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Common California Real Estate Terms
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. These definitions
derive from various web sites of various real estate companies and
undoubtedly more can be found by the reader by searching the web, but we
have found the list below covers the bulk of most of the terms the
typical buyer or seller will need to know.
You
should consult with a licensed Realtor or attorney before relying on
these brief definitions for anything more than general information and
certainly before entering into a legal agreement relying on such terms.
This is for general information only.
The
reader should consult our articles on
Real Estate Transactions
for a general description of the typical real estate transaction in
California.
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
control 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 fixed rate 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 monthly
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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