Real Estate 101

SOUTHWEST MICHIGAN REAL ESTATE TERMS

Understanding Terms used in the home buying process can be important to both first time buyers and repeat buyers. I have compiled an alphabetic list of terms I thought might be helpful.   

Assessed value

The valuation placed on property by a public tax assessor for purposes of taxation.

Broker

Brokers have several meanings in different situations. Most Realtors are "agents" who work under a "broker." Some agents are brokers as well, either working for themselves or under another broker. In the mortgage industry, brokers usually refer to a company or individual that does not lend the money for the loans themselves, but broker loans to larger lenders or investors. As a normal definition, a broker is anyone who acts as an agent, bringing two parties together for any type of transaction and earns a fee for doing so.

Certificate of deposit

A time deposit held in a bank which pays a certain amount of interest to the depositor.

Certificate of deposit index

One of the indexes used for determining interest rate changes on some adjustable-rate mortgages. It is an average of what banks are paying on certificates of deposit.

Common law

An unwritten body of law based on general custom in England and used to an extent in some states.

Community property

In some states, especially the southwest, property acquired by a married couple during their marriage is owned jointly, except under special circumstances. This is an outgrowth of the Spanish and Mexican heritage of the area.

Condominium

A type of ownership in real property where all the owners own the property, common areas and buildings together, except for the interior of the unit to which they have title. Often mistakenly referred to as a type of construction or development, it refers to the type of ownership.

Condominium conversion

Changing the ownership of an existing building (usually a rental project) to the condominium form of ownership.

Condominium hotel

A condominium project that has rental or registration desks, short-term occupancy, food and telephone services, and daily cleaning services and that is operated as a commercial hotel even though the units are individually owned, these are often found in resort areas like Hawaii.

Cooperative (co-op)

A type of multiple ownership in which the residents of a multi-unit housing complex own share in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

Cost of funds index (COFI)

One of the indexes that are used to determine interest rate changes for certain adjustable-rate mortgages. It represents the weighted-average cost of savings, borrowings, and advances of the financial institutions such as banks and savings & loans, in the 11th District of the Federal Home Loan Bank.

Delinquency

Failure to make mortgage payments when mortgage payments are due, for most mortgages. Even though they may not charge a "late fee" for several days, the payment is still considered to be late and the loan delinquent. When a loan payment is more than 30 days late, most lenders report the late payment to one or more credit bureaus.

Depreciation

A decline in the value of property; the opposite of appreciation, depreciation is also an accounting term which shows the declining monetary value of an asset and is used as an expense to reduce taxable income. Since this is not a true expense where money is actually paid, lenders will add back depreciation expense for self-employed borrowers and count it as income.

Discount points

In the mortgage industry, this term is usually used only in reference to government loans, meaning FHA and VA loans. Discount points refer to any "points" paid in addition to the one percent loan origination fee. A "point" is one percent of the loan amount.

Down payment

The part of the purchase price of a property that the buyer pays in cash and does, not finance with a mortgage.

Due-on-sale provision

A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.

Effective age

An appraiser's estimate of the physical condition of a building, the actual age of a building may be shorter or longer than its effective age.

Equal Credit Opportunity Act (ECOA)

A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity

A homeowner's financial interest in a property, Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.

Eviction

The lawful expulsion of an occupant from real property.

Exclusive listing

A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time.

Foreclosure

The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property, this usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

Grantee

The person to whom an interest in real property is conveyed.

Grantor

The person conveying an interest in real property.

Hazard insurance

Insurance coverage that in the event of physical damage to a property from fire, wind, vandalism, or other hazards.

Home inspection

A thorough inspection by a professional that evaluates the structural and mechanical condition of a property, a satisfactory home inspection is often included as a contingency by the purchaser.

Homeowner's insurance

An insurance policy that combines personal liability insurance and hazard insurance coverage for a dwelling and its contents.

Homeowner's warranty

A type of insurance often purchased by home buyers that will cover repairs to certain items, such as heating or air conditioning, should they break down within the coverage period. The buyer often requests the seller to pay for this coverage as a condition of the sale, but either party can pay.

Judicial foreclosure

A type of foreclosure proceeding used in some states that is handled as a civil lawsuit and conducted entirely under the auspices of a court, other states use non-judicial foreclosure.

Lease

A written agreement between the property owner and a tenant that stipulates the payment and conditions under which the tenant may possess the real estate for a specified period.

Leasehold estate

A way of holding title to a property wherein the mortgagor does not actually own the property but rather has a recorded long-term lease on it.

Lender

A term which can refer to the institution making the loan or to the individual representing the firm, for example, loan officers are often referred to as "lenders."

Liability insurance

Insurance coverage that offers protection against claims alleging that a property owner's negligence or inappropriate action resulted in bodily injury or property damage to another part; it is usually part of a homeowner's insurance policy. 

Lien

A legal claim against a property that must be paid off when the property is sold, a mortgage or first trust deed is considered a lien.

Life cap

For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the mortgage.

Line of credit

An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower.

Multi dwelling units

Properties that provide separate housing units for more than one family, although they secure only a single mortgage.

Planned unit development (PUD)

A type of ownership where individuals own the building or unit they live in, but common areas are owned jointly with the other members of the development or association.

Power of attorney

A legal document that authorizes another person to act on one's behalf, a power of attorney can grant complete authority or can be limited to certain acts and/or certain periods of time.

Public auction A meeting in an announced public location to sell property to repay a mortgage that is in default.

Planned Unit Development (PUD)

A project or subdivision that includes common property that is owned and maintained by a homeowners' association for the benefit and use of the individual PUD unit owners.

Purchase money transaction

The acquisition of property through the payment of money or its equivalent.

Quitclaim deed

A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.

Real estate agent

A person licensed to negotiate and transact the sale of real estate.

Real Estate Settlement Procedures Act (RESPA)

A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Realtor®  

A real estate agent, broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of Realtors.

Refinance transaction

The process of paying off one loan with the proceeds from a new loan using the same property as security.

Rent loss insurance

Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty that renders the leased premises unavailable for use and as a result of which the tenant is excused from paying rent.

Replacement reserve fund

A fund set aside for replacement of common property in a condominium, PUD, or cooperative project -- particularly that which has a short life expectancy, such as carpeting, furniture, etc...

Right of first refusal

A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.

Right of ingress or egress

The right to enter or leave designated premises.

Sale-leaseback

A technique in which a seller deeds property to a buyer for a consideration, and the buyer simultaneously leases the property back to the seller.

Seller carry-back

An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage.

Settlement statement

A document that provides an itemized listing of the funds that were paid at closing, Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow (impound) amounts. Each type of expense goes on a specific numbered line on the sheet. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing. It is called a HUD1 because the form is printed by the Department of Housing and Urban Development (HUD). The HUD1 statement is also known as the "closing statement" or "settlement sheet."

Subdivision

A housing development that is created by dividing a tract of land into individual lots for sale or lease.

Sweat equity

Contribution to the construction or rehabilitation of a property in the form of labor or services rather than cash.

Tenancy in common

As opposed to joint tenancy, when there are two or more individuals on title to a piece of property, this type of ownership does not pass ownership to the others in the event of death.

Two- to four-family property

A property that consists of a structure that provides living space (dwelling units) for two to four families, although ownership of the structure is evidenced by a single deed.

Vested

Having the right to use a portion of a fund such as an individual retirement fund, for example, individuals who are 100 percent vested can withdraw all of the funds that are set aside for them in a retirement fund. However, taxes may be due on any funds that are withdrawn.

Veterans Administration (VA)

An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans.