"Home Buyer's Vocabulary"
[Graphic Omitted]
U.S. Department of Housing and Urban Development
Washington, D.C. 20410
March 1987
HUD-383-H(8)
(Previous Edition Current)
Preface
The potential home buyer will find this Vocabulary helpful for
understanding words and terms used in real estate transactions. There
are, however, some factors that may affect these definitions:
* Terms are defined as they are commonly understood in the mortgage
and real estate industry. The same terms may have different
meanings in another context.
* The definitions are intentionally general, non-technical and short.
They do not encompass all possible meanings or nuances that a term
may acquire 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 defined.
Before signing any documents or depositing any money preparatory to
entering into a real estate contract, the purchaser should consult with
an attorney of his choice to ensure that his rights are properly
protected.
Note: A bold typed word appearing within a definition indicates that the
word is defined elsewhere in the alphabetical listing.
A
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 determine whether there are any title defects which
must be cleared before a buyer can purchase clear, marketable, and
insurable title.
Acceleration Clause
Condition in a mortgage that may require the balance of the loan to
become due immediately, if regular mortgage payments are not made or for
breach of other conditions of the mortgage.
Agreement of Sale
Known by various names, such as contract of purchase, purchase
agreement, or sales agreement according to location or jurisdiction. 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.
Amortization
A payment plan which enables the borrower to reduce his debt gradually
through monthly payments of principal.
Appraisal
An expert judgment or estimate of the quality or value of real estate as
of a given date.
Assumption of Mortgage
An obligation undertaken by the purchaser of property to be personally
liable for payment of an existing mortgage. In an assumption, the
purchaser is substituted for the original mortgagor in the mortgage
instrument and the original mortgagor is to be released from further
liability in the assumption, the mortgagee's consent is usually
required.
The original mortgagor should always obtain a written release from
further liability if he desires to be fully released under the
assumption. Failure to obtain such a release renders the original
mortgagor liable if the person assuming the mortgage fails to make the
monthly payments.
An "Assumption of Mortgage" is often confused with "purchasing subject
to a mortgage." When one purchases subject to a mortgage, the purchaser
agrees to make the monthly mortgage payments on an existing mortgage,
but the original mortgagor remains personally liable if the purchaser
fails to make the monthly payments. Since the original mortgagor remains
liable in the event of default, the mortgagee's consent is not required
to a sale subject to a mortgage.
Both "Assumption of Mortgage" and "Purchasing Subject to a Mortgage" are
used to finance the sale of property. They may also be used when a
mortgagor is in financial difficulty and desires to sell the property to
avoid foreclosure.
B
Binder or "Offer to Purchase"
A preliminary agreement, secured by the payment of earnest money,
between a buyer and seller as an offer to purchase real estate. A binder
secures the right to purchase real estate upon agreed terms for a
limited period of time. If the buyer changes his mind or is unable to
purchase, the earnest money is forfeited unless the binder expressly
provides that it is to be refunded.
Broker
(See real estate broker)
Building Line or Setback
Distances from the ends and/or sides of the lot beyond which
construction may not extend. The building line may be established by a
filed plat of subdivision, by restrictive covenants in deeds or leases,
by building codes, or by zoning ordinances.
C
Certificate of Title
A certificate issued by a title company or a written opinion rendered by
an attorney that the seller has good marketable and insurable title to
the property which he is offering for sale. A certificate of title
offers no protection against any hidden defects in the title which an
examination of the records could not reveal. The issuer of a certificate
of title is liable only for damages due to negligence. The protection
offered a homeowner under a certificate of title is not as great as that
offered in a title insurance policy.
Closing Costs
The numerous expenses which buyers and sellers normally incur to
complete a transaction in the transfer of ownership of real estate.
These costs are in addition to price of the property and are items
prepaid at the closing day. This is a typical list:
BUYER'S EXPENSES SELLER'S EXPENSES
Documentary Stamps on Notes Cost of Abstract
Recording Deed and Mortgage Documentary Stamps on Deed
Escrow Fees Real Estate Commission
Attorney's Fee Recording Mortgage
Title Insurance Survey Charge
Appraisal and Inspection Escrow Fees
Survey Charge Attorney's Fee
The agreement of sale negotiated previously between the buyer and the
seller may state in writing who will pay each of the above costs.
Closing Day
The day on which the formalities of a real estate sale are concluded.
The certificate of title, abstract, and deed are generally prepared for
the closing by an attorney and this cost charged to the buyer. The buyer
signs the mortgage, and closing costs are paid. The final closing merely
confirms the original agreement reached in the agreement of sale.
Cloud (On Title)
An outstanding claim or encumbrance which adversely affects the
marketability of title.
Commission
Money paid to a real estate agent or broker by the seller as
compensation for finding a buyer and completing the sale. Usually it is
a percentage of the sale price--6 to 7 percent on houses, 10 percent on
land.
Condemnation
The taking of private property for public use by a government unit,
against the will of the owner, but with payment of just compensation
under the government's power of eminent domain. Condemnation may also be
a determination by a governmental agency that a particular building is
unsafe or unfit for use.
Condominium
Individual ownership of a dwelling unit and an individual interest in
the common areas and facilities which serve the multi-unit project.
Contract of Purchase
(See agreement of sale)
Contractor
In the construction industry, a contractor is one who contracts to erect
buildings or portions of them. There are also contractors for each phase
of construction: heating, electrical, plumbing, air conditioning, road
building, bridge and dam erection, and others.
Conventional Mortgage
A mortgage loan not insured by HUD or guaranteed by the Veterans'
Administration. It is subject to conditions established by the lending
institution and State statutes. The mortgage rates may vary with
different institutions and between States. (States have various interest
limits.)
Cooperative Housing
An apartment building or a group of dwellings owned by a corporation,
the stockholders of which are the residents of the dwellings. It is
operated for their benefit by their elected board of directors. In a
cooperative, the corporation or association owns title to the real
estate. A resident purchases stock in the corporation which entitles him
to occupy a unit in the building or property owned by the cooperative.
While the resident does not own his unit, he has an absolute right to
occupy his unit for as long as he owns the stock.
D
Deed
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 conveyed, 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 and the grantee. (See also deed
of trust, general warranty deed, quitclaim deed, and special warranty
deed.)
Deed of Trust
Like a mortgage, a security instrument whereby real property is given as
security for a debt. However, in a deed of trust there are three parties
to the instrument: the borrower, the trustee, and the lender, (or
beneficiary). In such a transaction, the borrower transfers the legal
title for the property to the trustee who holds the property in trust as
security for the payment of the debt to the lender or beneficiary. If
the borrower pays the debt as agreed, the deed of trust becomes void.
If, however, he defaults in the payment of the debt, the trustee may
sell the property at a public sale, under the terms of the deed of
trust. In most jurisdictions where the deed of trust is in force, the
borrower is subject to having his property sold without benefit of legal
proceedings. A few States have begun in recent years to treat the deed
of trust like a mortgage.
Default
Failure to make mortgage payments as agreed to in a commitment based on
the terms and at the designated time set forth in the mortgage or deed
of trust. It is the mortgagor's responsibility to remember the due date
and send the payment prior to the due date, not after. Generally, thirty
days after the due date if payment is not received, the mortgage is in
default. In the event of default, the mortgage may give the lender the
right to accelerate payments, take possession and receive rents, and
start foreclosure. Defaults may also come about by the failure to
observe other conditions in the mortgage or deed of trust.
Depreciation
Decline in value of a house due to wear and tear, adverse changes in the
neighborhood, or any other reason.
Documentary Stamps
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 varies with each State.
Downpayment
The amount of money to be paid by the purchaser to the seller upon the
signing of the agreement of sale. The agreement of sale will refer to
the downpayment amount and will acknowledge receipt of the downpayment.
Downpayment is the difference between the sales price and maximum
mortgage amount. The downpayment may not be refundable if the purchaser
fails to buy the property without good cause. If the purchaser wants the
downpayment to be refundable, he should insert a clause in the agreement
of sale specifying the conditions under which the deposit will be
refunded, if the agreement does not already contain such clause. If the
seller cannot deliver good title, the agreement of sale usually requires
the seller to return the downpayment and to pay interest and expenses
incurred by the purchaser.
E
Earnest Money
The deposit money given to the seller or his agent by the potential
buyer upon the signing of the agreement of sale to show that he is
serious about buying the house. If the sale goes through, the earnest
money is applied against the downpayment. If the sale does not go
through, the earnest money will be forfeited or lost unless the binder
or offer to purchase expressly provides that it is refundable.
Easement Rights
A right-of-way granted to a person or company authorizing access to or
over the owner's land. An electric company obtaining a right-of-way
across private property is a common example.
Encroachment
An obstruction, building, or part of a building that intrudes beyond a
legal boundary onto neighboring private or public land, or a building
extending beyond the building line.
Encumbrance
A legal right or interest in land that affects a good or clear title,
and diminishes the land's value. It can take numerous forms, such as
zoning ordinances, easement rights, claims, mortgages, liens, charges, a
pending legal action, unpaid taxes, or restrictive convenants. 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, and it is up to the buyer to determine
whether he wants to purchase with the encumbrance, or what can be done
to remove it.
Equity
The value of a homeowner's unencumbered interest in real estate. Equity
is computed by subtracting from the property's fair market value the
total of the unpaid mortgage balance and any outstanding liens or other
debts against the property. A homeowner's equity increases as he pays
off his 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% equity in his property.
Escrow
Funds paid by one party to another (the escrow agent) to hold until the
occurrence of a specified event, after which the funds are released to a
designated individual. In FHA mortgage transactions an escrow account
usually refers to the funds a mortgagor pays the lender at the time of
the periodic mortgage payments. The money is held in a trust fund,
provided by the lender for the buyer. Such funds should be adequate to
cover yearly anticipated expenditures for mortgage insurance premiums,
taxes, hazard insurance premiums, and special assessments.
F
Foreclosure
A legal term applied to any of the various methods of enforcing payment
of the debt secured by a mortgage, or deed of trust, by taking and
selling the mortgaged property, and depriving the mortgagor of
possession.
G
General Warranty Deed
A deed which conveys not only all the grantor's interests in and title
to the property to the grantee, but also 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 grantee may
hold the grantor liable.
Grantee
That party in the deed who is the buyer or recipient.
Grantor
That party in the deed who is the seller or giver.
H
Hazard Insurance
Protects against damages caused to property by fire, windstorms, and
other common hazards.
HUD
U.S. Department of Housing and Urban Development. Office of
Housing/Federal Housing Administration within HUD insures home mortgage
loans made by lenders and sets minimum standards for such homes.
I
Interest
A charge paid for borrowing money. (See mortgage note)
L
Lien
A claim by one person on the property of another as security for money
owed. Such claims may include obligations not met or satisfied,
judgments, unpaid taxes, materials, or labor. (See also special lien.)
M
Marketable Title
A title that is free and clear of objectionable liens, clouds, or other
title defects. A title which enables an owner to sell his property
freely to others and which others will accept without objection.
Mortgage
A lien or claim against real property given by the buyer to the lender
as security for money borrowed. Under government-insured or
loan-guarantee provisions, the payments may include escrow amounts
covering taxes, hazard insurance, water charges, and special
assessments. Mortgages generally run from 10 to 30 years, during which
the loan is to be paid off.
Mortgage Commitment
A written notice from the bank or other lending institution saying it
will advance mortgage funds in a specified amount to enable a buyer to
purchase a house.
Mortage Insurance Premium
The payment made by a borrower to the lender for transmittal to HUD to
help defray the cost of the FHA mortgage insurance program and to
provide a reserve fund to protect lenders against loss in insured
mortgage transactions. In FHA insured mortgages this represents an
annual rate of one-half of one percent paid by the mortgagor on a
monthly basis.
Mortgage Note
A written agreement to repay a loan. The agreement is secured by a
mortgage, serves as proof of an indebtedness, and states the manner in
which it shall be paid. The note states the actual amount of the debt
that the mortgage secures and renders the mortgagor personally
responsible for repayment.
Mortgage (Open-End)
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 such borrowing to no more than
would raise the balance to the original loan figure.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
P
Plat
A map or chart of a lot, subdivision or community drawn by a surveyor
showing boundary lines, buildings, improvements on the land, and
easements.
Points
Sometimes called "discount points." A point is one percent of the amount
of the mortgage loan. For example, if a loan is for $25,000, one point
is $250. Points are charged by a lender to raise the yield on his loan
at a time 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, points may be paid by either buyer or seller or
split between them.
Prepayment
Payment of mortgage loan, or part of it, before 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. The Federal Housing Administration does not permit such
restrictions in FHA insured mortgages.
Principal
The basic element of the loan as distinguished from interest and
mortgage insurance premium. In other words, principal is the amount upon
which interest is paid.
Purchase Agreement
See agreement of sale.
Q
Quitclaim Deed
A deed which transfers whatever interest the maker of the deed may have
in the particular parcel of land. 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.
Such a deed makes no warranties as to the title, but simply transfers to
the buyer whatever interest the grantor has. (See deed.)
R
Real Estate Broker
A middle man or agent who buys and sells real estate for a company,
firm, or individual on a commission basis. The broker does not have
title to the property, but generally represents the owner.
Refinancing
The process of the same mortgagor paying off one loan with the proceeds
from another loan.
Restrictive Covenants
Private restrictions limiting 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 determination whether a
covenant runs with the land or is personal is governed by the language
of the covenant, the intent of the parties, and the law in the State
where the land is situated. 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 or minority groups from
owning or occupying homes in a given area. (This latter discriminatory
covenant is unconstitutional and has been declared unenforceable by the
U.S. Supreme Court.)
S
Sales Agreement
See agreement of sale.
Special Assessments
A special tax imposed on property, individual lots or all property in
the immediate area, for road construction, sidewalks, sewers, street
lights, etc.
Special Lien
A lien that binds a specified piece of property, unlike a general lien,
which is levied against all one's assets. It creates a right to retain
something of value belonging to another person as compensation for
labor, material, or money expended in that person's behalf. In some
localities it is called "particular" lien or "specific" lien. (See
lien.)
Special Warranty Deed
A deed in which the grantor conveys title to the grantee and agrees to
protect the grantee against title defects or claims asserted by the
grantor and those persons whose right to assert a claim against the
title arose during the period the grantor held title to the property. In
a special warranty deed the grantor guarantees to the grantee that he
has done nothing during the time he held title to the property which
has, or which might in the future, impair the grantee's title.
State Stamps
See documentary stamps
Survey
A map or plat made by a licensed surveyor showing the results of
measuring the land with its elevations, improvements, boundaries, and
its relationship to surrounding tracts of land. A survey is often
required by the lender to assure him that a building is actually sited
on the land according to its legal description.
T
Tax
As applied to real estate, an enforced charge imposed on persons,
property or income, to be used to support the State. The governing body
in turn utilizes the funds in the best interest of the general public.
Title
As generally used, the rights of ownership and possession of particular
property. In real estate usage, title 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 one has in the
real estate.
Title Insurance
Protects lenders or homeowners against loss of their interest in
property due to legal defects in title. Title insurance may be issued to
a "mortgagee's title policy." Insurance benefits will be paid only to
the "named insured" in the title policy, so it is important that an
owner purchase an "owner's title policy", if he desires the protection
of title insurance.
Title Search or Examination
A check of the title records, generally at the local courthouse, to make
sure the buyer is purchasing a house from the legal owner and there are
no liens, overdue special assessments, or other claims or outstanding
restrictive convenants filed in the record, which would adversely affect
the marketability or value of title.
Trustee
A party who is given legal responsibility to hold property in the best
interest of or "for the benefit of" another. The trustee is one placed
in a position of responsibility for another, a responsibility
enforceable in a court of law. (See deed of trust.)
Z
Zoning Ordinances
The acts of an authorized local government establishing building codes,
and setting forth regulations for property land usage.
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