Home Buying-Selling Dictionary

Real estate transactions include many terms of art. This dictionary can help you understand familiar words and phrases in real estate transactions.

A few notes about the dictionary:

• We define terms commonly used in the mortgage and real estate industry. These same terms may have different meanings in another context.
• Definitions are intentionally general, non-technical, and short. They may not encompass all possible meanings. Some definitions may only be applicable under some states' existing laws.
• If you are looking for a specific term or word, you can use the control+F keyboard shortcut to search for that term or phrase.

Abstract (of title): A summary of the public records relating to the title of a particular piece of land. An attorney or title insurance company reviews an abstract of the title to determine if there are any title defects to clear before someone can buy the house.

Acceleration clause: A condition in a mortgage may require the loan balance to become due immediately if the borrower does not make regular mortgage payments or breaches other mortgage conditions.

Adjustable-rate mortgage: A home loan with a variable interest rate.

Agreement of sale: A contract in which a seller agrees to sell, and a buyer agrees to buy under specific terms and conditions spelled out in writing and signed by both parties. Other names include:

• Contract of purchase
• Purchase agreement
• Sales agreement

Amortization: A payment plan that gradually lets the borrower reduce his debt through monthly principal payments.

Annual percentage rate: The annual cost of the mortgage loan as a percentage.

Appraisal: The estimate of the value of real property made by an impartial expert, typically including references to sales of comparable properties to estimate the value. A lender will require an appraisal as a condition of the mortgage.

Appraised value: Value of home, based on appraised value.

Assessments: Costs charged for public improvements that benefit the land. The purchase agreement should address pending assessments and at closing.

Assessor: A public official who determines the value of a home for tax purposes.

Assumption of mortgage: An obligation undertaken by the property buyer to be personally liable for payment of an existing mortgage. In an assumption, the buyer replaces the original mortgagor in the mortgage instrument, and the original mortgagor has no further liability in the assumption; the mortgagee's consent is usually required.

The original mortgagor should always get a written release from further liability if they desire a full release under the assumption. Failure to get such a release renders the original mortgagor liable if the person assuming the mortgage fails to make the monthly payments.

Binder or "offer to purchase": A preliminary agreement, secured by earnest money payment, between a buyer and seller as an offer to buy real estate. A binder secures the right to buy real estate upon agreed terms for a limited period. If the buyer changes their mind or can't buy, they lose the earnest money unless the binder expressly provides for a refund.

Broker: (See real estate broker)

Building line or setback: Distances from the lot's ends and sides beyond which construction may not extend. The building line is often a filed plat of subdivision by restrictive covenants in deeds or leases, building codes, or zoning ordinances.

Certificate of title: A certificate issued by a title company or a written opinion by an attorney that the seller has a good, marketable, and insurable title to the property they are offering for sale.

A certificate of title offers no protection against any hidden defects in the title that an examination of the records could not reveal. The issuer of a certificate of title is liable only for damages due to negligence. A title insurance policy offers more excellent protection.

Closing: The closing is a meeting to finalize the transfer of sold property. The buyer signs the mortgage documents at closing and pays all closing costs. The seller signs the deed. Both parties sign the closing statement, which accounts for funds credited to the buyer and seller.

Closing costs: The many expenses that buyers and sellers typically incur to complete a transaction in the transfer of real estate ownership. These costs are in addition to the property's price and are items prepaid on the closing day. This is a typical list:

The sale agreement negotiated between the buyer and the seller may state in writing who will pay each of the above costs.

Closing day: The day on which the formalities of a real estate sale conclude. An attorney prepares the certificate of title, abstract, and deed charged to the buyer. The buyer signs the mortgage, and the escrow company pays the closing costs. The final closing confirms the original agreement reached in the agreement of sale.

Cloud (on title): An outstanding claim (encumbrance) that adversely affects the marketability of the title.

Commission: Money paid to a real estate agent or broker as compensation for finding a buyer and completing the sale. Usually, it is a percentage of the sale price.

Condemnation: Condemnation is a determination by a governmental agency that a particular building is unsafe or unfit for use.

Condominium: The condominium unit owner owns the unit and, along with other unit owners, has the right to use the common areas owned by the condominium association. Condominium laws vary significantly from state to state but typically include an association that maintains the building, pays taxes and insurance, and holds the reserves for improvements.

Counteroffer: An offer made in response to an original offer.

Contract for deed: A contract for deed allows a buyer to take possession of the property in exchange for monthly payments. The seller maintains legal title to the property until they get the final payment. The parties negotiate the terms of the contract for the deed.

Contractor: In the construction industry, a contractor contracts to erect buildings or portions of them. There are also contractors for each construction phase:

• Heating
• Electrical
• Plumbing
• Air conditioning
• Road building
• Bridge and dam erection

Conventional mortgage: A mortgage loan not insured by HUD or guaranteed by the Veterans' Administration. It is subject to conditions established by the lending institution and state statutes. The mortgage rates may vary with different institutions and between states. (States have various interest limits.)

Cooperative housing: An apartment building or a group of dwellings owned by a corporation, the stockholders of which are the residents of the units. An elected board of directors operates the dwelling for the resident's benefit. In a cooperative, the corporation or association owns title to the real estate. Residents buy stock in the corporation, entitling them to live in a unit in the cooperative's building or property. While the residents do not own the unit, they have an absolute right to occupy it for as long as they hold the stock.

Creditor: The person or party who lends money.

Credit report: A written account of a person's credit history.

Deed: A legal document by which title to real property transfers from one owner to another.

Deed of trust: A security instrument where real property is security for a debt. In a deed of trust, the instrument has three parties:

• Borrower
• Trustee
• Beneficiary

In this transaction, the borrower transfers the 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.

Default: Failure to make mortgage payments as agreed to in a commitment based on the mortgage terms or deed of trust. Generally, 30 days after the due date, if payment is not received, the mortgage is in default. In the event of default, the mortgage may give the lender the right to speed up payments, take possession and receive rent, and start foreclosure. Defaults may also happen by failing to observe other mortgage or deed of trust conditions.

Depreciation: Decline in house value due to wear and tear, adverse changes in the neighborhood, or any other reason.

Documentary stamps: A state tax, in the form of stamps, required on deeds and mortgages when real estate title passes from one owner to another. The number of stamps required varies with each state.

Down payment (lump sum): The amount of money the buyer pays the seller upon signing the sale agreement.

Earnest money: The deposit money given to the seller or their agent by the potential buyer upon signing the sale agreement to show that he is serious about buying the house. The seller subtracts the earnest money down payment if the sale goes through. The buyer loses the earnest money if the deal does not go through.

Easement rights: A right-of-way granted to a person or company authorizing access to the owner's land. An electric company getting a right-of-way across private property is a typical example.

Encroachment: An obstruction, building, or part of a building that intrudes beyond a legal boundary onto neighboring private or public land or a building extending beyond the building line.

Encumbrance: A legal right or interest in land that affects a good or clear title and diminishes the land's value. It can take many forms, including the following:

• Zoning
• Ordinances
• Easement rights
• Claims
• Mortgages
• Liens
• Pending legal action
• Unpaid taxes
• Restrictive covenants

An encumbrance does not legally prevent the transfer of the property to another. A title search should reveal the existence of such encumbrances.

Equity: The value of a homeowner's unencumbered interest in real estate. Equity is the difference between the unpaid mortgage balance and the property's fair market value. A homeowner's equity increases as they pay off their mortgage or the property appreciates. The homeowner has 100% equity in their property after they pay off the mortgage.

Escrow: Funds paid by one party to another (the escrow agent) to hold until a specified event happens. The funds then go to a designated party. In FHA mortgage transactions, an escrow account is the funds a mortgagor pays the lender at the time of the periodic mortgage payments. A trust fund, provided by the lender, holds the money. These funds cover yearly anticipated expenditures for

• Mortgage insurance premiums
• Taxes
• Hazard insurance premiums
• Special assessments

FHA loan: Loans that the Federal Housing Authority (FHA) insures. The FHA is part of the Housing and Urban Development (HUD).

Fixed-rate mortgage: A fixed-rate mortgage has an interest rate that remains the same throughout the life of the home loan.

Foreclosure: A legal term applied to any of the various methods of enforcing payment of the debt secured by a mortgage or deed of trust by taking and selling the mortgaged property and depriving the mortgagor of possession. Foreclosure proceedings vary by state but typically include foreclosure by advertisement, which does not include a court proceeding or foreclosure by court action.

General warranty deed: A deed that conveys not only all the grantor's interests in and title to the property to the grantee but also warrants that if the title is defective or has a "cloud" on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic's liens against it) the grantee may hold the grantor liable.

Grantee: The party in the deed who is the buyer or recipient.

Grantor: The party in the deed who is the seller or giver.

Hazard insurance: Protects against damages caused to property by fire, windstorms, and other common hazards.

Home equity: Home equity is how much of your home you own. (See equity)

Home inspection: During a home inspection, a home inspector checks the house for any major defects or pest infestation. Lenders often need a home inspection before you can close on a home loan.

Homeowner's association: An organization comprised of homeowners that manage a residential community (like a development).

Homeowner's insurance: Property insurance that covers a private home. It can also cover personal property.

HUD: U.S. Department of Housing and Urban Development. The Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes. FHA loan, Freddie Mac, home loan

Interest: A charge paid for borrowing money. (See mortgage note)

Lien: A claim by one person on the property of another as security for money owed. Such claims may include the following:

• Unsatisfied obligations
• Judgments
• Unpaid taxes
• Unpaid materials or labor

Marketable title: A title that is free and clear of objectionable liens, clouds, or other title defects. A title that enables an owner to sell his property freely to others and which others will accept without objection.

Mortgage: A lien or claim against real property given by the buyer to the lender as security for money borrowed. Under government-insured or loan-guarantee provisions, the payments may include:

• Escrow amounts covering taxes
• Hazard insurance
• Water charges
• Special assessments

Mortgages generally last 10 to 30 years, during which the loan gets paid off with a due-on-sale clause.

Mortgage broker: A mortgage broker is a person or company that helps you find a mortgage for a fee. They do not provide loans.

Mortgage commitment: A written notice from the bank or other lending institution saying it will advance mortgage funds in a specified amount to a buyer to buy a house.

Mortgage insurance premium: The payment made by a borrower to the lender for transmittal to HUD to help defray the cost of the FHA mortgage insurance program.

Mortgage loan: A mortgage loan is secured with a lien on real property. Forms of mortgages include:

• Fixed-rate
• Adjustable-rate
• Balloon mortgages

Mortgage note: A written agreement to repay a loan secured by a mortgage. The note states the amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment.

Mortgage payment: Most mortgage payments have four parts, identified with the acronym PITI as follows:

• Principal
• Interest
• Taxes
• Insurance

Mortgage (open-ended): Open-ended mortgages allow you to borrow more money in the future without refinancing the loan or paying extra financing charges.

Mortgagee: The lender in a mortgage agreement.

Mortgagor: The borrower in a mortgage agreement.

Multiple listing service (MLS): The MLS is a database of housing for sale used by real estate professionals.

National Association of Realtors (NAR): The NAR is an organization for real estate professionals. The title "Realtor" is a professional designation only for NAR members. They must follow the organization's Realtor code of ethics.

Open house: An open house is an event a seller organizes to show their house to potential buyers.

Origination fee: Mortgage lenders charge this fee to cover the costs associated with processing a mortgage loan.

Plat: A map or chart of a lot, subdivision, or community drawn by a surveyor showing boundary lines, buildings, improvements on the land, and easements.

Points: A point is one percent of the mortgage loan amount. For example, if a loan is $25,000, one point is $250. Lenders charge points to raise the yield on their loan when:

• Money is tight
• Interest rates are high
• The law limits the interest rate they can charge

Buyers can't pay points on HUD or Veteran's Administration-guaranteed loans. The seller or buyer can pay points or split the payments on a conventional mortgage.

Prepayment: Payment of mortgage loan, or part of it, before the due date. Mortgage agreements often restrict the right of prepayment by limiting the amount that a borrower can prepay in any year or charging a prepayment penalty. The Federal Housing Administration does not allow such restrictions in FHA-insured mortgages.

Principal: The principal is the amount in a mortgage loan subject to interest. The principal equals the total amount of the loan minus any interest.

Private mortgage insurance (PMI): PMI is insurance lenders often require private mortgages to protect the lender.

Property taxes: Property tax is payable to the local government on your property.

Purchase agreement: See agreement of sale.

Purchase price: The purchase price of a home is the price that the buyer and seller agree on. This price does not include taxes and closing costs.

Quitclaim deed: A deed that transfers the maker's interest in real property. A quitclaim deed can clear the title when the grantor's interest in a property is questionable. Buyers who accept a quitclaim deed assume all the risks. A quitclaim deed offers no title warranties; it only transfers the grantor's interest in the real property. (See deed.)

Real estate broker: A licensed person or entity representing either the buyer or seller in the purchase or sale of real estate, usually on a commission basis. A "dual" broker represents both parties in the same transaction.

Real Estate Settlement Procedures Act: The Real Estate Settlement Procedures Act (RESPA) requires lenders to give borrowers disclosures on:

• Closing costs
• Lender servicing and escrow account practices
• Business relationships between settlement service providers

Under RESPA, mortgage lenders must provide the borrower with a good faith estimate of settlement service charges.

Refinance: When borrowers refinance their homes, they take out a new home loan, often at a lower interest rate.

Refinancing: The same mortgagor paying off their original loan with the proceeds from a new loan.

Restrictive covenants: Private restrictions limiting the use of real property created by a deed. Restrictive covenants may "run with the land" (binding all subsequent purchasers), or they are "personal" (binding between the original seller and buyer). Restrictive covenants that run with the land are encumbrances that may affect the value and marketability of the title. Restrictive covenants often:

• Limit the density of buildings per acre
• Regulate the size, style, or price range of buildings
• Prevent particular businesses from operating in a given area

Special assessments: A special tax imposed on property, individual lots, or all property in the immediate area for government improvements, like road construction.

Special warranty deed: A deed in which the grantor conveys title to the grantee and guarantees to the grantee that they have done nothing that might, in the future, impair the grantee's title.

Survey: A map or plat made by a licensed surveyor showing the results of measuring the land with its:

• Elevations
• Improvements
• Boundaries
• Relationship to surrounding tracts of land

Lenders often require surveys to ensure that real property is actually on the land according to its legal description.

Tax: As applied to real estate, an enforced charge imposed on property to support a local government. The governing body, in turn, uses the funds in the general public's best interests.

Title: In real estate, the title is the instrument or document establishing a right of ownership. It may also be the ownership interest one has in the real estate.

Title insurance: Protects lenders or homeowners against losing their interest in property due to legal defects in title. Title insurance is often issued to "mortgagee's title policy." Since insurance benefits go to the insured party, owners should buy an "owner's title policy" if they want title insurance protection.

Title search or examination: A check of the title records to ensure the buyer purchases a house from the legal owner without any encumbrances that would adversely affect the title's marketability.

Trustee: A party with legal responsibility to hold property in the best interests of or "for the benefit of" another. The trustee is placed in a position of responsibility for another, an obligation enforceable in a court of law. (See deed of trust.)

Underwriting: Underwriting analyzes a lender's risk in giving a borrower a home loan.

Zoning ordinances: The acts of an authorized local government establishing building codes and creating regulations for property land usage.

Get Help from a Real Estate Attorney

Real estate transactions include many legal documents that have terms of art. A qualified real estate attorney can review those documents and protect your interests. Speak to an experienced local real estate attorney today.