REAL ESTATE TERMS
Below is a list of general real estate terms to assist buyers and sellers when they are the market to move to a new location. There are specific laws for the state of California regarding each of these terms. Make sure you consult with your attorney when you need specific information or legal advice about any of these definitions.
Adjustable Rate Mortgage (ARM)
The interest rate on the mortgage loan changes periodically depending on the index. The index adjusts based on the cost the buyer needs to pay to the lender. The lender usually offers this loan to the buyer at their base rate. An example of this adjustable rate mortgage may be one-year treasury bills. The adjustable mortgage rate usually doesn’t change any more than six points or two percentage points every year above the rate at which the rate started. There are specific rate specifications for different mortgage loans so the buyer should check these rates with the lender before they agree to receive the loan.
Amortization
This maturing process starts as soon as you make your first payment on your mortgage loan. The buyer is able to pay off their loan to the lender in monthly payment installations. Every single monthly payment includes the amounts that may vary in price such as interest or principal payments. The process lasts for the entire life of the loan.
Appraisal
These are made by professionals who have an unbiased opinion of the property or home being sold. The current state of the home is decided and a quality value is placed on the property. This allows the buyer and seller to understand if the value the property being sold at is reasonable given its current condition. The appraisal is done as of a specific date for lending purposes. The final quality value placed on the property may not have any true effect on its market value.
Appraised Value
This is a professional judgement that is completed to place a quality value on any given property or estate that is on the market to be sold to potential buyers. The final determination of the property’s worth may not actually have any effect on its market value. This helps buyers, lenders, and sellers understand the security that may be offered on this property for a home loan.
Bridge Finance
These loans are received by the buyer on a short-term basis from the lender. These types of loans usually have higher interest rates than the long-term mortgage loans. These are usually only taken out for about two to three weeks when someone selling a home wants to buy a new one before the old one has been officially sold. This can also be referenced when a buyer or seller need a second subordinate loan in addition to their first.
Caveat Emptor
Caveat emptor is a phrase that is originated from the Latin language and is roughly translated into English meaning “let the buyer beware.”
Although many states require the seller to tell potential buyers about any defects there may be with the property they’re selling, the final burden still lies with the buyer to make sure they are fully satisfied with the home they are trying to purchase. The buyer should take all the necessary steps and receive all the appropriate inspections to determine whether the home is right for them. All of these events should occur before the buyer legally closes on the home.
Chattels: Personal Property
Chattels are the personal property items that can be easily removed from the home or property. Some examples of “movable” personal property include furniture, clothing, some electronics, etc. On the other hand, real property items can’t be moved. Real property consists of items that can’t be moved such as the actual land or property in question.
Closing Protection Letter (CPL)
The letter is created by the title insurance company and is given to the lender before the official closing of the house is complete. This is a contractual letter that is agreed upon by the lender and the title insurance underwriter to ensure the lender isn’t held responsible for any misconduct that is performed by the closing agent. This misconduct can occur if the closing agent or attorney doesn’t properly follow the closing instructions previously set forth by the lender. If this misconduct effects the title or mortgage in any way, the lender is not legally held responsible.
Commission
This is the fee the buyer, seller, or both have to pay the real estate agent for allowing them to sell and buy the property. The amount is usually determined by taking a percentage of the sale price of the property but it can be negotiated between the buyer, seller, and the real estate agent/ broker.
Contingent Offer
The homebuyer is able to make an offer to the seller with contingencies attached. These are requirements the seller must fulfill before the buyer is officially prepared to proceed with purchasing the home or property from the seller. The buyers can receive a refund of the earnest money deposit they gave if the seller is not able to fulfill the criteria established in the contingent offer. Potential contingencies may be that the buyer needs to sell their home first or the seller needs to have a specific inspection done on the home before the buyer will agreed to purchase the property.
Contract of Sale
This is an official agreement that occurs between the buyer and seller of a home or property. Within this contract is the buyer’s agreement to purchase the property at the price named by the seller. The entire list of terms and agreements associated with the buying and selling of the property are included in this contract. The official transfer of ownership occurs when the buyer pays the allotted amount of the seller gives over the property. This means closing is complete and the title rights are with the new owner.
Covenant
The formal promise or agreement that is incorporated into every contract or deed. This specifies the conditions that must be met concerning any issues or defects that exist with the property. These stipulations are commonly included in the contract or deed because the covenant is usually presented in some form of written agreement.
Conventional Mortgage
These loans aren’t offered by any kind of institution or organization that is secured by the government. Conventional loans aren’t insured by Urban Development or the United States Department of Housing. Additionally, the Department of Veteran Affairs does not guarantee these loans either. Any loan offered under conventional terms will be administered through institutions that consider themselves to be private lenders. Some examples include credit unions, banks, and numerous mortgage companies. The private lender sets their own requirements and conditions for the distribution of these loans so the mortgage rates vary depending on the lender the buyer chooses to use.
Credit Report
Lenders will usually ask to see a buyer’s credit report to understand the credit history of that specific buyer. The credit report number dictates how well the buyer is at handling their money as well as paying back any debts that are owed in a timely manner. A higher credit score means the buyer is responsible with their money and pays their credit bills on time every month. A lower credit score most likely depicts a buyer who just recently started using credit or someone who has a lot of debt they still haven’t paid back. If the buyer has a low credit score, the lender may see them as an unfavorable candidate trust their money with in the form of a home loan.
Deposit (or Earnest Money)
This is a portion of the property’s purchase price that the buyer agrees to pay at the beginning of escrow as a “good faith” payment. Through the depositing of earnest money, the buyer is showing the seller that they are serious about purchasing the home or property that is up for sale. Depending on the terms and conditions set forth by the purchase agreement, this deposit may be nonrefundable. After the final purchase is made when escrow is closed, this earnest money deposit most commonly goes towards paying the total purchase price of the home.
Document Preparation
The attorney designated by the buyer will commonly charge a fee for preparing the necessary transactional documents. These are all the appropriate legal documents both the buyer and seller need to sign in order to make the transaction official and legal.
Encroachment
This is a structure or feature of a home that overhangs onto someone else’s property. The structure or feature could also be a fence that is built over the line that legally separates the two properties. If such a structure exists, the owner of the encroachment can be asked to move it by the other property owner that it is affected. If they chose not to remove the structure, they could be subject to legal repercussions.
Encumbrance
These are the home or property defects that are addressed by the buyer and the seller before the property is closed on. This can be in the form of a judgment, lien, easement, or any other restrictions that are currently placed on the property being sold. The buyer has a responsibility to make sure all the proper inspections are completed before they agree to purchase the property to make sure they are able to receive proper transfer of a clean title to their name.
Equity
The current market value of the real property being sold or purchased after any outstanding loans and liens deducted. The total equity of the property is the market value minus these outstanding discrepancies. Once the final calculations are completed, the outstanding loan amount can’t exceed the market value or the property is considered to have negative equity.
Escrow Funds
A third-party account that holds the earnest money deposits for both the buyer and seller until escrow is officially closed. The buyer pays their earnest money deposit to the escrow agent until all conditions within the purchase agreement contract are met by both parties. During this time the buyer will make sure their homeowner’s insurance is secured while the seller will make any reparations to the house that were previously agreed upon. After escrow is closed, each party will receive what they signed for. In most cases the seller will receive their money and the buyer will receive their new home or property. The lender will usually require the buyer to make monthly payment installations for any additional principals or interests to cover their expenses once the closing is complete.
Exclusions
If there are any items or features on the property that the seller doesn’t want to include in the final sale, this information needs to be written out within the contract. These transactional documents must also be signed by both the buyer and seller of the property or home.
Fixed Rate Mortgage
These are very desirable loans for people who want to continuously pay the same amount of interest on the loan they are receiving from the lender. Some of these types of loans in California include the CalHFA FHA, CalPLUS FHA, CalHFA VA, CalHFA USDA, Cal-EEM + Grant Program, and NADL loans. A buyer who chooses this type of loan will pay the same amount of interest on it for the entire length of the loan term. This is usually during the time span of 15 to 30 years.
Homeowners Insurance
This is a type of insurance that the buyer usually discusses with their lender before the lender is willing to let them borrow the money to purchase their new home or property. The home or property is fully protected under this insurance from any kind of loss or damage. Lenders commonly want the insurance to cover the entire loan amount or at least 80% of the improvement value. The lender will choose the greater value and require the buyer to pay it throughout the duration of the loan.
Inclusions
These are all of these removable or easily movable items that the seller has agreed to allow the buyer to have with the overall purchase of the home or property. These items include personal belongings such as ceiling fans, air-conditioning units, lights, curtains, stoves, fixed cupboards, etc.
Inspections
These are the overall assessments that a buyer should have a professional third-party complete on the prospective property they are looking to buy. The professional will be able to tell the buyer what current condition the property is in as well as if there are any defects that the buyer should address in the contingency offer to make sure all of the issues are fixed by the seller before escrow is closed. These inspections can be overall home and property inspections as well as more specific assessments such as pest and termite inspections. If reparations are needed before escrow is closed and the funds are disbursed to the appropriate parties, the inspections will uncover these issues.
Interest
This is the amount of money the lender is going to charge the buyer for allowing them to borrow money for the home loan. The loan that the lender is giving to the buyer is the money the buyer needs in order to purchase their new home. The lender allows the buyer to borrow this money as long as they also pay an additional amount of money on top of the total cost of the loan. The type of loan the buyer receives will determine if the interest rate is fixed or not.
Interest-Only Loan
The type of loan allows the buyer to only have to pay the interest for the loan on a monthly basis. During this entire life of the loan, the buyer doesn’t have to pay the principal amount until the end of the loan term. Although this an option for the full term for some loans, other loans can be interest-only for a certain length of time. Then, the buyer must begin paying the interest and the principal of the loan once that time period has expired.
Inventory
This is the full list of every item that is included in the purchase agreement. Every item listed in the inventory will be received by the buyer once escrow is closed. These items are usually the removable items that the seller isn’t going to take with them such as the furniture, furnishings, and other removable items that is considered unwanted by the seller.
Investment
A buyer will purchase a home or property in order to make money off the real estate they buy. They are investing the money they currently have in the hopes that they will earn an even larger sum of money as income. People who invest their money in real estate will usually purchase an average home, add some new furnishings as well as other modern renovations, and then sell the asset for a higher price than they originally bought it.
Join Tenants with Right of Survivorship
This is when two or more people have the legal rights to a home or property. They are considered to be in a joint tenancy when they have equal holdings. Additionally, the survivor of the property receives the interests of the person who died.
Liabilities
This is usually a sum of money that a person or company still owes to another person or company. Another commonly used term for liabilities are debts. Buyers are less likely to receive a home loan from a lender if they have a lot of outstanding debts they still need to pay to other institutions. Having a lot of liabilities could also result in the buyer having a low credit score.
Lien
Many banks and institutions utilize these claims as a means of placing a hold on a person’s property so they can feel more secure that they will receive the money they are owed. A lien can come in the form of legitimate money or other conditions such as judgments, materials, labor, or even unpaid taxes.
Loan Application Fee
The buyer has to pay this fee to the lender when they are initially applying to receive a loan from that specific bank or institution. This fee varies on the lender. There can also be additions added to this fee if the lender wants to get a copy of the buyer’s credit report from a private agency. The buyer is responsible for making this payment to the lender as well.
Loan Discount (or Discount Points)
During closing the buyer can pay extra money in order to receive a decrease quote on their interest rate. This will allow the buyer to pay more cash upfront during the closing process so they have to pay less money each month for interest on the loan. If the lender choosing to use the “discount points”, one point usually equals about 1% of the total loan amount. When the lender offers the buyer points during closing, they are basically pushing the loan amount above the amount that is required for the original interest rate. This allows the buyer the opportunity to pay less interest throughout the entire life of the loan.
Loan Estimate Form and Closing Disclosure Form
The Consumer Financial Protection Bureau wants to ensure that buyers complete extensive research before they decide which mortgage loan they want to receive. These forms allow the buyers to completely understand what the mortgage loans are going to cost so the buyer can choose a lender that is going to best suit their needs in both the short and long term. Most transactions require these forms to ensure the transaction is smooth and the buyer isn’t met with any unknown charges from the lender when they are about to officially close on their new home.
Maintenance Fee
The subdivision restrictions that are included in the transaction documents addresses the specific amount the buyer must pay to the homeowner’s association for maintenance fees. These fees cover all costs that are necessary to keep the grounds and common areas aesthetically pleasing within the neighborhood. This is usually more common for buyers who live in condos or apartments, but this can also be the cause for homeowners who choose to live in more upscale neighborhoods.
Maturity Date
This is the last official day that exists within the home-loan agreement. After this date, the buyer is required to pay the full amount of the home loan or they are responsible for getting the home-loan agreement refinanced or simply renewed.
Mortgage (or Deed of Trust)
This is the legal agreement that allows the lender to formally communicate their terms and conditions to the buyer. Within this contract the new homeowner states that the lender has rights to the title of their home if they are unable to pay back the agreed monthly amount for the loan. All this information is laid out in a promissory note and the transactional documents are made official in the county records.
Mortgagee’s (or Lender’s) Title Policy
This policy does not provide any form of protection for the property owner. The sole purpose of this policy is to provide protection for the lender so the owner is legally bound to adhere to the validity and priority of any lien placed on the property by the lender. Before the prospective buyer purchases the property, the must agree to this title policy in order to protect the lender from any future ownership claims made on the property.
Multiple Listing Service (MLS)
A multiple listing service (MLS) is officially created by real estate brokers who gather any and all data they have about properties for sale into one database. The MLS is only accessible to brokers/agents and it gives them an opportunity to connect homebuyers and sellers who match really well based on the properties for sale contained in the provided listings. This extremely resourceful tool can be efficiently used by both buyers and sellers alike. Sellers are able to receive a lot of visibility because their home is being advertised to a large variety of people. Moreover, various agencies and brokerages provide buyers an easy way to search numerous listings all in one place. The MLS does not list homes that are classified as “For Sale by Owner” (FSBO).
Offer
This offer is the formal document used to purchase real estate. This document establishes the basic terms and conditions being proposed between the buyer and seller during any real estate transaction. Once the Offer is signed by the buyer and the seller and the contained contingencies are met, it then becomes a legally binding agreement.
Offer to Purchase
Both the buyer and seller use this document to lay out the specific conditions that determine how the property is to be sold. Within this document, the seller states a particular price they would like to sell their home or property for. The buyer is then able to either fully agree to this price or agree to it based on certain contingencies that are also addressed in the purchase agreement and other legal documents that are exchanged during the transaction. This includes the contingency offer as well so all encumbrances or liens currently placed on the property must be resolved before the buyer officially purchases and gains legal ownership of the property.
Option to Buy
This is a legal document that states the buyer is allowed to purchase property at any point and time and for a certain price during any time in the future. The buyer can choose this option by paying a fee. The fee is usually a portion of the total price of the home or property. If the conditions the buyer sets within this agreement aren’t met by the seller, this option may be refunded to the buyer. Also, the buyer will not receive their money back if the buyer doesn’t actually decide to complete the purchase.
Origination Fee
When a loan is originated, the buyer is applying for the loan and the lender is processing their application. The origination fee is the amount of money the lender requires the buyer to pay in order for them to process the buyer’s application.
Owner’s Title Policy
Depending on the exact terms and conditions that apply, this policy gives the buyer rights to the clean title that is transferred to their name after escrow closes on their new home or property.
PITI
This is the commonly used abbreviation that represents the various payments that a new homeowner is subject to when they purchase a new home or property. This abbreviation stands for principal, interest, taxes, and insurance. All of these features require the buyer to pay different amounts. Additionally, the buyer may not have to pay some of the features until the end of the loan term. This is especially true if they have an interest-only loan where the principal is only paid at the end of the loan term.
Power of Attorney (POA)
This is a written authorization that allows one person to act completely on behalf as another person. Some married couples enact a power of attorney when they get married so their spouse is able to make all legal decisions on their behalf.
Principal
The principal value is a specific amount of money that buyer must pay during the course of the loan term. This value is the exact amount of money the lender allowed the buyer to borrow when they were making the purchase for their new home or property. The buyer has to pay the lender back all of this money including interest by the end of the loan term or legal repercussions may be enforced on the delinquent buyer.
Private Mortgage Insurance (PMI)
The lender of the money is protected from any default the buyer may inflect on the mortgage payment. The type of insurer that is used will cause the public or private classification of the private mortgage insurance to vary. This type of insurance is usually used on smaller loans but is most often used on loans where the lender is allowing the buyer to borrow a large sum of money.
Property Survey
Property surveys are completed by a professional to assess and confirm the boundaries of the land being purchased. The entire size of the lot is confirmed through this survey and any encroachments that are witnessed during the assessment must be addressed by the buyer unless they want to deal with legal repercussions.
Real Estate Professional Fee
The term “commission” is more commonly used to describe this fee. This is the amount of money that both the buyer and seller are required to give their real estate agents when the home or property is closed. The real estate professionals are compensated for the time and effort they input throughout the duration of their services to both parties.
Recording Fees
The transactional documents are established in the county records to make sure the new homeowner has legal rights to the title that was transferred when the property was closed. The county charges a fee to have these official records changed upon the transference of the property title to a new name.
Restrictions
Any restrictions that apply for the home or property specify what modifications can and cannot be made to the property by the new homeowner once they receive legal rights to the possession of the title. These restrictions are written down and contained within the official property deed. The homeowner’s association for any given neighborhood are most commonly in charge of enforcing these restrictions for every resident. The lender will usually require the buyer to give them a certified copy of all the restrictions contained within the deed. The buyer must also renew the restrictions after their termination date if applicable.
Settlement
The settlement is reached when the buyer has paid the total amount owed to the seller. Once the money has been properly distributed to the appropriate parties, the buyer now has legal ownership over the title and the property.
Tax Proration
The buyer and the seller will split the cost of the property taxes during the closing appointment. The amount that each party pays depends on how long they each spend in the home during that year. For example, the person who spend a longer amount of time in the home that year will put more money towards the property tax.
Title Insurance
This provides a certain level of protection for the lenders and real estate owners if any property is lost or damaged due to the defects, liens, or judgments that are already associated with the title of the property. Every individual title insurance policy has its own terms and conditions that must be adhered to.
Title Search
This is when public records and other legal documents are examined to determine all the history that exists for the property in question. The buyer wants to ensure that a title search is completed before they officially purchase the new home or property because there may be liens or judgments on the title. If there are any of these defects on the title, the buyer will not be able to receive a clean title transference when they close on the home or property. This may cause the buyer to be burden with additional payments that were not any fault of their own.