Home-Buyer’s Vocabulary

Overview If you are buying a home, you may sometimes feel confused by the
A glossary of commonly
used terms in real estate
complicated vocabulary used in real estate transactions. This list can help
transactions, whether you you understand some of the terms you’ll hear as you go through the
are buying a house,
apartment, condominium, process of negotiating the purchase of a new home.
or other property.
• A word of explanation A word of explanation
• Glossary of terms
Some things to keep in mind when you are reading through these definitions:

• These terms are defined as they are commonly understood in the real estate
business. The same terms may have different meanings in another context.

• These definitions are intentionally general, non-technical, and short. They do

not cover all of the possible meanings that a term may have 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.

Before signing any documents or depositing any money, you should always
consult with an attorney to ensure that your rights are properly protected.

Glossary of terms
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 find
out whether there are any problems with the title (title defects) that must be
cleared before the purchase. Problems with the title could prevent you from
getting adequate insurance on the property, and could affect the value of the
property and your ability to sell it later on.

Acceleration clause
A condition in a mortgage that requires the borrower or property owner (the
mortgagee) to pay the balance of the loan immediately or following an
accelerated schedule. An acceleration clause may become effective if you fail to
make regular mortgage payments or violate another condition of the mortgage
(such as the requirement that you pay local property taxes or maintain an
adequate homeowner’s insurance policy).

Agreement of sale
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

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parties. It may also be called a contract of purchase, purchase agreement, or sales

agreement, depending on where you live.

Amortization
A payment plan that enables you, as a borrower, to reduce your debt gradually
through periodic (generally monthly) payments. When property is used for
business, amortization also refers to the annual reduction in the property’s
value for tax and business reporting purposes.

Appraisal
An expert estimate of the value of a piece of property. Mortgage lenders
generally require an appraisal to ensure that the value of the property is
greater than the loan they are considering.

Assumption of mortgage
An arrangement that allows an existing mortgage to be shifted from one
property owner (or mortgagor) to the next. If you enter into this type of
agreement, your name is entered on the mortgage instrument and you become
legally responsible for paying the mortgage and following all of its conditions.
The former owner is released from any responsibility under the mortgage.
Your consent, as the buyer, is usually required for an assumption of mortgage,
and it becomes legally valid (or binding) only if you sign a written release from
liability (which releases the former owner from any liability under the
mortgage). Without that release, if you fail to make your monthly mortgage
payments, the mortgage lender may still require the former owner to pay.

An assumption of mortgage is often confused with purchasing subject to a

mortgage. When you make an agreement to purchase subject to a mortgage,
you agree to make the monthly payments on an existing mortgage, but the
original mortgagor remains personally liable if you fail to make your payments.
Since the original owner remains liable in the event of default, the mortgage
lender’s consent to a sale subject to a mortgage is not required.

Both arrangements (assumption of mortgage and purchasing subject to a mortgage)

are ways to finance the sale of property. They may be used when a property
owner is in financial difficulty and needs to sell the property to avoid
foreclosure.

Binder or offer to purchase

A preliminary agreement to purchase a piece of real estate. To be valid, a
binder must be secured by the payment of “earnest money,” and must be
signed by both the buyer and the seller. A binder grants you, as the buyer, the
right to purchase the property at an agreed price and on agreed terms for a
limited period of time (while you apply for a mortgage, have the property
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inspected, have the title checked, and take any other steps you may need to
take before you complete the purchase). If you change your mind or are unable
to purchase, you forfeit the earnest money unless the binder clearly states that
it is to be refunded.

Broker
(See real estate broker.)

Building line or setback

Distances from the ends or sides of the lot beyond which construction may not
extend. The building line or setback restrictions may be required by the
subdivision in which the property lies, by local building codes or zoning laws,
or by a special requirement in the property’s deed or lease.

Certificate of title
A certificate issued by a title company, or a written opinion from an attorney,
stating that the seller has a clear title (“good, marketable, and insurable” title)
to the property being offered for sale. A certificate of title is not a guarantee to
you, as a buyer, that there are no hidden problems with the title (hidden title
defects) that would not be uncovered by a normal, careful examination of the
title records. The title company or lawyer issuing the certificate of title is liable
only for damages due to negligence -- for not noticing and pointing out a
defect that is in the title records. You can get more comprehensive protection
against a title problem by purchasing a title insurance policy.

Closing
The meeting at which documents are signed, payments are made, and
ownership of the property is legally transferred from the seller to the buyer.
The certificate of title, abstract, and deed are generally prepared for the
closing by an attorney and this cost is charged to the buyer. The buyer signs
the mortgage document and payment is made to cover the closing costs. The
final closing confirms the original agreement reached in the binder or
agreement of sale.

Closing costs
The many small and large expenses that buyers and sellers normally incur to
complete the sale of a piece of property. These costs are separate from the
price of the property. Payment of closing costs is generally required at the
closing. This is a typical list:

• Buyer’s expenses
- Documentary stamps on notes
- Recording deed and mortgage
- Escrow fees
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- Attorney’s fees
- Title insurance
- Appraisal and inspection
- Survey charge

• Seller’s expenses
- Cost of abstract
- Documentary stamps on deed
- Real estate commission
- Recording mortgage
- Survey charge
- Escrow fees
- Attorney’s fees

The agreement of sale negotiated between the buyer and the seller (the binder)
may state in writing who will pay each of the various closing costs.

Cloud (on title)

An outstanding claim or encumbrance that adversely affects the marketability
of the title. This might be a second or third mortgage, a legal challenge to the
title, an agreement to allow mining or drilling on the property, or a restriction
on the property that might prevent you, as new owner, from using and
enjoying the property in the ways you intend.

Commission
Money paid to a real estate agent or broker -- most commonly by the seller --
as compensation for finding a buyer and completing the sale of a piece of
property. A commission is usually a percentage of the sale price -- 6 to 7
percent on houses, 10 percent on land. While sellers have traditionally hired
and paid commissions to real estate agents or brokers, more and more buyers
are hiring buyer’s agents and paying them commissions to perform these
services on their behalf.

Condemnation
The taking of private property for public use under the government’s power of
eminent domain. The property is taken by the government against the will of
the owner, but with payment of reasonable and just compensation.
Condemnation may also be the decision by a government agency that a
particular building is unsafe or unfit for use.
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Home Buyer’s Vocabulary

Condominium
A form of property ownership that allows you, the buyer, to be the sole owner
of an apartment or living unit and to share in the ownership of common areas
and facilities in a multi-unit building or development.

Contract of purchase
(See agreement of sale.)

Contractor
In the construction industry, a contractor is someone who contracts to build
buildings or portions of buildings. There are also contractors for each phase of
construction: heating, electrical, plumbing, air conditioning, road building,
bridge and dam construction, etc.

Conventional mortgage
A mortgage loan that is not insured by the U.S. Department of Housing and
Urban Development (HUD) or guaranteed by the Veterans Administration.
Banks, mortgage companies, and other financial institutions lend money for
home purchases in the form of conventional mortgages.

Cooperative housing
An apartment building or a group of homes owned by a housing corporation
whose stockholders are the people who live in the homes or apartments. The
residents/stockholders elect a board of directors to oversee the management of
the property. The corporation or association owns title to the property. While
the residents do not own their specific apartments or units, they have an
absolute right to live in their units for as long as they own stock in the
corporation.

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 transferred, 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 (the
person giving up ownership of the property) and the grantee (the new owner of
the property). (See also deed of trust, general warranty deed, quitclaim deed, and
special warranty deed.)

Deed of trust
Like a mortgage, a deed of trust is a legal document that pledges property as
security for a debt. It gives the lender a way to recover any money owed if the
borrower falls behind in making payments or in some other way violates the
terms of the loan agreement. A deed of trust has three parties: the borrower,
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Home Buyer’s Vocabulary

the trustee, and the lender (or beneficiary). 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 and title for the property
reverts back to the borrower (now the owner, with no debt obligation). If,
however, the borrower does not pay or abide by the conditions of the loan, the
trustee may sell the property at a public sale under the terms of the deed of
trust.

Default
Failure to make mortgage payments according to the terms of the mortgage or
deed of trust. The borrower is responsible for making payments when they are
due, without reminders from the lender. Generally, if payment is not received
30 days after the due date, the loan is in default. The loan may also be in
default if the borrower fails to meet other conditions in the mortgage or deed
of trust, such as timely payment of real estate taxes or maintaining adequate
homeowner’s insurance. When a loan is in default, the mortgage or deed of
trust may give the lender the right to accelerate payments, take possession of
and rent the property, or start foreclosure (the forced sale of the property).

Depreciation
A decline in value of a home due to wear and tear, changes in the
neighborhood, or any other reason. When property is used for business,
depreciation also refers to the annual reduction in the property’s value for tax
and business reporting purposes.

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,
and their cost, varies from state to state.

Down payment
The amount you, as the buyer, come up with from your own resources to
purchase the property. The down payment is the difference between the sale
price and amount to be borrowed under the mortgage or deed of trust. You
pay the down payment amount to the seller when you both sign the agreement
of sale. The agreement of sale specifies the down payment amount and
acknowledges its receipt by the seller. If you do not follow through and
complete the purchase of the property, you may forfeit the down payment.
Because events outside of your control may keep you from completing the
purchase, you should be sure the agreement of sale specifies the conditions
under which the deposit will be refunded. If the seller cannot deliver good title,
for example, or you make a reasonable effort and find that you are unable to
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obtain the needed mortgage, the agreement of sale usually requires the seller
to return the down payment.

Earnest money
The deposit money that you give to the seller or to the seller’s agent when you
and the seller sign the binder or offer to purchase to show that you are serious
about buying the house. If the sale goes through, the earnest money is applied
against the down payment. If the sale does not go through, you may forfeit the
earnest money 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. A common example is when an electric company obtains a
right-of-way across private property for a power line.

Encroachment
An obstruction, building, or part of a building that intrudes beyond a legal
boundary onto neighboring property, 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. This can take numerous forms, such as zoning ordinances,
easement rights, claims, mortgages, liens, charges, a pending legal action,
unpaid taxes, or restrictive covenants. 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. It is up to the buyer to
determine whether he or she wants to purchase the property 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 taking the property’s fair market value and subtracting the total
of the unpaid mortgage balance and any outstanding liens or other debts
against the property. A homeowner’s equity increases as he or she pays off his
or her 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 percent equity in the property.

Escrow
Money the property owner pays to the lender to be held in a special, protected
account (an escrow account) to be used to pay mortgage insurance premiums,
real estate taxes, and other regular expenses required to ensure the continued
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Home Buyer’s Vocabulary

value of the property. The money in the escrow account belongs to the buyer,
and can only be used to pay for certain expenses related to the property, as
specified in the mortgage or deed of trust.
Foreclosure
A legal term for any of the various methods of enforcing payment of the debt
secured by a mortgage or deed of trust. Foreclosure methods include taking
and selling the mortgaged property, and evicting the borrower from the
property and renting it until the mortgage is paid.

General warranty deed

A deed that conveys all of the seller’s interests in and title to a piece of
property to the buyer, and that 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 buyer may hold the seller liable.

Grantee
The party in the deed who is the buyer or recipient.

Grantor
The party in the deed who is the seller or giver.

Hazard insurance
Protects against damages caused to property by fire, windstorms, and other
common hazards.

HUD
The U.S. Department of Housing and Urban Development. The Office of
Housing/Federal Housing Administration within HUD insures home
mortgage loans made by lenders and sets minimum standards for such homes.

Interest
A charge paid for borrowing money. (See also mortgage note.)

Lien
A claim by one person or party on the property of another as security for
money owed. A lien may be applied to guarantee the payment of unpaid taxes,
money due to a contractor, or any other debt. A lien prevents the property
from being sold without first paying the money owed. (See also special lien.)

Marketable title
A title that is free and clear of objectionable liens, clouds, or other title defects.
It enables an owner to sell his or her property freely to others, and is accepted
by others without objection.
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Mortgage
A lien or claim against real property given by the buyer (or borrower) to the
lender as a security for money borrowed. Under the terms of a mortgage, the
borrower grants the lender certain rights to the property in the event that the
borrower defaults on the mortgage (fails to make regular mortgage payments
or does not fulfill other conditions of the loan). The lender has the right to
force the property to be sold to repay the loan, for example, or to evict the
borrower from the home in order to rent it and earn money toward the loan’s
repayment. Mortgages generally run from 10 to 30 years. The borrower
makes regular (generally monthly) payments of interest and principal until the
loan is completely repaid.

Mortgage commitment
A written notice from the bank or other lending institution saying it agrees to
make a mortgage loan to the buyer, and will advance mortgage funds in a
specified amount to enable a buyer to purchase a house.

Mortgage insurance
A government insurance program, administered by the Federal Housing
Administration (FHA), that protects mortgage lenders against loss when
borrowers default on mortgage loans. A mortgage lender may require you, as a
borrower, to buy mortgage insurance. When this happens, the lender generally
adds the mortgage insurance premiums to the amount you pay with your
regular mortgage payment. The lender then forwards the premium portion of
your payment to the government to help defray the cost of the FHA mortgage
insurance program.

Mortgage note
A written agreement to repay a loan. The agreement is secured by a mortgage,
serves as proof of the debt, and specifies how the loan will be repaid. The note
states the actual amount of the debt that the mortgage secures and renders the
borrower (or 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 borrowing to no more than the balance of the
original loan figure.

Mortgagee
The lender in a mortgage agreement.

Mortgagor
The borrower in a mortgage agreement.
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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 1 percent of the amount of the
mortgage loan. For example, if a loan is for $25,000, one point is $250.
Lenders charge points to raise their returns on loans at times 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, either buyer or seller or a combination
of the two may pay the points.

Prepayment
Payment of the mortgage loan, or part of it, before the 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. No
restrictions on prepayments are allowed in FHA-insured mortgages.

Principal
The amount of money borrowed under a mortgage loan -- as distinguished
from additional money that may be paid over the course of the loan, such as
interest and mortgage insurance premiums. In other words, principal is the
amount upon which interest is paid.

Purchase agreement
(See agreement of sale.)

Quitclaim deed
A deed that transfers whatever interest the owner of a deed may have in a
particular parcel of land -- with the understanding that other parties may also
have a claim to the property. Such a deed makes no warranties that the title is
clear of any encumbrances, but simply transfers to the buyer whatever interest
the current owner of the deed has. 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 of dealing with competing claims
and encumbrances on the property. (See also deed.)

Real estate broker

An agent who buys and sells real estate for someone else on a commissioned
basis. The broker does not have title to the property, but generally represents
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the owner or seller. Buyers may also arrange for brokers to represent them in
their search for property and negotiations for its purchase.
Refinancing
The process of replacing one mortgage loan with another, generally at a lower
rate. Refinancing is done by obtaining a new mortgage (from the same
mortgage lender or from a different lender) and using the money borrowed in
the new loan to pay off the outstanding balance on the old loan.

Restrictive covenants
Private restrictions that limit 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 language of the covenant, the intent of the
parties, and the law in the state where the land is situated determine whether a
covenant runs with the land or is personal. 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 in a given area. (Note that federal law prohibits housing
discrimination based on race, color, national origin, religion, sex, family status,
or disability. If you encounter restrictive covenants that discriminate in these
ways, call the U.S. Department of Housing and Urban Development Housing
Discrimination Hotline, toll-free, at 800-669-9777.)

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 (as opposed to a general lien,
which is levied against all of an individual’s assets). A special lien gives one
person certain ownership rights to another person’s property as a way to
collect money that is owed for work or materials or money spent on the
property. In some places it is called a “particular” or “specific” lien. (See also
lien.)

Special warranty deed

A deed that gives limited warranty protection to the buyer of a piece of
property for problems with the title (title defects) that may have arisen during
the time the previous owner owned the property. The person issuing the
special warranty deed (the grantor) guarantees to the property’s buyer (the
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grantee) that he or she has done nothing during the time he or she held title to
the property that has impaired, or that 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 elevations,
improvements, and boundaries of the land, as well as its relationship to
surrounding pieces of property. A survey is often required by the lender as
assurance that a building is actually located on the land according to its legal
description.

Title
The rights of ownership and possession of particular property. In real estate
transactions, title has two meanings: it 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 an individual has in the real estate.

Title insurance
Insurance that protects homeowners or lenders from loss due to problems with
the title to a piece of property. Title insurance may be issued to either the
homeowner, as an owner’s title policy, or to the mortgage lender, as a
mortgagee’s title policy. Since payment is made only to the party insured, if you
want the full benefit of a title insurance policy be sure to purchase an owner’s
title policy.

Title search or examination

A check of the title records, generally at the local courthouse, to make sure the
buyer is purchasing a piece of property from the legal owner and there are no
restrictions, claims, or liens on the property that would reduce its value or limit
the buyer’s ability to resell.

Trustee
A party who is given legal responsibility to hold property in the best interest or
for the benefit of another. The trustee is put in a position of responsibility for
someone else and must conform to certain legal requirement. (See also deed of
trust.)

Zoning ordinances
Acts carried out by an authorized local government, establishing building
codes and setting regulations for property land usage.
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Adapted from “Home Buyer’s Vocabulary,” a brochure published by the U.S. Department of Housing
and Urban Development, Washington, D.C.

© 1998, 2004 Ceridian Corporation. All rights reserved.