Understanding the Language of Real Estate Cambridge MA
Understanding the Language of Real Estate
Real estate is full of specific terms that are not used in any other field or aspect of life. When looking at real estate ads or speaking with a real estate agent, we often hear these terms and don’t know what they mean. This is a helpful glossary of some common real estate terms to help you better understand.
Abstract of Judgment: After a court judgment regarding a property is issued, an abstract of judgment will be created summarizing the provisions of the judgment. An abstract of judgment creates a general lien on all of the judgment debtor’s real property within the county of the judgment.
Acknowledgement: A formal declaration that an execution of a property is the doer’s act and deed. Acknowledgements are usually made before notary publics and are required to close most real estate transactions
Adjustable Rate Mortgage (ARM): The interest rate for an ARM is adjusted according to a pre-selected index. Each lender has its own form of ARM, meaning the terms, schedule, and index used vary
Agency: The relationship most people buying or selling property have with a real estate agent is called agency. This means giving the real estate agent the right to act on the principal’s behalf in business transactions.
All-Inclusive Trust Deed (Wrap-Around Mortgage): This is a financing technique where a new trust deed is created including the balance due on the previous deed in addition to any new money.
American Land Title Association (ALTA): This is the nation’s largest association of title companies, abstractors, and agents. The association has standard forms for all of its members.
Amortization: Paying off debt in installments over a period of time without any final balloon payment.
Annual Percentage Rate (APR): The percentage of your total loan amount that must be paid yearly for finance charges. Lenders are required to supply you with this information under the Truth-in-Lending Act.
Appraisal: An assessment of a property’s fair market value according to various factors. Appraisals are normally made by state-licensed appraisers
Assessed Valuation: A property’s value according to the government. Used to calculate taxes.
Assumable: A mortgage that can be transferred to another person without any change in terms.
Balloon Payment: A lump sum paid at the end of the loan term to cover the remaining principal - required by many loan agreements.
Beneficiary: A person who receives the property or money under a will, trust, insurance policy, or security instrument. The beneficiary of a mortgage is the lender.
Beneficiary’s Statement: If a home owner wants to sell or refinance his/her home, he/she will usually ask for a beneficiary’s statement from the lender. This statement lists the remaining balance due on the principal of the loan, as well as any other information on the loan.
Bill of Sale: The means by which a property’s title is exchanged.
Bona Fide Purchaser (BFP): A person who is buying property for the fair market price without any claims against or infringing on the rights of any third parties.
Broker: A person who is licensed by the state to act as an agent for someone else’s interests in a real estate transaction in exchange for a fee or commission.
Buydown: A common finance technique whereby the recipient of a loan will make subsidy payments in order to lower the effective interest rate of a loan, lowering monthly payments. It is sometimes used by developers or builders to make the property more attractive to potential buyers.
California Land Title Association (CLTA): A statewide association of title companies. Like the ALTA, the CLTA’s members use standardized forms.
Covenants, Conditions, and Restrictions (CC and Rs): Most commonly used in reference to condominiums or planned developments, CC and Rs are bylaws for the use of real property.
Chain of Title: A timeline of a property’s ownership from its original owner to present. Title companies will establish a chain of title before issuing title insurance.
Cap: A limit on the increase in the rate of an adjustable rate mortgage, preventing the mortgage from becoming too onerous, even if the index it is tied to increases more than expected.
Clear Title: A property title with no liens, defects, or encumbrances. What every home owner wants
Closing: The last step in a real estate transaction. After the purchase agreement is signed, it must be fulfilled during the closing process, after which the property’s title can finally be exchanged, along with payment. Closing is called “settlement” in some areas.
Closing Costs: Fees not included in the price of the property, but which must be paid before the title can be transferred. Include things like loan, title, and inspection fees and are paid at closing of sale.
Closing Statement: Created by an escrow or settlement agent, a balance sheet for both parties detailing the debits and credits of both parties at closing.
Cloud on Title: Anything that negatively affects a property’s title.
Commission: The payment due a real estate agent from the principal for services rendered.
Community Property: Property acquired during marriage that is held jointly by husband and wife.
Comparables (comps): The comparable properties that are used by an appraiser to determine a home’s value.
Consideration: A part of all contracts – the clause by which something of value or a promise is exchanged for someone else’s act or promise.
Contingency: An action that is dependent on something else happening first. A contract is contingent on its conditions being met.
Conveyance: A transfer of title or interest in real property requiring a written agreement like a deed of trust.
Deed of Trust: The means by which a property’s title is transferred to a third-party trustee as security for money owed by the borrower to the lender. A deed of trust creates a lien on the property.
Demand: A statement from the lender detailing the amount necessary to pay off a loan.
Documentary Transfer Tax: A tax charged by the city and/or county on a property’s transfer. The amount of the tax is based on the sales price minus the loans being assumed.
Due-on-Sale Clause: A clause sometimes included in mortgages that allows the lender to demand full payment of the remaining principal on the loan if the property is sold. Due-on-Sale Clauses are not applicable to FHA or VA loans.
Earnest Money: A cash deposit made by a prospective buyer to prove his/her good faith to the seller.
Easement: A right or interest in land owned by another person which entitles its holder to limited use, privilege, or benefit in the land.
Encumbrance: A lien or claim upon, or right to, real property held by a person who does not own the property.
Endorsement: An amendment to an insurance policy which expands or limits the policy’s coverage. Can also be spelled “indorsement.”
Equity: The value of someone’s interest in real property minus all liens and charges upon the property.
Escrow: Called closing or settlement in some areas. After the purchase agreement is signed, a third party holds the money and documents involved the transaction to be delivered to the necessary parties after the purchase agreement is fulfilled.
Exception: A provision in title insurance excluding liability for a specific title defect, lien, or encumbrance.
Fair Market Value: The price an appraiser believes the property would sell for in a competitive market if there were a willing seller and a willing buyer, both having knowledge of all important facts about the property, but with no compulsion to buy or sell.
Fee Simple: An estate that allows the owner a total interest in a property, allowing him/her to use the property without restriction and the right to dispose of it.
Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac): An agency that buys mortgages on the secondary mortgage market. Freddie Mac is a quasi-governmental agency, so the mortgages it buys must be from depository institutions and bankers that have been approved by the Department of Housing and Urban Development (HUD).
Federal Housing Administration (FHA): Part of the Department of Housing and Urban Development, the FHA primarily insures residential mortgage loans that have been issued by private lenders.
Federal National Mortgage Association (FNMA, Fannie Mae): Congress created Fannie Mae during the depression in order to support the secondary mortgage market. Fannie Mae is a private corporation that buys and sells residential mortgages that have been insured by the FHA or guaranteed by the VA, in addition to normal home mortgages.
Finance Charge: The total costs that are imposed on the customer by the lender. Under the federal Truth-in-Lending laws, financial institutions must provide borrowers with all information on direct and indirect charges prior to issuing a loan.
First Mortgage: A mortgage on a property that has rights superior to those held by any other mortgage.
Fixed Rate Loan: A loan for which the rate of interest does not change during the life of the loan.
Fixture: Personal property that is not removable from real property, such as a structure. Due to their inseparability, the fixture become part of the real property.
Grantee: The recipient of a grant. OR One who purchases real property.
Grantor: The giver of a grant. OR One who sells real property.
Hidden Defect: Any encumbrance on a title not listed in the public records. Examples include unknown heirs or secret marriages.
Impound Account: A lender’s account held for the payment of taxes, insurance, or other debts against real property.
Joint Tenancy: A system of property ownership where to or more people own equal shares in the property. The remaining owners take ownership of another’s share in the event of his/her death.
Legal Description: A geographical description of a property that allows it to be located on surveys or maps. Also called just “The Legal.”
Lien: An interest in real property as security for a debt. Liens must be recorded in writing and can be created by contract or by court judgment.
Lis Pendens: A notice of a pending lawsuit. Also known as a “Notice of Action.”
Loan-to-Value Ratio: The ratio of the principal of the mortgage loan to the lower amount between the property’s appraised value and its sales price.
Marketable Title: A title with no defects that could allow a purchaser to escape his/her obligation to purchase.
Market Value: The amount that a property has been appraised for. A property’s market value reflects the lowest price a willing seller and the highest price a willing buyer would accept without compulsion.
Mechanic’s Lien: A lien placed on a property for debts owed someone who has provided labor, services, or materials for construction or improvement of the property.
Metes and Bounds: A description of a property’s boundaries using courses, directions, distances, and monuments.
Mortgage: A legal document that secures the performance of an obligation.
Notarization: A Notary Public’s certification that the person signing a document has been properly identified. Notarization ensures only the signature, not the document’s contents.
Perfecting Title: The process of eliminating any adverse claims or liens from a title.
PITI: The four major components of the standard monthly mortgage payment: Principal, Interest, Taxes, and Insurance.
PITI Ratio: The ratio of your PITI to your income. PITI ratio is used by lenders in making decisions on the issuance of a mortgage.
Points: A fee charged a borrower to fund a loan in addition to any other fees charged. One point = one percent of the loan’s amount.
Principal: The amount of a loan which is still unpaid and on which interest is payable. OR Someone who is served by a real estate agent.
Private Mortgage Insurance (PMI): Insurance issued by a private mortgage insurance company to protect a lender from loss due to default and foreclosure on a mortgage.
Proration: The method by which charges are divided into the amount of time for which a party has had ownership of a property.
Qualification: The review conducted of the prospective borrower’s credit and ability to pay conducted by a lender prior to loan approval.
Quitclaim Deed: A deed by means of which the grantor relinquishes all interest, title, and claim to a property. Can be issued without representing the validity of a title or having a warranty or covenants of title.
Real Estate Settlement Procedures Act (RESPA): A federal statute that requires certain costs to be disclosed in the case of a sale of improved residential property that is to be financed by a federally insured lender.
Reconveyance: The conveyance of a property’s title from the trustee of a trust to the property’s owner following the performance of a debt.
Recordation: Filing a record in the county recorder’s office to give notice of title, claim, or interest in real property.
Record Owner: A property’s owner according the public record.
Statement of Information (SI): A statement of confidential information made by buyer, seller, and borrower in any real estate transaction where title insurance is requested. Gives the title company the ability to search for documents that affect the property in the question, no matter if these documents refer to the property or not. Also helps the title company to differentiate between the parties in the transaction and others with similar names in reference to liens and court decrees.
“Subject To” Clause: A clause in a contract of sale allowing one of the parties to get out of the contract if certain conditions or contingencies of the sale, such as financing, are not met.
Subordination Agreement: An agreement that relegates a lien which had previously been superior to a position inferior to another lien.
Tax Lien: A lien placed on a property by a governmental body as punishment for failure to pay taxes.
Tenancy in Common: Two or more people owning a property with an undivided interest in the entire property.
Title Plant: A title company’s database of information on property titles. Title plants are continuously updated in order to allow the title company to conduct a quick search of all records relevant to a property.
Trustee: A person holding the title to a property in trust for another person. The trustee is the person named by the deed of trust to hold title until the loan is paid off.
Trustor: The borrower under a trust agreement. OR A person who gives his/her property to a trustee as security for a loan.
Uniform Settlement Statement: A standard form that must be given to the borrower, lender, and seller before a real estate transaction can be closed according to HUD.
Unmarkable Title: A title with defects that would allow a purchaser to get out of his/her obligation to purchase the property.
Vesting: The manner in which a title is held. Common types of vestings include Community Property, Joint Tenancy, and Tenancy in Common.
Veterans Administration (VA): Part of the Executive branch of the federal government, the VA can insure and guarantee loans made to veterans by private companies. The VA also makes loans directly to veterans if they live in non-urban areas where private loans are unobtainable.
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