If you are buying a home, you may sometimes feel confused by the complicated vocabulary used in real estate transactions. This list can help you understand some of the terms you’ll hear as you go through the process of negotiating the purchase of a new home.
A word of explanation
Some things to keep in mind when you are reading through these definitions:
■These terms are defined as they are commonly understood in the real estate business. The same terms may have different meanings in another context.
■These definitions are intentionally general, non-technical, and short. They do not cover all of the possible meanings that a term may have 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.
Before signing any documents or depositing any money, you should always consult with an attorney to ensure that your rights are properly protected.
Glossary of terms
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 find out whether there are any problems with the title (title defects) that must be cleared before the purchase. Problems with the title could prevent you from getting adequate insurance on the property, and could affect the value of the property and your ability to sell it later on.
A condition in a mortgage that requires the borrower or property owner (the mortgagee) to pay the balance of the loan immediately or following an accelerated schedule. An acceleration clause may become effective if you fail to make regular mortgage payments or violate another condition of the mortgage (such as the requirement that you pay local property taxes or maintain an adequate homeowner’s insurance policy).
Agreement of sale
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. It may also be called a contract of purchase, purchase agreement, or sales agreement, depending on where you live.
A payment plan that enables you, as a borrower, to reduce your debt gradually through periodic (generally monthly) payments. When property is used for business, amortization also refers to the annual reduction in the property’s value for tax and business reporting purposes.
An expert estimate of the value of a piece of property. Mortgage lenders generally require an appraisal to ensure that the value of the property is greater than the loan they are considering.
Assumption of mortgage
An arrangement that allows an existing mortgage to be shifted from one property owner (or mortgagor) to the next. If you enter into this type of agreement, your name is entered on the mortgage instrument and you become legally responsible for paying the mortgage and following all of its conditions. The former owner is released from any responsibility under the mortgage. Your consent, as the buyer, is usually required for an assumption of mortgage, and it becomes legally valid (or binding) only if you sign a written release from liability (which releases the former owner from any liability under the mortgage). Without that release, if you fail to make your monthly mortgage payments, the mortgage lender may still require the former owner to pay.
An assumption of mortgage is often confused with purchasing subject to a mortgage. When you make an agreement to purchase subject to a mortgage, you agree to make the monthly payments on an existing mortgage, but the original mortgagor remains personally liable if you fail to make your payments. Since the original owner remains liable in the event of default, the mortgage lender’s consent to a sale subject to a mortgage is not required.
Both arrangements (assumption of mortgage and purchasing subject to a mortgage) are ways to finance the sale of property. They may be used when a property owner is in financial difficulty and needs to sell the property to avoid foreclosure.
Binder or offer to purchase
A preliminary agreement to purchase a piece of real estate. To be valid, a binder must be secured by the payment of “earnest money,” and must be signed by both the buyer and the seller. A binder grants you, as the buyer, the right to purchase the property at an agreed price and on agreed terms for a limited period of time (while you apply for a mortgage, have the property inspected, have the title checked, and take any other steps you may need to take before you complete the purchase). If you change your mind or are unable to purchase, you forfeit the earnest money unless the binder clearly states that it is to be refunded.
(See real estate broker.)
Building line or setback
Distances from the ends or sides of the lot beyond which construction may not extend. The building line or setback restrictions may be required by the subdivision in which the property lies, by local building codes or zoning laws, or by a special requirement in the property’s deed or lease.
Certificate of title
A certificate issued by a title company, or a written opinion from an attorney, stating that the seller has a clear title (“good, marketable, and insurable” title) to the property being offered for sale. A certificate of title is not a guarantee to you, as a buyer, that there are no hidden problems with the title (hidden title defects) that would not be uncovered by a normal, careful examination of the title records. The title company or lawyer issuing the certificate of title is liable only for damages due to negligence — for not noticing and pointing out a defect that is in the title records. You can get more comprehensive protection against a title problem by purchasing a title insurance policy.
The meeting at which documents are signed, payments are made, and ownership of the property is legally transferred from the seller to the buyer. The certificate of title, abstract, and deed are generally prepared for the closing by an attorney and this cost is charged to the buyer. The buyer signs the mortgage document and payment is made to cover the closing costs. The final closing confirms the original agreement reached in the binder or agreement of sale.
The many small and large expenses that buyers and sellers normally incur to complete the sale of a piece of property. These costs are separate from the price of the property. Payment of closing costs is generally required at the closing. This is a typical list:
■Documentary stamps on notes
■Recording deed and mortgage
■Appraisal and inspection
■Cost of abstract
■Documentary stamps on deed
■Real estate commission
The agreement of sale negotiated between the buyer and the seller (the binder) may state in writing who will pay each of the various closing costs.
Cloud (on title)
An outstanding claim or encumbrance that adversely affects the marketability of the title. This might be a second or third mortgage, a legal challenge to the title, an agreement to allow mining or drilling on the property, or a restriction on the property that might prevent you, as new owner, from using and enjoying the property in the ways you intend.
Money paid to a real estate agent or broker — most commonly by the seller — as compensation for finding a buyer and completing the sale of a piece of property. A commission is usually a percentage of the sale price — 6 to 7 percent on houses, 10 percent on land. While sellers have traditionally hired and paid commissions to real estate agents or brokers, more and more buyers are hiring buyer’s agents and paying them commissions to perform these services on their behalf.
The taking of private property for public use under the government’s power of eminent domain. The property is taken by the government against the will of the owner, but with payment of reasonable and just compensation. Condemnation may also be the decision by a government agency that a particular building is unsafe or unfit for use.
A form of property ownership that allows you, the buyer, to be the sole owner of an apartment or living unit and to share in the ownership of common areas and facilities in a multi-unit building or development.
Contract of purchase
(See agreement of sale.)
In the construction industry, a contractor is someone who contracts to build buildings or portions of buildings. There are also contractors for each phase of construction: heating, electrical, plumbing, air conditioning, road building, bridge and dam construction, etc.
A mortgage loan that is not insured by the U.S. Department of Housing and Urban Development (HUD) or guaranteed by the Veterans Administration. Banks, mortgage companies, and other financial institutions lend money for home purchases in the form of conventional mortgages.
An apartment building or a group of homes owned by a housing corporation whose stockholders are the people who live in the homes or apartments. The residents/stockholders elect a board of directors to oversee the management of the property. The corporation or association owns title to the property. While the residents do not own their specific apartments or units, they have an absolute right to live in their units for as long as they own stock in the corporation.
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 transferred, 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 (the person giving up ownership of the property) and the grantee (the new owner of the property). (See also deed of trust, general warranty deed, quitclaim deed, and special warranty deed.)
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, and their cost, varies from state to state.
The amount you, as the buyer, come up with from your own resources to purchase the property. The down payment is the difference between the sale price and the amount to be borrowed under the mortgage or deed of trust. You pay the down payment amount to the seller when you both sign the agreement of sale. The agreement of sale specifies the down payment amount and acknowledges its receipt by the seller. If you do not follow through and complete the purchase of the property, you may forfeit the down payment. Because events outside of your control may keep you from completing the purchase, you should be sure the agreement of sale specifies the conditions under which the down payment will be refunded. If the seller cannot deliver good title, for example, or you make a reasonable effort and find that you are unable to obtain the needed mortgage, the agreement of sale usually requires the seller to return the down payment.
The deposit money that you give to the seller or to the seller’s agent when you and the seller sign the binder or offer to purchase to show that you are 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, you may forfeit the earnest money unless the binder or offer to purchase expressly provides that it is refundable.
A right-of-way granted to a person or company, authorizing access to or over the owner’s land. A common example is when an electric company obtains a right-of-way across private property for a power line.
An obstruction, building, or part of a building that intrudes beyond a legal boundary onto neighboring property, or a building extending beyond the building line.
A legal right or interest in land that affects a good or clear title, and diminishes the land’s value. This can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes, or restrictive covenants. 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. It is up to the buyer to determine whether he or she wants to purchase the property with the encumbrance, or what can be done to remove it.
The value of a homeowner’s unencumbered interest in real estate. Equity is computed by taking the property’s fair market value and subtracting the total of the unpaid mortgage balance and any outstanding liens or other debts against the property. A homeowner’s equity increases as he or she pays off his or her 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 percent equity in the property.
Money the property owner pays to the lender to be held in a special, protected account (an escrow account) to be used to pay mortgage insurance premiums, real estate taxes, and other regular expenses required to ensure the continued value of the property. The money in the escrow account belongs to the buyer, and can only be used to pay for certain expenses related to the property, as specified in the mortgage or deed of trust.
A legal term for any of the various methods of enforcing payment of the debt secured by a mortgage or deed of trust. Foreclosure methods include taking and selling the mortgaged property, and evicting the borrower from the property and renting it until the mortgage is paid.
General warranty deed
A deed that conveys all of the seller’s interests in and title to a piece of property to the buyer, and that 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 buyer may hold the seller liable.
The party in the deed who is the buyer or recipient.
The party in the deed who is the seller or giver.
Protects against damages caused to property by fire, windstorms, and other common hazards.
The 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.
A charge paid for borrowing money. (See also mortgage note.)
A claim by one person or party on the property of another as security for money owed. A lien may be applied to guarantee the payment of unpaid taxes, money due to a contractor, or any other debt. A lien prevents the property from being sold without first paying the money owed. (See also special lien.)
A title that is free and clear of objectionable liens, clouds, or other title defects. It enables an owner to sell his or her property freely to others, and is accepted by others without objection.
A lien or claim against real property given by the buyer (or borrower) to the lender as a security for money borrowed. Under the terms of a mortgage, the borrower grants the lender certain rights to the property in the event that the borrower defaults on the mortgage (fails to make regular mortgage payments or does not fulfill other conditions of the loan). The lender has the right to force the property to be sold to repay the loan, for example, or to evict the borrower from the home in order to rent it and earn money toward the loan’s repayment. Mortgages generally run from 10 to 30 years. The borrower makes regular (generally monthly) payments of interest and principal until the loan is completely repaid.
A written notice from the bank or other lending institution saying it agrees to make a mortgage loan to the buyer, and will advance mortgage funds in a specified amount to enable a buyer to purchase a house.
A government insurance program, administered by the Federal Housing Administration (FHA), that protects mortgage lenders against loss when borrowers default on mortgage loans. A mortgage lender may require you, as a borrower, to buy mortgage insurance. When this happens, the lender generally adds the mortgage insurance premiums to the amount you pay with your regular mortgage payment. The lender then forwards the premium portion of your payment to the government to help defray the cost of the FHA mortgage insurance program.
A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of the debt, and specifies how the loan will be repaid. The note states the actual amount of the debt that the mortgage secures and renders the borrower (or mortgagor) personally responsible for repayment.
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 borrowing to no more than the balance of the original loan figure.
The lender in a mortgage agreement.
The borrower in a mortgage agreement.
A map or chart of a lot, subdivision, or community drawn by a surveyor showing boundary lines, buildings, improvements on the land, and easements.
Sometimes called discount points. A point is 1 percent of the amount of the mortgage loan. For example, if a loan is for $25,000, one point is $250. Lenders charge points to raise their returns on loans at times 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, either buyer or seller or a combination of the two may pay the points.
Payment of the mortgage loan, or part of it, before the 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. No restrictions on prepayments are allowed in FHA-insured mortgages.
The amount of money borrowed under a mortgage loan — as distinguished from additional money that may be paid over the course of the loan, such as interest and mortgage insurance premiums. In other words, principal is the amount upon which interest is paid.
(See agreement of sale.)
A deed that transfers whatever interest the owner of a deed may have in a particular parcel of land — with the understanding that other parties may also have a claim to the property. Such a deed makes no warranties that the title is clear of any encumbrances, but simply transfers to the buyer whatever interest the current owner of the deed has. 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 of dealing with competing claims and encumbrances on the property. (See also deed.)
An agent who buys and sells real estate for someone else on a commissioned basis. The broker does not have title to the property, but generally represents the owner or seller. Buyers may also arrange for brokers to represent them in their search for property and negotiations for its purchase.
The process of replacing one mortgage loan with another, generally at a lower rate. Refinancing is done by obtaining a new mortgage (from the same mortgage lender or from a different lender) and using the money borrowed in the new loan to pay off the outstanding balance on the old loan.
Private restrictions that limit 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 language of the covenant, the intent of the parties, and the law in the state where the land is situated determine whether a covenant runs with the land or is personal. 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 in a given area. (Note that federal law prohibits housing discrimination based on race, color, national origin, religion, sex, family status, or disability. If you encounter restrictive covenants that discriminate in these ways, call the U.S. Department of Housing and Urban Development Housing Discrimination Hotline, toll-free, at 800-669-9777.)
(See agreement of sale.)
A special tax imposed on property, individual lots, or all property in the immediate area, for road construction, sidewalks, sewers, street lights, etc.
A lien that binds a specified piece of property (as opposed to a general lien, which is levied against all of an individual’s assets). A special lien gives one person certain ownership rights to another person’s property as a way to collect money that is owed for work or materials or money spent on the property. In some places it is called a “particular” or “specific” lien. (See also lien.)
Special warranty deed
A deed that gives limited warranty protection to the buyer of a piece of property for problems with the title (title defects) that may have arisen during the time the previous owner owned the property. The person issuing the special warranty deed (the grantor) guarantees to the property’s buyer (the grantee) that he or she has done nothing during the time he or she held title to the property that has impaired, or that might in the future impair, the grantee’s title.
(See documentary stamps.)
A map or plat made by a licensed surveyor showing the elevations, improvements, and boundaries of the land, as well as its relationship to surrounding pieces of property. A survey is often required by the lender as assurance that a building is actually located on the land according to its legal description.
The rights of ownership and possession of particular property. In real estate transactions, title has two meanings: it 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 an individual has in the real estate.
Insurance that protects homeowners or lenders from loss due to problems with the title to a piece of property. Title insurance may be issued to either the homeowner, as an owner’s title policy, or to the mortgage lender, as a mortgagee’s title policy. Since payment is made only to the party insured, if you want the full benefit of a title insurance policy be sure to purchase an owner’s title policy.
Title search or examination
A check of the title records, generally at the local courthouse, to make sure the buyer is purchasing a piece of property from the legal owner and there are no restrictions, claims, or liens on the property that would reduce its value or limit the buyer’s ability to resell.
A party who is given legal responsibility to hold property in the best interest or for the benefit of another. The trustee is put in a position of responsibility for someone else and must conform to certain legal requirement. (See also deed of trust.)
Acts carried out by an authorized local government, establishing building codes and setting regulations for property land usage.