometimes used to determine market value.
Maturity Date: The date on which a mortgage loan is scheduled to be paid in full, as stated in the note.
Mortgage: A loan using your home as collateral. In some states the term mortgage is also used to describe the document you sign (to grant the lender a lien on your home). It also may be used to indicate the amount of money you borrow, with interest, to purchase your house. The amount of your mortgage often is the purchase price of the home minus your down payment.
Mortgage Broker: An individual or firm that brings borrowers and lenders together for the purpose of loan origination. A mortgage broker typically takes loan applications and may process loans. A mortgage broker also may close the loan.
Multiple listing service: A computer-based service, commonly referred to as MLS, that provides real estate professionals with detailed listings of most homes currently on the market.
Note: A written promise to pay a specified amount under the agreed upon conditions.
Offer: A formal bid from the home buyer to the home seller to purchase a home.
Open House: When the seller’s real estate agent opens the seller’s house to the public. You don’t need a real estate agent to attend an open house.
Original Principal Balance: The total amount of principal owed on a mortgage before any payments are made.
Origination Fee: A fee paid to a lender or broker to cover the administrative costs of processing a loan application. The origination fee typically is stated in the form of points. One point is one percent of the mortgage amount.
PITI: Abbreviation for the major expenses that make up a mortgage payment: principal (the amount borrowed), interest, (property) taxes, and (homeowners') insurance.
Pre-Approval: A process by which a lender provides a prospective borrower with an indication of how much money he or she will be eligible to borrow when applying for a mortgage loan. This process typically includes a review of the applicant’s credit history and may involve the review and verification of income and assets to close.
Pre-Approval Letter: A letter from a mortgage lender indicating that you qualify for a mortgage of a specific amount. It also shows a home seller that you’re a serious buyer.
Pre-Qualification: A preliminary assessment by a lender of the amount it will lend to a potential home buyer. The process of determining how much money a prospective home buyer may be eligible to borrow before he or she applies for a loan.
Principal: The amount of money borrowed or the amount of the loan that has not yet been repaid to the lender. This does not include the interest you will pay to borrow that money. The principal balance (sometimes called the outstanding or unpaid principal balance) is the amount owed on the loan minus the amount you’ve repaid.
Promissory Note: A written promise to repay a specified amount over a specified period of time.
Private mortgage insurance: Insurance that reimburses a mortgage lender if the buyer defaults on the loan and the foreclosure sale price is less than the amount owed the lender (the mortgage plus the costs of the sale). A home buyer who makes less than a 20% down payment will most likely have to purchase private mortgage insurance, commonly referred to as PMI.
Purchase and Sale Agreement: A document that details the price and conditions for a transaction. In connection with the sale of a residential property, the agreement typically would include: information about the property to be sold, sale price, down payment, earnest money deposit, financing, closing date, occupancy date, length of time the offer is valid, and any special contingencies.
Real estate: Land and things permanently attached to it, such as buildings, houses, stationary mobile homes, fences, and trees. Real estate is also called real property. Anything that isn't real estate is personal property.
Real Estate Professional: An individual who provides services in buying and selling homes. The real estate professional is paid a percentage of the home sale price by the seller. Unless you’ve specifically contracted with a buyer’s agent, the real estate professional represents the interest of the seller. Real estate professionals may be able to refer you to local lenders or mortgage brokers, but are generally not involved in the lending process.
Real estate broker: A real estate professional licensed to negotiate the purchase and sale of real estate for a commission or fee. In most states, a broker is one step up from a real estate agent, having more training and the power to supervise agents. However, in some states, the term "broker" is used for all agents
Rehabilitation Mortgage: A mortgage loan made to cover the costs of repairing, improving, and sometimes acquiring an existing property.
Revolving Debt: Credit that is extended by a creditor under a plan in which
(1) the creditor contemplates repeated transactions; (2) the creditor may impose a finance charge from time to time on an outstanding unpaid balance; and
(3) the amount of credit that may be extended to the consumer during the term of the plan is generally made available to the extent that any outstanding balance is repaid.
Right of First Refusal: A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.
Seller Disclosure: Documents completed by the seller when they list their home for sale. It is comprised of at least three pages listing known issues with the property that are not visiable to the naked eye. Sellers Disclosures normally include information about different systems in the home such as: plumbing, electrical, HVAC and septic. It can also include information about remodels, easements and HOA fees.
Settlement Statement: A document that lists all closing costs on a consumer mortgage transaction.
Taxes and Insurance: Funds collected as part of the borrower’s monthly payment and held in escrow for the payment of the borrower’s, or funds paid by the borrower for, state and local property taxes and insurance premiums.
Termite Inspection: An inspection to determine whether a property has termite infestation or termite damage. In many parts of the country, a home must be inspected for termites before it can be sold.
Title: Ownership of real estate or personal property. With real estate, title is evidenced by a deed (or other document) recorded in the county land records office.
Title report: The written analysis of a real estate title search, including a property description, names of titleholders and how title is held, tax rate, encumbrances (mortgages, liens, deeds of trust, recorded judgments), and real estate taxes due. A title report is needed before a lender will agree to finance purchase of the property. A title report is prepared by a title company, an attorney, or an escrow company.
Underwriting: The process used to determine loan approval. It involves evaluating the property and the borrower’s credit and ability to pay the mortgage.
Walk-Through: A common clause in a sales contract that allows the buyer to examine the property being purchased at a specified time immediately before the closing, for example, within the 24 hours before closing.
Warranties: Written guarantees of the quality of a product and the promise to repair or replace defective parts free of charge.
Zoning: The local laws dividing cities or counties into different zones according to allowed uses, from single-family residential to commercial to industrial. Mixed-use zones are also used. Zoning ordinances control the size, location, and use of buildings within these different areas and have a profound effect on traffic, health, and livability.