Glossary of Terms
A - D, E - H, I - L, M - P, Q - T, U - Z
Abstract of Judgment - The summary of a court judgment that creates a lien against a property when filed with the county recorder Abstract of Title - historical summary of all of the recorded instruments and proceedings that affect title to a property.
Accelerated Cost Recovery System - A tax calculation that provides greater depreciation in the early years of ownership of real estate or personal property.
Acceleration Clause - a loan provision giving the lender the right to declare the entire amount immediately due and payable upon violation of another specific loan provision, commonly referred to as the Due on Sale Clause.
Acceptance - a buyers or sellers agreement to enter into a contract and be bound by the terms of the offer.
Accrued Interest - interest that has been earned but not paid.
Accumulated Depreciation - in accounting, the amount of depreciation expense that has been claimed to date.
Acknowledgment - a declaration by a person who has signed a document that such signature is a voluntary act, made before a duly authorized person.
Acquisition Cost - the price and all fees required to obtain a property.
Acquisition Loan - money borrowed for the purpose of purchasing a property.
Acre - a two dimensional measure of land equaling 4,840 square yards or 43,560 square feet.
Addendum - something added as an attachment to a contract.
Additional Principal Payment - Extra money included in the monthly payment to help reduce the principal and shorten the term of the loan.
Adjoining - contiguous, attached, sharing a common border.
Adjustable Rate Mortgage (ARM) - a mortgage loan that allows the interest rate to be changed at specific intervals over the maturity of the loan, based on a monitored index.
Adjusted Cost Basis - The cost of any improvements the seller makes to the property. Deducting the cost from the original sales price provides the profit or loss of a home when it is sold.
Adjusted Tax Basis - the original cost or other basis of the property, reduced by depreciation deductions and increased by capital expenditures.
Adjustment Period - The amount of time between interest rate adjustments in an adjustable-rate mortgage.
Administrator - a person appointed by a court to administer the estate of a deceased person who left no will.
Administrator\’s Deed - A legal document that an administrator of an estate uses to transfer property.
Adverse Possession - a means of acquiring title to real estate where an occupant has been in actual, open, notorious, exclusive and continuous occupancy of property for the period required by state law.
Affidavit - a written statement, sworn to or affirmed before an officer who is authorized to administer an oath or affirmation.
Agency - the legal relationship between a principal and his agent arising from a contract in which the principal engages the agent to perform certain acts on behalf of the principal.
Agreement for Deed - see Contract for Deed.
Alienation - to convey or transfer title and possession of property.
All Inclusive Trust Deed - This applies to states that use trust deeds instead of mortgages. It is the same as a wraparound mortgage.
Amortized Loan - loan that is repaid in a series of installments each of which contains a portion that is applied to reduce the principal amount of the loan and a portion that is applied to pay interest with each successive payment allocates a larger portion to principal reduction and a smaller portion to interest payment until the outstanding balance is ultimately reduced to zero.
Annual Cap - maximum amount the interest rate on an adjustable rate mortgage can be raised or lowered in the course of one twelve month period.
Annual Percentage Rate (APR) - effective rate of interest rate for a loan per year including fees and points, disclosure of which is required by the Truth-in-Lending Law.
Anticipatory Breach - A communication that informs a party that the obligations of the original contract will not be fulfilled.
Appraised Value - opinion or estimate of a value of a property, values are determined by one of three methods: comparable sales (residential), replacement cost (insurance), or income approach (commercial).
Appreciation - an increase in the value of a property.
Arrears - mortgage payment includes interest for prior month, or overdue payments in default.
As-Is - without guarantees as to condition.
Assessed Value - the value established for property tax purposes.
Assignee - the person to whom an agreement or contract is sold or transferred.
Assignment - the method by which a right or contract is transferred.
Assignor - the person who assigns or transfers an agreement or contract to another.
Assumable Mortgage - An existing mortgage which allows the next purchaser of a property to be liable for the payments and other obligations of the note and mortgage. Depending on the type of loan, the assumption of the obligation by this next purchaser may or may not require a qualification and approval process and may or may not release the original mortgagor (borrower) from further liability. A written release from the mortgagee (lender) is required to relieve the original mortgagor of responsibility.
Attornment - A tenant\’s formal agreement to be a tenant of a new landlord.
Backup Contract - a contract to buy real estate that becomes effective if a prior contract fails to be consummated.
Balance - see Principal Balance.
Balloon Loan - a loan that has level monthly payments that will amortize it over a stated term (e.g., 30 years) but that requires a lump sum payment of the entire principal balance at the end of a shorter term (e.g., 10 years).
Balloon Payment - An installment payment which is larger (most often much larger) than the other scheduled payments. It is usually the last payment. If a note is written for $50,000 at a fixed 9.0% rate of interest with payments based on an amortization schedule of 30 years and a balloon payment due in 5 years, the first 60 payments will each be $402.31 (the normal payment for a 30 year loan at 9.0% interest) and the last payment will be $47,940.15 which will be the outstanding balance remaining after the 60th payment.
Bankruptcy - the financial inability to pay one’s debts when due causes the debtor to seek relief through court action.
Bankruptcy Discharge - the release of a bankrupt party from the obligation to repay debts that were or might have been proved in a bankruptcy proceeding.
Basis Point - one 100th of 1%.
Beneficiary - the person who receives or is to receive the benefits resulting from certain acts.
Bilateral Contract - a contract under which each party promises performance.
Bill of Sale - a written instrument given to pass title of personal property.
Bird Dog - someone who identifies a potential good real estate investment opportunity and passes that deal on to another investor for a fee.
Biweekly Mortgage - A mortgage that requires payments every two weeks and helps repay the loan over a shorter term.
Blanket Mortgage - a single mortgage which attaches to more than one property.
Board Of Equalization - A state board charged with ensuring that local property taxes are assessed in a uniform manner
Board of Realtors - a local group of real estate licensees who are members of the state and national association of Realtors.
Bond - (1) a written agreement purchased from a bonding company that guarantees a person will properly carry out a specific act, such as managing funds, showing up in court, providing good title to a piece of real estate or completing a construction project. If the person who purchased the bond fails at his or her task, the bonding company will pay the aggrieved party an amount up to the value of the bond.
Breach of Contract - a violation of the terms of a legal agreement, default.
Bridge Loan - mortgage financing between the termination of one loan and the beginning of another loan.
Broker - An individual who acts as an intermediary between two or more parties for the purpose of negotiating a transaction agreeable to all of the parties. In lending, the broker arranges and negotiates loan amounts, interest rates and loan terms between borrowers and lenders. Depending on the type of loan, the state wherein the transaction is occurring and contractual arrangements, the broker may represent the borrower, the lender or not have a fiduciary responsibility to either. (See definition of "fiduciary responsibility" below.).
Building Permit - permission granted by a local government or agency to build a specific structure at a specific site.
Bundle of Rights - ownership in real property implies a group of rights, such as the right of occupancy, use and enjoyment, the right to sell in whole or in part, the right to control the use, the right to bequeath, the right to lease any or all of the rights, the right to the benefits derived by occupancy and use of the property, etc.
Buy Down - A payment of discounts points in exchange for a lower rate of interest. It has the effect of providing the lender with a greater yield today in exchange for a lower yield in the future. (See definition of "discount points" below.).
Call Option - A clause in a loan agreement that allows a lender to ask for the balance at any time.
Cancellation Clause - a contract provision that gives the right to terminate the obligations upon the occurrence of specified conditions or events.
Cap - a provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or loan payments may increase or decrease. In upward rate markets, it protects the borrower from large increases in the interest rate or monthly payment. See lifetime payment cap, lifetime rate cap, periodic payment cap, and periodic rate cap.
Capital - (1) money used to create income, either as an investment in a business or an income property. (2) the money or property comprising the wealth owned or used by a person or business enterprise. (3) the accumulated wealth of a person or business. (4) the net worth of a business represented by the amount by which its assets exceed liabilities.
Capital Expenditure - the cost of an improvement made to extend the useful life of a property or to add to its value, such as adding a room. The cost of repairing a property is not a capital expenditure. Capital expenditures are appreciated over their useful life; repairs are subtracted from income for the current year.
Capital Improvement - any structure or component erected as a permanent improvement to real property that adds to its value and useful life. (See Capital Expenditure).
Capitalization (Cap) Rate - rate of return used to derive the capital value of an income stream, divide annual income by net operating income.
Carrying Charges - expenses necessary for holding property, such as taxes and interest on idle property or property under construction.
Cash Flow - The net operating income minus the total of all debt service payments. (See definition of "net operating income" below.)
Cash Flow Basis - this calculation shows when your monthly payment savings exceed your estimated closing costs and discount points. It does not consider the tax impact or differences in principal balance reduction between your current loan and the refinance suggestions. You can use the Amortization Schedule Calculator to compare principal reduction.
Cash Out - Cash given to the borrower from the proceeds of a loan. While relatively common as part of a refinance, it is uncommon, but not impossible, as a benefit of a small percentage of non-conforming loans used for a purchase.
Cash-Out Refinance - a refinance transaction in which the new loan amount exceeds the total of the principal balance of the existing first mortgage and any secondary mortgages or liens, together with closing costs and points for the new loan. This excess is usually given to the borrower in cash and can often be used for debt consolidation, home improvement, or any other purpose. The borrower effectively borrows against the home equity.
Caveat Emptor - let the buyer beware.
Certificate of Eligibility - issues by the Veterans Administration to those who qualify for a VA loan.
Certificate of Insurance - a document issued by an insurance company to verify the coverage.
Certificate of Occupancy (C.O.) - a document issued by a local government or agency permitting the structure to be occupied by members of the public.
Certified Commercial Investment Member (CCIM) - a designation awarded by the Realtors National Marketing Institute, which is affiliated with the National Association of Realtors.
Certified Residential Broker (CRB) - a designation awarded by the Realtors National Marketing Institute, which is affiliated with the National Association of Realtors.
Certified Residential Specialist (CRS) - a designation awarded by the Realtors National Marketing Institute, which is affiliated with the National Association of Realtors.
Chain of Title - a history of conveyances and encumbrances affecting a title from the time that the original patent was granted or as far back as records are available.
Clear Title - a marketable title, one free of clouds and disputed interests.
Closing - The formal meeting where loan documents are signed and funds disbursed. Note, however, that Federal law requires that funds not be disbursed for three business days on certain loans where personal residences serve as the security. (See definition of "recission" below.)
Closing Costs - The expenses which borrowers incur to complete the loan transaction. These costs may include title searches, title insurance, closing fees, recording fees, processing fees and other charges.
Closing Date - the date on which the seller delivers the deed and the buyer pays for the property.
Closing Statement - an accounting of funds from a real estate transaction, also known as a HUD-1.
Cloud on Title - an outstanding claim or encumbrance that, if valid, would affect or impair the owner’s title.
Coinsurance Clause - a provision in a hazard insurance policy stating the minimum amount of coverage that must be maintained - as a percentage of the total value of the property - in order for the insured to collect the full amount of a loss.
Collateral - property pledged as security for a debt.
Collectors Deed - If the Property has not been redeemed during the one-year redemption period, the holder of the Certificate of Purchase may apply for and receive a Collectors Deed to the property
Combined Loan-to-Value (CLTV) - The total of all loans relative to the value of the property. If a property has a value of $100,000 and three loans totaling $125,000, the CLTV is 125% ($125,000 / $100,000).
Commitment - The notification that a lender has approved a loan. Virtually all commitments are issued conditionally; that is, subject to some list of conditions that must be satisfied prior to funding actually taking place. Typical conditions include appraisals of a certain value, clean title, verification of representations by the borrower, etc.
Comparable Sales - As part of the appraisal process, those relatively recently sold properties which will be compared to the subject property (the property being appraised) for the purpose of forming an opinion of value for the subject property. The facts and details of the comparable properties will be compared to those of the subject. In an urban setting, to be of credible assistance in this process, comparable sales must have the same use as the subject, have many similarities to the subject in terms of size of house, size of lot, construction, bedroom count, room count, floor plan, amenities, street traffic and be in the same neighborhood and have been sold in the recent past (preferably no more than six months) by way of an "arms length" transaction (i.e., not sold to a relative or friend and not sold due to a forced sale or distress sale) and be within one mile of the subject property. More liberal standards will apply for rural property and some suburban properties but the basic premise holds, the more similar the comparable sales are to the subject property, the more accurate the value assigned to the subject property will be. Lenders will often compensate for the less precise nature of rural appraised values by allowing only lower loan-to-value ratios than those in urban settings, usually 10% lower. (See definition of "loan-to-value" below.)
Conditions, Covenants, and Restrictions (CCR’s) - promises written into deeds and other instruments agreeing to performance or nonperformance of certain acts, or requiring or prohibiting certain uses of the property.
Conforming Loan - A loan which has underwriting criteria consistent with (i.e., conforming to) those strict guidelines of Fannie Mae, Freddie Mac, FHA or VA. These are typically the lowest interest rate loans with very good terms. (See definitions of "Fannie Mae", "Freddie Mac", "FHA", "VA" and "underwriting" below.).
Consideration - anything of value given to induce entering into a contract.
Contiguous - actually touching, having a common boundary.
Contingency - A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.
Contract - an agreement between competent parties to do or not do certain things for consideration.
Contract For Deed - a real estate installment selling arrangement whereby the buyer may use, occupy, and enjoy land, but no deed is given by the seller until all or a specified part of the sale price has been paid, same as land contract.
Contractor - one who contracts to provide specific goods or services.
Conventional Loan - A conforming loan with no government guarantee; that is, a Fannie Mae or Freddie Mac loan. (See definition of "conforming loan" above.).
Conversion - changing property to a different use or form of ownership.
Convey - to deed or transfer title to another.
Cooperative (co-op) - a type of multiple ownership in which the residents of a multi-unit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.
Counteroffer - rejection of an offer with a simultaneous substitute offer.
Creative Financing - any financing arrangement other than a traditional mortgage from a third party lending institution.
Credit Line - A loan that allows revolving use of the credit; that is, after funds have been borrowed and repaid they may be borrowed again without applying for a new loan. Typically, a credit limit is established and some or all of the available funds can be optionally disbursed at closing. Undisbursed funds are available for the borrowers use at any time. Payments are required only on the outstanding balance. They are similar in use to a credit card except that they typically use checks to access the funds. They are inexpensive, effective tools for investors.
Dealer - one who holds real property primarily for sale to customers, merchandise is inventory and gain on sale is treated as ordinary income.
Debt Coverage Ratio (DCR) - A ratio used in underwriting loans for income producing property which is created by dividing net operating income by total debt service. Ratios of at least 1.10 are generally required with ratios of 1.20 and higher considered the norm. (See definition of "underwriting" below.).
Debt Ratio (DR, D:I) - Also known as debt to income. The ratio of the total of minimum monthly debt payments to gross monthly income. If minimum monthly payments on a credit card, auto lease, and mortgage (PITI) were $30, $220 and $750 respectively and the gross monthly income was $3000, the debt ratio would be 33.33% ($1000 / $3000). Only debt obligations that will be in place after the loan has funded are considered. Payments for food, utilities, entertainment, medical bills, etc. are not included in the calculation. Contractual obligations for rent (e.g., a lease) would be included in the calculation. The housing ratio in this example would be 25.0% ($750 / $3000). The preferred candidate for conventional loans typically would have debt ratios of 28% for housing and 36% for the total with the maximum ratios allowed (on a case by case basis with compensating factors; i.e., some other strong positive to offset the negative of the higher debt ratio) being around 30% / 40% (housing / total). FHA and VA loans allow a total of approximately 41.0%. Non-conforming loans may allow total debt ratios as high as 55% or so. True "hard money" loans seldom consider debt ratios. (see definitions of "PITI", "Housing Ratio", "Non-conforming Loan" below).
Decree - an order issued by one in authority, a court order or decision.
Deed - written document, properly signed and delivered, that conveys title to real property.
Deed in Lieu of Foreclosure - the act of giving property back to the lender without foreclosure.
Deed of Trust (DOT) - DOT’s are similar to mortgages in that they serve as security for a loan by encumbering real estate. However, a mortgage is between two parties (borrower and lender) and a deed of trust involves three parties (borrower, lender and trustee). The trustee holds the property in trust as security for the payment of the debt and can sell the property if the borrower defaults.
Deed Restriction - see Conditions, Covenants, and Restrictions.
Default - Failure to meet all of the commitments and obligations specified in the mortgage or deed of trust. Defaults usually give the lender the right to accelerate payments and start foreclosure.
Defeasance - clause in mortgage that gives the borrower the right to redeem the property after default by paying the full indebtedness and fees incurred.
Deferred Maintenance - a type of physical depreciation due to lack of normal upkeep.
Deferred Payments - payments to be made at some future date.
Deficiency Judgment - a court order stating that the borrower still owes money when the security for a loan does not entirely satisfy a defaulted debt.
Density - the intensity of land use.
Density Test - An analysis of soil to determine if the surface can support the foundation of a house.
Depreciation Recapture - when real property is sold at a gain and accelerated depreciation has been claimed, the owner may be required to pay tax at ordinary income rates to the extent of the excess accelerated depreciation.
Discount Points - One point equals one percent of the loan amount. Paying points has the effect of giving the lender a higher yield. Two points on a $100,000 mortgage would cost $2,000 ($100,000 x 0.02).
Document Preparation - this fee covers the expenses associated with this process of preparing some of the legal documents that you will be signing at the time of closing, such as the mortgage, note, and truth-in-lending statement
Down Payment - The portion of the purchase price paid by a buyer to a seller from sources of funds outside of those provided by a lender.
Draw - a periodic advance of funds from a lender.
Due Diligence - The act of carefully reviewing, checking and verifying all of the facts and issues before proceeding. In lending it is, among other things, verification of employment, income and savings; review of the appraisal; credit report; and status of the title.
Due-on-Sale - see Acceleration Clause - reservation of lender’s right to call the loan due and payable upon sale of the property.
Glossary of Terms
A - D, E - H, I - L, M - P, Q - T, U - Z