Adjustable Rate Mortgage (ARM)

Mortgage loan with an interest rate that changes every 6 months or so, adjusting up or down with the market. It usually has a "cap", or maximum interest rate. ARMs are compared to fixed rate mortgages.

Amortization

A loan which is calculated, including compounded interest, to be paid off completely in a certain number of years. Each monthly payment includes an amount applied to the interest and the balance applied to the principal.

Annual Percentage Rate (APR)

A loan’s interest rate plus other loan fees, calculated over the life of the loan. It is a little higher than the interest rate. Disclosure of a loan’s APR is required at closing (on the Federal Truth-In-Lending Disclosure form).

Appraisal

An estimate of a property’s fair market value. An Appraisal Report is prepared by a licensed real estate Appraiser. The Appraisal usually compares the property to several other comparable (similar) properties in the same neighborhood which have recently sold.

Appreciation

A property’s increase in value caused by market forces or by inflation. For example, authorities say that real property in California has appreciated by an average of at least 5% every year for the past 100 years.

Assessor’s Parcel Number (APN)

An identification number which the county gives to each piece of real property for the purpose of assessing taxes.

Assumable Loan

A mortgage which the buyer can assume (take over) from the property seller. The terms of the loan and the payments will remain the same. The buyer may have to qualify with the lender.

Balloon Payment

The final payment on a loan, when that final payment is greater than the previous payments, and it pays the loan off in full. For example, you may pay $500 a month for 7 years and then the balance of $45,000 would be due.

Beneficiary

The person who receives or who is to receive the benefits resulting from certain acts in a Deed of Trust. 

Bi-weekly Payment Loan

A loan in which the borrower pays every 2 weeks rather than every month. The purpose is to pay off the loan sooner.

Borrower (Mortgagor)

A person who borrows money or takes out a loan and is obligated to repay it.

Broker

A person who is licensed to act on behalf of another person. For example, a real estate broker.

Building Inspection

An inspection of a property on behalf of a buyer in which defects are identified. Usually performed by a licensed home inspector. The buyer may have the right to cancel the sale if he does not like the building inspector’s report.

Buyer

In a sales contract, the person who arranges to pay the sales price and takes ownership of the property.

Buyer’s Agent

A real estate licensee who represents the buyer in a transaction. Also known as a Buyer Broker.

Cap

The highest limit of the interest rate on an Adjustable Rate Mortgage (ARM).

Closing Costs

 Dollar amounts which the seller and buyer must pay in a real estate sale. May include appraisal, title policy, property inspection, brokerage commissions, recording fees, loan points, and credit check fees. May equal approximately 10 percent of the property sales price.

Covenants, Codes, & Restrictions (CC&R)

Rules and regulations which apply to a certain property. It can limit things such as what color the house can be painted. Usually found on condos, PUDs, and homes in newer developments.

Collateral

Property which is held for payment of a debt. In a real estate loan, the lender holds a deed of trust against the property.

Community Property

Property accumulated through joint efforts of husband and wife and owned by them in equal shares. Husband and wife must agree to all real estate transactions involving community property. Also, a way of holding legal title.

Comparables

Properties which are similar to a certain unit being compared. Appraisers find comparable properties to arrive at an estimate of the property being appraised.

Compound Interest

Interest which is paid on the original principal and also on the unpaid interest that has accumulated. Most loans charge compound interest. Compare to simple interest.

Condominium (Condo)

Real estate in which each unit is individually owned but the common areas are jointly owned by all of the owners. They usually form a homeowners association and each owner pays a monthly fee for upkeep of the common areas.

Counter Offer

After a buyer makes an offer to purchase real estate from a seller, the seller may counter offer back with a slight change in terms or price.

Credit Bureau

A business that maintains a database with each person’s credit history. There are 3 major credit bureaus, each with their own data.

Credit Report

A document which shows the history of a borrower’s debt repayment. It may also list employment information and home addresses.

Credit Rating

An evaluation, often a FICO score, of a credit worthiness of an individual based on their credit history. The better a person’s credit rating, the best loan rates and terms they can receive.

Debt to Income Ratio

The amount of consumer debt (car payment and credit card payments) as compared to gross income. FHA lenders allow a borrower to have 28% debt to income ratio, whereas conventional lenders may allow up to 40%.

Deed of Trust 

or 

Trust Deed

A written document by which the title to land is conveyed as security for the repayment of a loan or other obligation. It is a form of mortgage. The landowner or debtor is called the "trustor." The party to whom the legal title is conveyed (and who may be called on to conduct a sale thereof if the loan is not paid) is the "trustee." The lender is the "beneficiary." When the loan is paid off, the trustee is asked by the beneficiary to issue a "recon" or reconveyance. This reconveyance corresponds to the release that the holder of a mortgage executes when the mortgage is paid off. The first trust deed is the mortgage. Junior trust deeds are those recorded in 2^nd or higher positions. Trust deeds are recorded on file at the county courthouse.

Deferred Maintenance

Lack of repairs and maintenance to a property. A property in this condition may be a "fixer".

Distressed Property

Real estate undergoing foreclosure, bankruptcy, or on the verge of doing so.

Down Payment / Deposit

Cash which is put down on a property for sale.

Duplex

A property which has two adjoining units. Triplex: A property which has three adjoining units.

Equity

The amount of owner’s value in a property. For example, if a home is valued at $100,000 and the lender is owed $80,000, the owner has $20,000 equity.

Escrow

An agreement between two or more parties providing that certain documents or property be placed with a neutral third party for safekeeping until all the terms and conditions of the sale are fulfilled.

Existing Financing

The sellers’ state of financing on the real estate they are selling. It is important to know if the existing financing is assumable. If the seller has no existing financing, they own the property free and clear.

Fair Market Value

The highest price a willing and able buyer would pay for a property in the open market. A home’s selling price is usually a good indication of its fair market value.

FHA

Federal Housing Administration, a government-backed program which underwrites loans. As such, they set loan standards for many loans in the industry which are then sold to FNMA (Fannie Mae) and FDMC (Freddie Mac) on the secondary loan market.

FICO score

A score which is calculated by the credit bureau specifically for real estate loans. Each person has a FICO score between 300 (worst) to 850 (best). A higher FICO score (700 and above) allows a borrower to receive a better interest rate and loan terms.

First Time Homebuyer

A person who has not owned real estate for at least 3 years. Owning a mobile home on rented property is not considered real estate. Could also apply to a displaced spouse after a divorce.

Fixed Rate

A loan in which the interest rate stays the same throughout the term of the loan. Compare to an Adjustable Rate Mortgage (ARM).

Foreclosure

The borrower of a loan on real estate defaults (does not make payments on time), and so the lender forecloses on the real estate to gain possession of the property.

Free and Clear

Real estate that is owned without a mortgage or any other liens against it.

Gross Income

A borrower’s complete monthly or annual income, before taxes or anything else is deducted.

Home Owners Association (HOA)

For a real estate development which has common areas that are jointly owned by all of the owners, the owners form a homeowners association. Each owner pays a monthly fee to the HOA for upkeep of the common areas. Applies to condos and PUDs.

HUD (Housing and Urban Development)

The U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

Impound Account

When a lender collects a fixed amount each month from the borrower to pay other fees such as taxes and insurance. If the lender does not collect these fees into an impound account, the borrower is responsible for paying these himself.

Insurance

The annual homeowners insurance premium is estimated at .35% of the value (usually the selling price) of the property. Fire and earthquake insurance are usually extra.

Interest

A fee charged for the use of money. Compare Simple Interest and Compounded Interest. Loan companies make their profit on the interest charged to borrowers.

Interest Rate

The amount of interest charged on a monthly loan payment; usually expressed as a percentage.

Joint Tenancy

A joint tenancy estate is owned by two or more persons in equal shares. The main feature is right of survivorship -- when a joint tenant dies, title to the property immediately vests in the surviving joint tenant(s). Joint tenancy property is not subject to disposition by will.

Lien

A charge against property, making it security for the payment of a debt, judgment, mortgage, or taxes. A lien makes the property collateral for a debt. Compare to property held Free and Clear.

Listing Agent

A real estate agent who lists a property for sale. The Listing Agent always represents the seller in a sales transaction. Compare to a Selling Agent.

Loan

Money borrowed that is usually repaid with interest.

Loan Application

Forms which borrowers must complete in order to apply for a loan on real estate. Most lenders use the Uniform Residential Loan Application which is 4 pages long.

Loan Documents

Papers that borrowers must sign in order for their loan to fund. The loan documents can be between 30 to 80 pages long.

Loan-To-Value (LTV) Ratio

The ratio, expressed as a percentage, of the amount of a loan to the value or purchase price of real property. The higher the LTV, the less cash a borrower is required to pay as down payment.

Marketable Title

Merchantable title; title free and clear of objectionable liens or encumbrances.

Mediation / Arbitration

The process of settling a dispute by meeting with a neutral party rather than suing in court (civil litigation).

Mobile Home

Sometimes known as Modular Homes. Usually in a mobile home park where the land is rented. Only mobile homes which are on a permanent foundation are considered real estate. Other mobile homes are considered personal property and therefore must borrow a loan as personal property.

Mortgage Banker

A company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac. Also known as a Lender.

Mortgage Broker

A firm that originates and processes loans for a number of lenders.

Mortgage Insurance

A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. Also known as PMI.

Multiple Listing Service (MLS)

Multiple Listing is the name given a service performed by the Local Board of Realtors (Multiple Listing Service). MLS exposes properties to a wider market base. Most properties sold are sold through real estate agents through its listing in the MLS.

Net Income

A borrower’s complete monthly or annual income, after taxes are deducted.

Notarized

A document in which the signing parties have appeared before a Notary Public of the State of California.

Note

See Promissory Note.

Notice of Default (NOD)

Offer

Indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing

Origination

The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination Fee

The charge for originating a loan; is usually calculated in the form of points and paid to the lender at closing.

Personal Property

Any property which is not real property (i.e. money, savings accounts, appliances, boats, etc.).

Pest Control Inspection

An inspection usually performed on a home when purchasing. Sections 1 & 2 of the inspection tell what parts of the property should be fixed, Section 1 is usually done before closing escrow. It is negotiable between buyer and seller.

PITI

The total monthly payment of a loan and the cost of the home, including Principal, Interest, Taxes, and Insurance.

Points

An abbreviation for percentage points. For example, 3 points is 3%.

Pre-approve

Lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.

Pre-qualify

A lender informally determines the maximum amount an individual is eligible to borrow.

Prepayment

Payment of the mortgage loan before the scheduled due date. This might occur if the borrower makes extra payments, sells the property, or refinances the existing loan. A loan may be subject to a prepayment penalty. It is important to find out whether or not your loan has a prepayment penalty.

Principal

The amount borrowed from a lender, not including interest or additional fees.

Pro-rate

The process of dividing a fee into smaller equal chunks. For instance, rent that is $300 per month would be divided between 30 days per month and pro-rated at $10 per day.

Promissory Note

Following a loan commitment from the lender, the borrower signs a note promising to repay the loan under stipulated terms. The promissory note establishes personal liability for its repayment. Also referred to as the "Note".

PUD (Planned Unit Development)

A zoning classification that applies to subdivisions. PUDs include individually owned units as well as some common space that is jointly owned, similar to a condominium. Many times a PUD includes a monthly HOA fee.

Real Estate

Real property; land. The improvements, such as houses built on the land, are not considered real estate. Real estate usually appreciates in value; but personal property and improvements usually depreciate in value.

Real estate agent

An individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.

Realtor

A real estate agent or broker who is a member of the National Association Of Realtors, and its local and state associations.

Refinancing

Paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).

Seller Carryback

A loan which the seller of real property agrees to finance for the buyers/borrowers.

Selling Agent

In a real estate transaction, the Real Estate Agent who brings the buyer to the transaction. Some Selling Agents are Buyer Brokers.

Sole Ownership

Title held as sole ownership can be held as 1) A Single Man/Woman (someone never married); 2) An Unmarried Man/Woman (someone divorced); 3) A Married Man/Woman, as His/Her Sole and Separate Property (the spouse consents to relinquish all right, title, and interest in the property). Compare Sole Ownership to Co-Ownership.

Sweat Equity

Using labor to build or improve a property as part of the down payment.

Taxes

The property taxes which must be paid to the County twice per year. Annual taxes are usually calculated at 1.25% of the value (usually the selling price) of the property.

Tenant

One who is given possession of real estate for a fixed period or at will.

Tenants in Common

A method of holding title. Co-owners own undivided interests, but not necessarily equal interests. There is no right of survivorship; each tenant owns an interest which on his or her death vests in his or her heirs. Compare to Joint Tenancy.

Title

Evidence that the owner of land is in lawful possession thereof; evidence of ownership. Title is vested in a certain manner. Often clarified or qualified by an adjective such as absolute, good, clear, marketable, defective, or legal.

Title Company

A company that offers title insurance and other settlement services. Title companies commonly administer the closing process for most real estate transactions. The company conducts the title search upon which the title policy is issued (see below), alerts the seller of any problems with the title, schedules the closing meeting, prepares for and conducts the meeting.

Title Insurance

Insurance that protects the lender against any claims that arise from arguments about ownership of the property. The premium is paid by the buyer when purchasing a home, and the insurance is in effect until ownership changes.

Title Search

An examination of the public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property. A Title Search is typically performed before a title policy is issued. If the search shows a title risk, the policy might contain an exclusion or not be issued.

Transfer Fees

Recording fees collected at closing. These fees cover the costs of recording the deed conveying the property and mortgage established at the time of purchase. Refer to Closing Costs.

Trust

Title to real property in California may be held in a title holding trust. The trust holds legal and equitable title to the real estate. The trustee holds title for the benefit of the trustor/beneficiary who retains all of the management rights and responsibilities.

Trust Deed 
(Deed of Trust)

A conveyance of real estate to a third person to be held for the benefit of another. The Deed of Trust is usually recorded with the County records office. When the property owners borrow money against the property, usually the borrowers sign a Deed of Trust giving up title until their loan is paid in full.

Trustor

Trustee

One who holds the property in trust for another to secure performance of an obligation; the neutral party in a trust deed transaction.

Truth-in-Lending Statement

A standardized disclosure that must be provided to a borrower when a mortgage loan application is submitted. The statement clearly indicates the contract interest rate on the loan, the amount of monthly payments required to cover principal and interest, and the APR of the loan.

Vesting

A way of holding title. Could be vested as Sole Ownership or as Co-Ownership (Community Property, Tenants in Common, or Joint Tenants).

VA Loan

A loan guaranteed by the Veterans Administration insuring payment in case of default by the borrower. Available to qualified veterans. Most VA loans require no down payment, and the borrower pays minimal closing costs. There are certain limitations, such as the amount of money borrowed. Compare to a Cal-Vet loan, which is administered by the State of California.