General
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Answers to the most Frequently Asked
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The Real Estate Dictionary |
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"Home Buyer's
Vocabulary"
U.S. Department of Housing and
Urban Development
Washington, D.C. 20410
HUD-383-H(8)
(Previous Edition Current)
The potential home buyer will find this Vocabulary helpful for
understanding words and terms used in real estate transactions. There are,
however, some factors that may affect these definitions:
* Terms are defined as they are commonly understood in the mortgage
and real estate industry. The same terms may have different meanings in
another context.
* The definitions are intentionally general, non-technical and short.
They do not encompass all possible meanings or nuances that a term may
acquire in legal use.
* State laws, as well as custom and use in various States or regions of
the country, may modify or completely change the meanings of certain terms
defined.
Before signing any documents or depositing any money preparatory to
entering into a real estate contract, the purchaser should consult with an
attorney of his choice to ensure that his rights are properly protected.
Note: A bold typed word appearing within a definition indicates that the
word is defined elsewhere in the alphabetical listing.
A
Abstract (Of Title)
A summary of the public records relating to the title to a particular
piece of land. An attorney or title insurance company reviews an abstract
of title to determine whether there are any title defects which must be
cleared before a buyer can purchase clear, marketable, and insurable
title.
Acceleration Clause
Condition in a mortgage that may require the balance of the loan to become
due immediately, if regular mortgage payments are not made or for breach
of other conditions of the mortgage.
Agreement of Sale
Known by various names, such as contract of purchase, purchase agreement,
or sales agreement according to location or jurisdiction. A contract in
which a seller agrees to sell and a buyer agrees to buy, under certain
specific terms and conditions spelled out in writing and signed by both
parties.
Amortization
A payment plan which enables the borrower to reduce his debt gradually
through monthly payments of principal.
Appraisal
An expert judgment or estimate of the quality or value of real estate as
of a given date.
Assumption of Mortgage
An obligation undertaken by the purchaser of property to be personally
liable for payment of an existing mortgage. In an assumption, the
purchaser is substituted for the original mortgagor in the mortgage
instrument and the original mortgagor is to be released from further
liability in the assumption, the mortgagee's consent is usually required.
The original mortgagor should always obtain a written release from further
liability if he desires to be fully released under the assumption. Failure
to obtain such a release renders the original mortgagor liable if the
person assuming the mortgage fails to make the monthly payments.
An "Assumption of Mortgage" is often confused with "purchasing subject to
a mortgage." When one purchases subject to a mortgage, the purchaser
agrees to make the monthly mortgage payments on an existing mortgage,
but the original mortgagor remains personally liable if the purchaser
fails to make the monthly payments. Since the original mortgagor remains
liable in the event of default, the mortgagee's consent is not required to
a sale subject to a mortgage.
Both "Assumption of Mortgage" and "Purchasing Subject to a Mortgage" are
used to finance the sale of property. They may also be used when a
mortgagor is in financial difficulty and desires to sell the property to
avoid foreclosure.
B
Binder or "Offer to Purchase"
A preliminary agreement, secured by the payment of earnest money, between
a buyer and seller as an offer to purchase real estate. A binder secures
the right to purchase real estate upon agreed terms for a limited period
of time. If the buyer changes his mind or is unable to purchase, the
earnest money is forfeited unless the binder expressly
provides that it is to be refunded.
Broker
(See real estate broker)
Building Line or Setback
Distances from the ends and/or sides of the lot beyond which construction
may not extend. The building line may be established by a filed plat of
subdivision, by restrictive covenants in deeds or leases, by building
codes, or by zoning ordinances.
C
Certificate of Title
A certificate issued by a title company or a written opinion rendered by
an attorney that the seller has good marketable and insurable title to the
property which he is offering for sale. A certificate of title offers no
protection against any hidden defects in the title which an examination of
the records could not reveal. The issuer of a certificate
of title is liable only for damages due to negligence. The protection
offered a homeowner under a certificate of title is not as great as that
offered in a title insurance policy.
Closing Costs
The numerous expenses which buyers and sellers normally incur to complete
a transaction in the transfer of ownership of real estate. These costs are
in addition to price of the property and are items prepaid at the closing
day. This is a typical list:
BUYER'S EXPENSES SELLER'S EXPENSES
Documentary Stamps on Notes Cost of Abstract
Recording Deed and Mortgage Documentary Stamps on Deed
Escrow Fees Real Estate Commission
Attorney's Fee Recording Mortgage
Title Insurance Survey Charge
Appraisal and Inspection Escrow Fees
Survey Charge Attorney's Fee
The agreement of sale negotiated previously 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 are concluded. The
certificate of title, abstract, and deed are generally prepared for the
closing by an attorney and this cost charged to the buyer. The buyer signs
the mortgage, and closing costs are paid. The final closing merely
confirms the original agreement reached in the agreement of sale.
Cloud (On Title)
An outstanding claim or encumbrance which adversely affects the
marketability of title.
Commission
Money paid to a real estate agent or broker by the seller as
compensation for finding a buyer and completing the sale. Usually it is a
percentage of the sale price--6 to 7 percent on houses, 10 percent
on-land.
Condemnation
The taking of private property for public use by a government unit,
against the will of the owner, but with payment of just compensation under
the government's power of eminent domain. Condemnation may also be
a determination by a governmental agency that a particular building is
unsafe or unfit for use.
Condominium
Individual ownership of a dwelling unit and an individual interest in the
common areas and facilities which serve the multi-unit project.
Contract of Purchase
(See agreement of sale)
Contractor
In the construction industry, a contractor is one who contracts to erect
buildings or portions of them. There are also contractors for each phase
of construction: heating, electrical, plumbing, air conditioning, road
building, bridge and dam erection, and others.
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 dwellings. It is operated
for their benefit by their elected board of directors. In a cooperative,
the corporation or association owns title to the real estate. A resident
purchases stock in the corporation which entitles him to occupy a unit in
the building or property owned by the cooperative. While the resident does
not own his unit, he has an absolute right to occupy his unit for as long
as he owns the stock.
D
Deed
A formal written instrument by which title to real property is transferred
from one owner to another. 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 purchaser at closing day. There
are two parties to a deed: the grantor and the grantee. (See also deed of
trust, general warranty deed, quitclaim deed, and special warranty deed.)
Deed of Trust
Like a mortgage, a security instrument whereby real property is given as
security for a debt. However, in a deed of trust there are three parties
to the instrument: the borrower, the trustee, and the lender, (or
beneficiary). In such a 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. If the
borrower pays the debt as agreed, the deed of trust becomes void. If,
however, he defaults in the payment of the debt, the trustee may sell the
property at a public sale, under the terms of the deed of trust. In most
jurisdictions where the deed of trust is in force, the borrower is subject
to having his property sold without benefit of legal proceedings. A few
States have begun in recent years to treat the deed of trust like a
mortgage.
Default
Failure to make mortgage payments as agreed to in a commitment based on
the terms and at the designated time set forth in the mortgage or deed of
trust. It is the mortgagor's responsibility to remember the due date and
send the payment prior to the due date, not after. Generally, thirty 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
accelerate payments, take possession and receive rents, and start
foreclosure. Defaults may also come about by the failure to observe other
conditions in the mortgage or deed of trust.
Depreciation
Decline in value of a house due to wear and tear, adverse changes in the
neighborhood, or any other reason.
Documentary
Stamps
A State tax, in the forms of stamps, required on deeds and mortgages when
real estate title passes from one owner to another. The amount of stamps
required varies with each State.
Down Payment
The amount of money to be paid by the purchaser to the seller upon the
signing of the agreement of sale. The agreement of sale will refer to the
down payment amount and will acknowledge receipt of the down payment. Down
payment is the difference between the sales price and maximum mortgage
amount. The down payment may not be refundable if the purchaser fails to
buy the property without good cause. If the purchaser wants the down
payment to be refundable, he should insert a clause in the agreement of
sale specifying the conditions under which the deposit will be refunded,
if the agreement does not already contain such clause. If the seller
cannot deliver good title, the agreement of sale usually requires the
seller to return the down payment and to pay interest and expenses
incurred by the purchaser.
E
Earnest Money
The deposit money given to the seller or his agent by the potential buyer
upon the signing of the agreement of sale to show that he is serious about
buying the house. If the sale goes through, the earnest money is applied
against the down payment. If the sale does not go through, the earnest
money will be forfeited or lost unless the binder or offer to purchase
expressly provides that it is refundable.
Easement Rights
A right-of-way granted to a person or company authorizing access to or
over the owner's land. An electric company obtaining a right-of-way across
private property is a common 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 numerous forms, such as zoning
ordinances, easement rights, claims, mortgages, liens, charges, a pending
legal action, unpaid taxes, or restrictive convenants. An encumbrance does
not legally prevent transfer of the property to another. A title search is
all that is usually done to reveal the existence of such encumbrances, and
it is up to the buyer to determine whether he wants to purchase with the
encumbrance, or what can be done to remove it.
Equity
The value of a homeowner's unencumbered interest in real estate. Equity is
computed by subtracting from the property's fair market value the total of
the unpaid mortgage balance and any outstanding liens or other debts
against the property. A homeowner's equity increases as he pays off his
mortgage or as the property appreciates in value. When the mortgage and
all other debts against the property are paid in full the homeowner has
100% equity in his property.
Escrow
Funds paid by one party to another (the escrow agent) to hold until the
occurrence of a specified event, after which the funds are released to a
designated individual. In FHA mortgage transactions an escrow account
usually refers to the funds a mortgagor pays the lender at the time of the
periodic mortgage payments. The money is held in a trust fund, provided by
the lender for the buyer. Such funds should be adequate to cover yearly
anticipated expenditures for mortgage insurance premiums, taxes, hazard
insurance premiums, and special assessments.
F
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.
G
General Warranty Deed
A deed which 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
That party in the deed who is the buyer or recipient.
Grantor
That party in the deed who is the seller or giver.
H
Hazard Insurance
Protects against damages caused to property by fire, windstorms, and other
common hazards.
HUD
U.S. Department of Housing and Urban Development. Office of
Housing/Federal Housing Administration within HUD insures home mortgage
loans made by lenders and sets minimum standards for such homes.
I
Interest
A charge paid for borrowing money. (See mortgage note)
L
Lien
A claim by one person on the property of another as security for money
owed. Such claims may include obligations not met or satisfied, judgments,
unpaid taxes, materials, or labor. (See also special lien.)
M
Marketable Title
A title that is free and clear of objectionable liens, clouds, or other
title defects. A title which 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, and special assessments. Mortgages generally run
from 10 to 30 years, during which the loan is to be paid off.
Mortgage Commitment
A written notice from the bank or other lending institution saying it will
advance mortgage funds in a specified amount to enable a buyer to purchase
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 and to provide
a reserve fund to protect lenders against loss in insured mortgage
transactions. In FHA insured mortgages this represents an annual rate of
one-half of one percent paid by the mortgagor on a monthly basis.
Mortgage Note
A written agreement to repay a loan. The agreement is secured by a
mortgage, serves as proof of an indebtedness, and states the manner in
which it shall be paid. The note states the actual amount of the debt that
the mortgage secures and renders the mortgagor personally responsible for
repayment.
Mortgage (Open-End)
A mortgage with a provision that permits borrowing additional money in the
future without refinancing the loan or paying additional financing
charges. Open-end provisions often limit such borrowing to no more than
would raise the balance to the original loan figure.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
P
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
Sometimes called "discount points." A point is one percent of the amount
of the mortgage loan. For example, if a loan is for $25,000, one point is
$250. Points are charged by a lender to raise the yield on his loan at a
time when money is tight, interest rates are high, and there is a legal
limit to the interest rate that can be charged on a mortgage. Buyers are
prohibited from paying points on HUD or Veterans' Administration
guaranteed loans (sellers can pay, however). On a conventional mortgage,
points may be paid by either buyer or seller or split between them.
Prepayment
Payment of mortgage loan, or part of it, before due date. Mortgage
agreements often restrict the right of prepayment either by limiting the
amount that can be prepaid in any one year or charging a penalty for
prepayment. The Federal Housing Administration does not permit such
restrictions in FHA insured mortgages.
Principal
The basic element of the loan as distinguished from interest and mortgage
insurance premium. In other words, principal is the amount upon which
interest is paid.
Purchase Agreement
See agreement of sale.
Q
Quitclaim Deed
A deed which transfers whatever interest the maker of the deed may have in
the particular parcel of land. A quitclaim deed is often given to
clear the title when the grantor's interest in a property is questionable.
By accepting such a deed the buyer assumes all the risks. Such a deed
makes no warranties as to the title, but simply transfers to the buyer
whatever interest the grantor has. (See deed.)
R
Real Estate Broker
A middle man or agent who buys and sells real estate for a company, firm,
or individual on a commission basis. The broker does not have title to the
property, but generally represents the owner.
Refinancing
The process of the same mortgagor paying off one loan with the proceeds
from another loan.
Restrictive Covenants
Private restrictions limiting the use of real property. Restrictive
covenants are created by deed and may "run with the land," binding all
subsequent purchasers of the land, or may be "personal" and binding only
between the original seller and buyer. The determination whether a
covenant runs with the land or is personal is governed by the language of
the covenant, the intent of the parties, and the law in the State where
the land is situated. Restrictive covenants that run with the land are
encumbrances and may affect the value and marketability of title.
Restrictive covenants may limit the density of buildings per acre,
regulate size, style or price range of buildings to be erected, or prevent
particular businesses from operating or minority groups from owning or
occupying homes in a given area. (This latter discriminatory covenant is
unconstitutional and has been declared unenforceable by the U.S. Supreme
Court.)
S
Sales Agreement
See agreement of sale.
Special Assessments
A special tax imposed on property, individual lots or all property in the
immediate area, for road construction, sidewalks, sewers, street lights,
etc.
Special Lien
A lien that binds a specified piece of property, unlike a general lien,
which is levied against all one's assets. It creates a right to retain
something of value belonging to another person as compensation for labor,
material, or money expended in that person's behalf. In some localities it
is called "particular" lien or "specific" lien. (See lien.)
Special Warranty Deed
A deed in which the grantor conveys title to the grantee and agrees to
protect the grantee against title defects or claims asserted by the
grantor and those persons whose right to assert a claim against the title
arose during the period the grantor held title to the property. In a
special warranty deed the grantor guarantees to the grantee that he has
done nothing during the time he held title to the property which has, or
which might in the future, impair the grantee's title.
State Stamps
See documentary stamps
Survey
A map or plat made by a licensed surveyor showing the results of measuring
the land with its elevations, improvements, boundaries, and its
relationship to surrounding tracts of land. A survey is often required by
the lender to assure him that a building is actually sited on the land
according to its legal description.
T
Tax
As applied to real estate, an enforced charge imposed on persons, property
or income, to be used to support the State. The governing body in turn
utilizes the funds in the best interest of the general public.
Title
As generally used, the rights of ownership and possession of particular
property. In real estate usage, title may refer to the instruments or
documents by which a right of ownership is established (title documents),
or it may refer to the ownership interest one has in the real estate.
Title Insurance
Protects lenders or homeowners against loss of their interest in property
due to legal defects in title. Title insurance may be issued to a
"mortgagee's title policy." Insurance benefits will be paid only to the
"named insured" in the title policy, so it is important that an owner
purchase an "owner's title policy", if he desires the protection of title
insurance.
Title Search or Examination
A check of the title records, generally at the local courthouse, to make
sure the buyer is purchasing a house from the legal owner and there are no
liens, overdue special assessments, or other claims or outstanding
restrictive convenants filed in the record, which would adversely affect
the marketability or value of title.
Trustee
A party who is given legal responsibility to hold property in the best
interest of or "for the benefit of" another. The trustee is one placed in
a position of responsibility for another, a responsibility enforceable in
a court of law. (See deed of trust.)
Z
Zoning Ordinances
The acts of an authorized local government establishing building codes,
and setting forth regulations for property land usage.
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