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California Real Estate Terminology
The following are brief descriptions of common terminology
used in California real estate transactions. These are
general terms and are not intended to apply to all possible
uses of the term. Please consult with your Realtor®
for more information or questions regarding definitions.
Accelerated Clause: Loan verbiage that
provides the lender with the right to demand payment
of the entire outstanding balance on your home loan,
if you miss a monthly payment, sell the home, or otherwise
fail to perform as promised under terms of your mortgage.
Adjustment Period: How often the rate
of an adjustable rate mortgage (see below) adjusts.
Typically, ARMs will adjust twice a year, but may adjust
as often as once a month.
Adjustable Rate Mortgage (ARM): A mortgage
that permits the lender to adjust the interest rate
periodically on the basis of changes in a specified
index. Compares to a fixed-rate mortgage.
Adjustable Period: The length of time
between interest rate changes on an ARM. For example,
a loan with an adjustable period of one year is called
a one-year ARM, which means that the interest rate can
change once per year.
Affidavit: A sworn statement in writing,
made before an authorized official.
ALTA: Abbreviation for the American
Land Title Association.
Amortization: Repayment of a loan in
equal installments of principal and interest rather
than interest only payments.
Annual Percentage Rate (APR): The total
finance charge (interest, loan fees, points expressed
as a percentage of the loan amount).
Appraisal: A written analysis of the
estimated value of a property prepared by a qualified
appraiser.
Appreciation/depreciation: Refers to
either the increase (appreciation) or the decrease (depreciation)
in a home’s value.
Assessments: Specific and special taxes
(in addition to normal taxes) imposed on real property
to pay for public improvements within a specific geographic
area.
Assessed value: The value of a property
according to your local tax assessor; determines how
much you will pay in property taxes.
Assumption of Mortgage: A buyer’s
agreement to assume the liability on an existing note
that is secured by a mortgage or deed of trust. The
lender must approve the buyer in order to assume the
loan.
Attorney-in-Fact: An agent authorized
to act for another under a power of attorney.
Balloon Loan: Require level payments
just as a 15-year or 30-year fixed rate loan. But well
before the date they become due, the full remaining
balance of the loan comes due. Though they can be economical
at the outset, beware of balloon loans – you may
not be able to refinance the loan.
Balloon Payment: A lump sum principal
payment due at the end of some mortgages or other long-term
loans.
Beneficiary: As used in a trust deed,
the lender is designated as the Beneficiary, i.e. obtains
the benefit of the security.
Binder: Sometimes known as an offer
to purchase or an earnest money request. A binder is
the acknowledgement of a deposit along with a brief
written agreement to enter into a contract for the sale
of real estate.
Biweekly payment mortgage: A mortgage
requiring payments every two weeks instead of the standard
monthly payment. The result is a substantial savings
in interest.
Bridge loan: If you close on a home
before completing the sale of your existing home (not
an ideal circumstance by anyone’s estimation),
you may need to obtain a bridge loan.
Broker: A person who, for a commission
or fee, brings parties together and assists in negotiating
contracts between them.
Buyer’s agent: A person licensed
to negotiate and transact the sale of real estate on
behalf of the buyer. The buyer’s broker or agent
only owes allegiance to the buyer and does not have
an agent relationship with the sellers.
Buydown: A Veteran’s Administration
loan plan available only in some new housing developments.
A builder agrees to pay part of the mortgage for the
first few yeas. Sellers also may create buydowns by
paying lenders a predetermined amount of money so lenders
will reduce their interest rates.
CLTA: Abbreviation for the California
Land Title Association.
Cap: The limit of how much the interest
rate or monthly payment can change either at each adjustment
or over the life of the mortgage.
Cash reserves: Lenders typically require
buyers to have enough cash left over after purchasing
a home to make two mortgage payments, to cover a financial
emergency.
CC & R’s: Covenants, Conditions
and Restrictions. A document that controls the use,
requirements and restrictions of a property.
Certificate of Reasonable Value (CRV):
A document that establishes the maximum value and loan
amount for a VA guaranteed loan.
Certificate
of Title: A statement provided by an abstract
company title or attorney stating that the title to real
estate is legally held by the current owner.
Closing: A meeting at which a sale of
a property is finalized by the buyer signing the mortgage
documents and paying closing costs.
Closing
Costs: Generally total from 2 percent to 5 percent
of the home’s purchase price; separate from the
down payment. Covers a number of costs including loan
document processing fees, appraisal report fees, credit
report fees etc.
Closing Statement:
The financial disclosure statement that accounts
for all of the funds received and expected at the closing
of the escrow, including deposits or taxes, hazard insurance
and mortgage insurance.
Collateral:
An asset (such as a car or home) that guarantees the repayment
of a loan.
Community Property: One
way to hold title to your home.
Conventional
Loan: A mortgage loan, which is not insured or
guaranteed by a governmental agency.
Contingencies:
Conditions contained in the Purchase Agreement, which
outlines the obligations, the seller and buyer must fulfill
before sale of the property is completed. Can concern
the results of your effort to obtain financing, an inspector’s
opinion of the condition of the property, etc.
Commission: The fee charged by a broker
or agent for providing services related to a real estate
transaction such as procuring the property, bringing the
parties together and negotiating a purchase contract or
loan.
Condominium: A form of
real estate ownership. The owner receives title to a particular
unit and has a proportionate interest in certain common
areas. The unit itself is generally a separately owned
space whose interior surfaces (walls, floors, and ceilings)
serve as its boundaries.
Contingency:
A condition that must be satisfied before a contract is
binding. For instance, a sales agreement may be contingent
upon the buyer obtaining financing.
Conversion
Clause: A provision in some ARMs that enables
you to change an ARM to a fixed rate loan, usually after
the first adjustment period. The new fixed rate is generally
set at the prevailing interest rate for fixed rate mortgages.
This conversion feature may cost extra.
Cooperative:
A form of multiple ownership in which a corporation or
business trust entity holds title to a property and grants
occupancy rights to shareholders by means of proprietary
leases or similar agreements.
Cosigner:
If your credit is less than stellar, it may be necessary
for you to have a cosigner – that is a friend or
relative willing to assume the risk (and actual indebtedness
for) your mortgage.
Credit Report: The
main basis for a lender to determine your "credit
worthiness." A historical list of your credit use
and bill payment performance.
Debt-to-income
Ratio: When you apply for a mortgage, the lender
looks at the amount of debt you will have relative to
your income. Acceptable limits generally range from 33
to 40 percent.
Deed: Written
instrument by which the ownership of land is transferred
from one person to another.
Deed of
Trust: Written instrument by which title to land
is transferred to a trustee as security for a debt or
other obligation.
Default: You
are officially in default when you fail to make two or
more monthly mortgage payments on time. This does not
automatically indicate that you will lose your home, however.
Many lenders will help you work to find a solution, as
foreclosure (see below) is expensive for the lender.
Delinquency: Comes before default.
What happens when you fail to provide one month’s
mortgage payment.
Deposit Receipt: Used
when accepting "Earnest Money" to bind an offer
for property by a prospective purchaser; also includes
terms of a contract.
Down Payment: Percentage
of the purchase price you will provide in cash up front.
Due on Sale Clause: An acceleration
clause that requires full payment of a mortgage or deed
of trust when secured property changes ownership.
Earnest Money: The portion of the
down payment delivered to the seller or escrow agent by
the purchaser with a written offer as evidence of good
faith.
Easement: A right created
by grant, reservation, agreement, prescription, or necessary
implication, which one has in the land of another.
Escrow: A procedure in which a third
party acts as a stakeholder for both the buyer and the
seller, carrying out both parties’ instructions
and assuming responsibility for handling all of the paperwork
and distribution of funds.
Equity:
A homeowner’s financial interest in a property.
Also can mean the difference between the market value
of your home and how much you owe on the property.
Exclusive listing: A written contract
that gives a licensed real estate agent the exclusive
right to sell a property for a specified time, but reserving
the owner’s right to sell the property himself without
the payment of a commission.
Fair Credit
Reporting Act: A consumer protection law that
regulates the disclosure of consumer reports by consumer/credit
reporting agencies and establishes procedures for correcting
mistakes on one’s credit record.
Federal
National Mortgage Association: Popularly known
as Fannie Mae. A privately owned corporation created by
Congress to support the secondary mortgage market. It
purchases and sells residential mortgages insured by FHA
or guaranteed by VA, as well as conventional home mortgages.
Fee Simple: An estate in which
the owner has unrestricted power to dispose of the property
as he wishes, including leaving by will or inheritance.
It is the greatest interest a person can have in real
estate.
FHA Loan (Federal Housing Administration):
A federal agency, create by the National Housing Act of
1934, for the purpose of expanding and strengthening home
ownership by making private mortgage financing possible
on a long-term, low down payment basis. The vehicle is
a mortgage insurance program, with premiums paid by the
homeowner, to protect lenders against loss on these higher
risk loans. Since 1965, FHA has been part of the newly
created department of Housing and Urban Development (HUD).
Finance Charge: The total cost
a borrower must pay, directly or indirectly, to obtain
credit. Fixed-rate Mortgage: A mortgage whose interest
rate is locked in for the life of the loan, which commonly
ranges from 15 to 30 years in duration. Compares to Adjustable
Rate Mortgages (ARMs).
Formula: The
way in which interest rates are calculated on Adjustable
Rate Mortgages. Add the margin to the index to get the
interest rate.
Foreclosure: The
legal process of the mortgage lender taking possession
of and selling the property. When you default on a loan
and the lender determines you are incapable of making
payment, you may lose your house to foreclosure. Graduated
Payment Mortgage: A residential mortgage with monthly
payments that start at a low level and increase at a predetermined
rate.
Grant: A transfer of
real property.
Grantee: The
person to whom a grant is made.
Grantor:
The person who makes a grant.
Home Inspection:
A thorough inspection that evaluates the structural and
mechanical condition of a property.
Home
Inspection Report: A qualified inspector’s
report on a property’s overall condition. The report
usually covers an evaluation of both the structural and
mechanical systems. Homeowner’s Insurance: Absolutely
required to obtain a mortgage, it covers the cost to rebuild
your home.
Home Warranty Policy:
Insurance that covers repairs to the home, generally for
one year. Covers smaller aspects of the home including
electrical, plumbing, pest contro,l etc.
Index:
The measure of interest rate changes used to
determine adjustments in an ARM’s interest rate
over the term of the loan.
Interest
Rate: The percentage fee lenders charge you to
use their money. The higher the rate of interest, the
higher the risk. For fixedrate mortgages, the interest
rate has a corresponding relationship with the points.
A high number of points will lower the rate and vice versa.
With an adjustable rate mortgage, understand the formula
(the index plus the margin) that determines how the interest
rate is calculated, after the teaser rate expires.
Joint Tenancy: An equal undivided
ownership of property by two or more persons. Upon death
of any owner, the survivor receives the decedent’s
interest in the property.
Late Charge:
What the mortgage company will add on to your payment
if it is received late. Can be as high as 5 percent of
the total payment.
Lien: A
legal hold or claim on property as security for a debt
or charge.
Life Cap: Determines the total amount that your adjustable
mortgage interest rate and monthly payment can fluctuate
during the duration of the loan. Different from the Periodic
Cap, which limits the extent to which your interest rate
can fluctuate during a predetermined adjustment period.
Loan Commitment: A written
promise to make a loan for a specified amount on specific
terms.
Loan to Value Ratio: The
relationship between the amount of the appraised value
of the property, expressed as a percentage of the appraised
value.
Lock-in: A written agreement
in which the lender guarantees a specified interest rate
if a mortgage goes to closing within set period of time.
Margin: The number of percentage points
the lender adds to the index rate to calculate the ARM
interest rate at each adjustment.
Mortgage:
A legal document that pledges a property to the lender
as security for payment of a debt.
Mortgage
Banker: A company or individual engaged in the
business of originating mortgage loans with its own funds.
Selling those loans to long term investors and servicing
the loans for the investor until they are paid in full.
Mortgage Broker: A person who
buys mortgages wholesale from lenders and then sells them
to buyers. Can "shop your loan around" to find
the best rate. Good for people with less-than-stellar
credit histories.
Mortgage Insurance:
A contract that insures the lender against loss
caused by a mortgagor’s default on a government
mortgage or conventional mortgage.
Multiple
Listing Service (MLS): A cooperative listing
of nearly all the homes on the market for real estate
agents.
Negative Amortization:
This occurs when monthly payments fail to cover the interest
cost. The interest not covered is added to the unpaid
principle balance so that even after several payments,
you could owe more than you did at the beginning of the
loan.
Net worth: The value
of all of a person’s assets, including cash, minus
all liabilities. Origination Fee: A fee or charge for
establishing a loan. See Points.
Partnership:
Way in which unmarried individuals can take title to a
property. Can include domestic partners or business partners.
It’s recommended that a real estate lawyer first
draw up a written partnership agreement before the purchase.
Periodic Cap: Limits the amount
that the interest rate of an adjustable-rate mortgage
can change in one adjustment period.
PITI:
Principal, interest, taxes and insurance. The basics of
your montly mortgage payment.
Planned
Unit Development (PUD): A zoning designation
for property developed at the same or slightly greater
overall density than conventional developments, sometimes
with improvements clustered between open, common areas.
Point: An amount equal to one
percent of the principal amount of the investment or note.
The lender assesses loan discount points at closing to
increase the yield on the mortgage to a position competitive
with other types of investments.
Pre-Payment
Penalty: A fee charged to a mortgagor who pays
a loan before it is due. Not allowed for FHA or VA loans.
Prime rate: The interest that
banks charge to their preferred customers.
Principal:
The amount borrowed or remaining unpaid.
Private
Mortgage Insurance (PMI): Insurance written by
private companies protecting the lender against loss if
the borrower defaults on the mortgage.
Probate
sale: Sale of a home after a homeowner dies and
the property is to be divided among inheritors or sold
to pay debts. The executor of the estate organizes the
sale, and a probate court judge oversees the process.
The highest bidder receives the house.
Property
Tax: Averages between 1 and 2 percent of a home’s
value but may vary by county.
Prorations:
Items that must be prorated between you and the seller
at the close of escrow. Can include Homeowner’s
dues, property taxes and other expenses. Generally, you
will be responsible for paying a percentage of these taxes
and fees beginning on the day in which you take title.
Real Estate Agent: Real estate
salespeople who are supervised by a real estate broker.
Licensed by the state and typically receive income from
commissions.
Real Property:
Land and buildings as opposed to property or chattels.
Realtor®: A real estate
broker or associate active in a local real estate board
affiliated with the National Association of Realtors®.
Recordation: Filing for record
in the office of the county recorder.
Refinance:
Taking out a new mortgage loan to receive more favorable
terms. Generally recommended for fixed-rate mortgages
if rates drop below 1 percent of what you’re currently
paying. (However, refinancing can be expensive and time-consuming,
so you’ll want to consider this carefully, and to
ask yourself how long you plan to own the property.
Survey: A drawing or map showing
the precise legal boundaries of a property, the location
of improvements, easements, rights of way, encroachment
and other physical features.
Tax Deductible:
Payments that you may deduct against your federal
and state taxable income, and includes the interest portion
of your mortgage payments, loan points and property taxes.
Teaser Rate: Introductory,
lower rate on an adjustable rate mortgage. The loan’s
formula is a better way to determine its affordability,
however.
Tenancy-in-common: A
method of taking title to a property generally used among
unmarried co-borrowers. See the Escrow section of this
guide for more information.
Title:
Evidence of a person’s right or the extent of his
or her interest in the property. Title Insurance Policy:
A policy that protects the purchaser, mortgagee or other
party against loss.
Truth in Lending:
a federal law that requires lenders to fully
disclose, in writing, the terms and conditions of a mortgage,
including the annual percentage rate and other charges.
Underwriting: The process of
evaluating a loan application to determine the risk involved
for the lender.
VA Loan: A
loan that is partially guaranteed by the Veterans Administration
and made by a private lender.
Veterans
Administration (VA): An independent agency of
the federal government created by the Service Men’s
Readjustment Act of 1944 to administer a variety of benefit
programs designated to facilitate the adjustment of returning
veterans to civilian life. Among the program’s benefit’s
is the home loan guaranty program designated to encourage
mortgage lenders to offer long term low down payment financing
to eligible veterans by guaranteeing the lender against
loss on these higher-risk loans.
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