Real Estate Glossary

Real Estate Glossary

Understanding the Real Estate language


The following are definitions for commonly used terms within the Real Esate business. When coming across these new terms you can use this glossary as a quick reference guild to help you fully understand details regarding your Real Estate experience.

Adjustable Rate Mortgage (ARM)- A mortgage with an interest rate that changes over time in line with movements in the index. ARM's are also referred to as AML'S (adjustable mortgage loans) or VRMS (variable rate mortgages)

Adjustment Period- The length of time between interest rate changes on the 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 a year.

Amortization- A period of reduction of a mortgage by making specific payments over a stated period of time.

Annual Percentage Rate- The entire cost of borrowing funds, regardless of who pays the charge, stated as a percentage rate. There is a prescribed procedure for this calculation as stated by the Federal Government.

Appraisal- An estimate of the property's value.

Arm- An adjustable Rate Mortgage where the rate can change at specific intervals as stated by a note. The payment is subject to change throughout the term of the loan.

Balloon Payment- A lump sum principal payment due at the end of some mortgages or other long term loans.

Buydown- Permanent- prepaid interest that brings the note rate on the loan down to a lower permanent rate.

Temporary- prepaid interest that lowers the note rate temporarily on the loan, allowing the buyer to more readily qualify and to increase payments as income grows

Cap- The limit on how much an interest rate or monthly payment can change, either at each adjustment or over the life of the mortgage.

Cash Flow- The amount of cash derived from an investment. Cash flow can come from operation, disposition, or refinancing of an investment.

Cash Reserves-The amount of the buyer's liquid cash remaining after making the down payment and paying the closing costs.

CC&Rs- Covenants, conditions and restrictions. A document that controls the use, requirements and restrictions of a property.

Certificate of Commitment- The lender's approval of a VA loan, which usually is good for up to 6 months.

Certificate of Reasonable Value (CRV)- A document that establishes the maximum value and loan amount for a VA guaranteed mortgage.

Chattel- Personal Property

Closing- Sometimes called a settlement, this is where all of the necessary documents are signed and consideration made in order to transfer title to the property.

Closing Statement- The financial disclosure statement that accounts for all of the funds received and expected at the closing including deposits for taxes, hazard insurance, and mortgage insurance.

Commitment Period- The period during which a loan approval is valid.

Condominium- A form of real estate ownership where 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 surface (walls, floors, and ceilings) server as its boundaries.

Contingency- A condition that must be satisfied before a contract is binding. For instance a sales contract may be contingent upon the buyer obtaining financing.

Conventional Loan- Generally speaking, any loan which is not a government insured loan, such as a FHA or VA, is considered a conventional loan.

Conversion Clause- A provision in some ARMs that enables home buyers to change an ARM to a fixed rate loan, usually after the first adjustment period. The conversion feature may cost more.

Cooperative- A form of multiple ownership in which a cooperation or business trust entity holds title to a property and grants occupancy rights to shareholders by means of proprietary leases or similar arrangements.

Debt Ratios- The comparison of a buyer's housing costs to his or her gross or net effective income, and the comparison of a buyer's total long-term debt to his or her gross or net effective income. The first ratio is housing ratio and the second is total debt ratio.

Due-On-Sale Clause- A clause that requires a full payment of a mortgage or deed of trust when the secured property changes ownership.

Earnest Money- The portion of the down payment delivered to the seller, listing company or escrow agent by the purchaser with a written offer as evidence of good faith.

Escrow- A procedure in which a third party acts as a stakeholder for both the buyer and seller, carrying out both parties' instructions and assuming responsibility for handling all the paperwork and distribution of funds.

Equity- The difference between what is owed and what the property could be sold for.

FHA Loan- A loan insured by The Federal Housing Administration (of the Department of Housing and Urban Development). This loan is very often useful for first time homebuyers and may require minimal down payment.

Federal Home Loan Mortgage Corporation (FHLMC)- Called "Freddie Mac"; a part of the secondary market, particularly used to purchase loans from savings and loan lenders within the Federal Home Loan Bank Board.

Federal National Mortgage Association (FNMA)- Popularly know 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 the 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/she wishes, including leaving by will or inheritance. It is the greatest interest a person can have in real estate.

Finance Charge- The total cost a borrower must pay, directly or indirectly, to obtain credit according to Regulation Z.

Fixed Rate Mortgage (FRM) A conventional loan with a single constant interest rate for the life of the loan.

Fully Indexed Rate- The maximum interest rate on an ARM that can be reached at the first adjustment.

Gift Letter- A letter from a relative stating that an amount will be gifted to the buyer, and that said amount is not to be repaid.

Government National Mortgage Association(GNMA)- Called "Ginnie Mae"; a governmental part of the secondary market that deals primarily in recycling VA and FHA mortgages, particularly those that are highly leveraged.

Graduated Payment Mortgage- A residential mortgage with monthly payments that start at a low level and increase at a predetermined rate.

Home Inspection Report- A qualified inspector's report on a property's overall condition, including structure and mechanical systems.

Home Warranty Plan- Protection against failure of mechanical systems within a property. Usually includes plumbing, electrical, heating systems, and installed appliances.

Income Ratio- An allowable percentage of monthly gross income which the proposed mortgage payment cannot exceed.

Index- A measure of interest rate changes used to determine changes in an ARM's interest rate over the loan's term. Commonly used Indices are the 11th District Cost of Funds and the One Year Treasury Index.

Initial Interest Rate- The introductory interest rate on a loan; signals that there may be adjustments to the loan.

Joint Tenancy-An equal undivided ownership of property by two or more persons. Upon the death of any owner, the survivors take the decedent's interest in the property.

Jumbo Loans- Mortgage loans that exceed the loan amounts acceptable for sale in the secondary market. These jumbos must be packaged and sold differently to investors and therefore have separate underwriting guidelines and often higher rates

Lien- A legal hold or claim on property as security for a debt or charge.

Loan Commitment- A written promise to make a loan for a specified amount on specified terms.

Loan To Value Ratio(LTV)- The ratio between the mortgage loan and the appraised value of a property. Typical LTV's could be 80% or 90%

Lock-In- The fixing of an interest rte or points at a certain level, usually during the loan application process. It is usually done for a certain period of time, such as 60 days, and may require a fee or premium in the form of a higher interest rate.

Margin- The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Mortgage Insurance Premium(MIP)- The mortgage insurance required on FHA loans which insures the lender in case the buyer is in default.

Negative Amortization- Occurs when the monthly payments fail to cover the interest cost. The interest that isn't covered is added to the unpaid balance, which means that even after several payments the borrowers could owe more they did at the beginning of the loan. Negative amortization can result when an Arm has a payment cap that results in monthly payments that aren't high enough to cover the interest.

Origination Fee- A fee or charge for work involved in evaluating preparing and submitting a proposed mortgage loan. The fee is limited to 1% for FHA and VA loans

Payment Cap- The maximum amount the payment can adjust in any given time frame.

PITI-Principal, Interest, Taxes and Insurance payment.

Planned Unit Development(PUD)- A zoning designation for property developed at the same or slightly greater overall density than conventional development, sometimes with improvements clustered between open common areas. Use may be residential, commercial or Industrial.

Point- A point is equal to one percent of the mortgage amount. This charge is by the lender which will increase the yield of the mortgage.

Prepayment Penalty- A fee charged to a borrower who pays a loan before it is due. Not allowed for FHA or VA loans.

Private Mortgage Insurance(PMI)-Insurance written by a private company protecting the lender against loss if the borrower is in default on the mortgage Usually not needed if 20% of the purchase price is towards down payment ( in excess of usually 80% loan to value(LTV).

Purchase Agreement- A written document in which the purchaser agrees to buy certain real estate and the seller agrees to sell under stated terms and conditions. Also called a sales contract, or agreement for sale.

Rate Gap- The difference between where the rate is now and where it could adjust to on an ARM. Also used to compare the difference between a current conventional rate and that of an ARM.

Realtor- A real estate broker or associate active in a local real estate board affiliated with the National Association of Realtors.

Regulation Z-The set of rules governing consumer lending issued by the Federal Reserve Board of Governors in accordance with the Consumer Protection Act.

 Tenancy in Common- A type of joint ownership of property by two or more persons with no right of survivorship.

Title Insurance Policy- A policy that protects the purchaser, mortgagee or other party against losses.

 VA Loans- A loan made by a private lender that is partially guaranteed by the Veterans Administration.

Yield- The rate of return an investment generates over a period of time.