Glossary

With an Adjustable Rate Mortgage, the interest rate may vary based on a formula. This formula is typically set based on an index, such as the one (1) year treasury bill. To the index, a margin would be added. The index and margin would generally be rounded up to the nearest 1/8 of a percentage point to arrive at your interest rate. The interest rate would be calculated periodically and would typically have caps limiting the amount that the rate could change within a given time frame.

An appraisal is an opinion of value given by a real estate professional known as an appraiser. Typically, the appraiser will evaluate a property based on comparable sales in the area as well as an evaluation of the cost to reconstruct the subject property. On occasion, the appraiser will take into consideration the condition of the property and must, therefore, evaluate possible repairs. However, it is important to distinguish appraisers from home inspectors. Appraisers are not principally charged with the duty of finding defects, such as a home inspector.

The assessment or assessed value is a value established by the local taxing authority for the purpose of calculating property taxes on the subject parcel. In many instances, the assessment may not reflect the true value of the property.

The closing or settlement is the transaction where title to the property is transferred and the sales price is paid. The closing must be handled strictly pursuant to the terms of the contract, terms of the mortgage lender’s instructions and title company standards. Typically, in conjunction with the closing or settlement, the closing or settlement agent or attorney will coordinate the payoff for satisfaction of existing loans on the property for the seller; obtain and examine the abstract or title search; obtain homeowner’s insurance; receive a termite inspection report; satisfy title company requirements; pay past due taxes; and prepare all necessary documents, including those associated with any new loans and those necessary to transfer title.

A contingency is generally a clause in the contract which requires that, before the contract truly becomes enforceable, a condition must be met. These conditions must be agreed to by the parties to the contract. Typical contingencies may include the purchaser procuring a new loan; purchaser’s sale of existing property; or inspections of the property.

A conventional loan is one which is generated under guidelines created by the Federal National Mortgage Association (FNMA), euphemistically known as “Fannie Mae.” Fannie Mae is not tied to any particular governmental agency, such as FHA or VA, therefore, the underwriting guidelines are typically more closely tied to commercially reasonable practices. One of the features of a conventional loan is that you can avoid mortgage insurance all together if you can pay enough money down so that the loan to value ratio will be less than 80%. As the loan to value ratio rises above 80%, at increments, the mortgage insurance on the loan increases, with typical increments being 90% and 95% loan to value. Another feature of a conventional loan is that, even though the initial loan to value may be greater than 80%, typically there is an opportunity to apply to have the mortgage insurance eliminated from your payment once the loan to value ratio falls below 80%. A drop in the loan to value ratio can result either from the mortgage loan balance being reduced or by the property values increasing. To fully understand the options available, you should consult with your mortgage banker.

An easement is an interest in real property allowing someone the right to use a portion of the property for a limited purpose. Easements may be for such things as utility lines, sewer lines, telephone lines, cable television, drainage, or for pedestrian traffic. As a property owner, it is not desirable to have a valuable improvement or structure located in an easement. For example, you would not want to have a sanitary sewer easement lying underneath your home since the holder of that easement presumably has the right to maintain and repair that easement even if those repairs interfere with your ownership.

Encroachment has occurred when an improvement or structure is not located where it should be. An encroachment is typically one of the following: A building setback or building line violation; the house being located on an easement; or the house being located over the property lines.

Equity is simply the difference between the value of a property and the total debts secured by the property.

Escrow refers to any transaction in which a third party holds money or documents, or both, for another persons benefit. The term escrow, in connection with a real estate transaction, may mean the account within which the real estate agent holds earnest money; the company which handles the actual closing; funds being held by a party after closing to guarantee certain types of performance; or the funds being held by the mortgage company for the purpose of paying taxes and insurance. In each case, funds are being held by a third party who claims no interest in the funds.

Fannie Mae is an acronym for the Federal National Mortgage Association. This Association sets forth standards for underwriting guidelines or standards for conventional loans. If these particular standards are met in creating a mortgage loan, the loan can be resold from the originating bank or mortgage company to other banks or mortgage companies more easily. Because the loans are standardized, the purchasing bank can be assured as to the quality of the loan itself. In addition, with a conventional or Fannie Mae loan, typically, if the loan to value ratio exceeds 80%, private mortgage insurance would be required which will guarantee that the lender will be made whole in the event of a default by the borrower.

FHA is a branch of the Federal Government that acts to insure loans which meet certain government standards. FHA is the branch of government, a division of the Department of Housing and Urban Development (a.k.a. “HUD”). One of the features of FHA loans is that the down payment may be lower and therefore the loan to value ratio can be larger. Regardless of the loan to value ratio, FHA mortgage insurance is a requirement of all loans. Typically, the FHA mortgage insurance will come in two (2) forms. One will be a substantial fee at closing which is typically financed as part of closing costs. In addition, a monthly mortgage insurance payment is also assessed to the homeowner and paid into the escrow account which is, in turn, paid to HUD. FHA prohibits certain fees to be paid by the Borrower, thus Sellers should bear in mind that the Seller may be required to pay certain new mortgage loan fees.

Periodically, the US Corp of Engineers establishes maps which are more likely to flood more often than once in every one hundred years or once in every five hundred years. These are known as the “one hundred year flood plain” and “five hundred year flood plain” respectively. If your house falls within a flood plain, the mortgage company may require, as a condition of your loan, that flood insurance is required. The flood maps are periodically revised, and as a result, homes that were once outside of the flood plain may subsequently be declared to be within a flood plain even though no notice was given to the home owner. Regardless of whether the property is located in a flood plain or not, a homeowner has the option to buy flood insurance.

At the time that you apply for your mortgage loan, the lender may be required to provide good faith estimates and truth in lending disclosures. These estimates are dependent upon the type of loan applied for initially, and may not be accurate if your interest rate, loan type, loan amount, or loan terms changed. Many times, until the actual closing, those estimates are the closest figures available for determining what your closing costs will be.

Nowadays, many contracts call for a home inspection. The home inspection is of course, an inspection of the home made by a professional inspector to determine the nature and extent of any possible defects. An inspection is not a substitute for asking intelligent questions about the condition of the property. (You may wish to look at the “Property Condition Disclosure” form in the form section of this site.) When a home inspection is made, a list of defects will be generated. What happens with that list depends on your contract. Some contracts provide that no repairs whatsoever are required to be made be the seller and are known as “as is.” Some contracts require that the seller make only certain limited repairs, and some require that the seller make all repairs with exceptions, such as “cosmetic defects.” In some cases, the contract will also refer to repairs which are required by the buyer’s lender. Finally, many contracts provide for repair limitations. Essentially, if the repairs required exceed the repair limitation amount, the seller may opt to make full repairs and hold the buyer to the contract; or make partial repairs, in which case the buyer has the option of closing with partial repairs, or rescinding the contract and receiving a refund of earnest money. If you have a question concerning the nature and extent of your repair rights and obligations, you should refer specifically to the terms of your contract, and rely upon the advise of your real estate professional.

The loan to value ratio is simply the loan amount divided by the value of the property as converted to a percentage. In the event of a sale, the value is deemed to be the sales price. Otherwise, the value may be determined by an appraiser.

Mortgage insurance is designed to protect the mortgage lender from the borrower’s default. Typically, with a conventional loan, the cost of mortgage insurance decreases as the down payment increases. Also, typically, with a conventional loan, if the loan to value ratio falls below 80%, no mortgage insurance would be required. Conversely, with an FHA loan, mortgage insurance would be required no matter what the loan to value ratio is. VA loans do not require mortgage insurance, however, there is a VA funding fee that is assessed. Typically, the VA funding fee is much lower than private mortgage insurance.

Personal property is property which is tangible but not considered to be real property.

Certain loans provide that if the loan is paid off prior to maturity (in whole or in part), a penalty or fee may be imposed at the time of payoff. The nature and extent of such prepayment penalties can vary greatly.

With new construction, at the time the house is complete or nearly complete, the new buyer is given the opportunity to examine the house and generate a list of items which the buyer considers to be defected. The builder may also participate in this “walk-thru” to compile a punch list of items which parties agree the builder will repair. Each builder’s procedure in generating such lists and handling warranty issues after the closing very greatly, but it is advisable to follow the standard procedures provided by the builder in dealing with punch list and post closing warranty issues.

Real property, most simply put, is land and the structures located on it. Tangible property which is not real property is considered to be “personalty” or “personal property.” Unless otherwise mentioned, a sale of land includes all fixtures attached to it, but no “personality.” As a result of this doctrine, many contracts provide that the normal accessories that should go along with the sale of a house, although they may not strictly be considered real property, are part of the property transferred in the contract. Such items may include built in appliances, garage door openers, fireplace screens and gas logs, bathroom mirrors (which simply may be hung rather than affixed), swimming pool equipment.

Refinance transaction is one in which a new loan is generated, generally to pay off an old loan.

This is another term for the closing itself, or the actual transaction when the property and funds change hands and all conditions of the contract are met.

The survey may refer to both the drawing of a parcel with improvements of easements and building lines shown. Typically, surveys have specific calls (directions) and distances. Typically, a survey also shows whether a property is located within a flood plain.

The term “title,” in dealing with real property, is somewhat abstract. Rather than it being an actual document, title to property is determined based upon an attorney’s examination of the deeds of record in the county register’s office where the property is located. This is somewhat different from a car title, for example, which is reflected in a certificate. Although it is typical for a title search to be performed at the time of closing on real property, having a search performed is not an absolute guarantee that title is clear. Typically, the search itself is, at best, several days old, and may not include matters affecting title which are not shown as a matter of public record in the county register’s office and in the local court clerk’s offices. Possible defects which would not show up in the abstract may include unrecorded lien claims, claims based on defects in existing deeds, such as forgeries, claims of heirs, claims of creditors (in the event of a bankruptcy), claims that documents were signed under duress, defects in the execution of documents, and anything that might have been recorded against the property from the date of the search until the closing date. Many of these types of defects would be undetectable by the title examiner. By issuing a policy of title insurance, the Title Insurance Company, assumes the risks for these sorts of defects. In the event of a claim, the Title Insurance Company would be responsible for defending the claim and paying to the insured the amount of the loss (the cost to satisfy the claim) up to the policy limits. Typically, most mortgage lenders require a policy of title insurance covering the loan amount. The additional fee to insure the owner is typically minimal if a mortgage loan is also being insured. If you have additional questions concerning title insurance, you may wish to review the online brochure in the “Practical Info” page on title insurance.

The term “truth in lending” takes its name from a Federal Act. The Act requires that certain disclosures be made by lenders in typical transactions involving the purchase or refinance of a home. “Truth in lending” also refers to one of the many documents signed at closing wherein calculations are shown reflecting such things as “annual percentage rate” or “APR” (loosely meaning the cost of the loan expressed as a percentage), the finance charge (including interest, some bank fees and mortgage insurance), the amount financed (the loan amount less certain fees), and the total for payments (the sum of the finance charge and loan amount.) The truth in lending statement also carries with it a disclosure as to whether the loan has a prepayment penalty; whether it is assumable; and a description of the payments to satisfy the loan, including principle, interest, and mortgage insurance, but not including homeowner’s insurance and property taxes.

A VA loan is one which is generated under the guidelines issued under the Veterans Administration of the Federal Government. One of the features of a VA loan is that there are certain limited fees that sellers are required to pay, such as attorney fees, closing fees, tax service and underwriting fees, and assignment fees.

With the sale of real property, there are several types of warranties available. For the sale of an existing home, there are one year warranties available for a fee that would typically cover the mechanical systems in the house. Also, on an existing home, the contract may contain the seller’s agreement to warranty, in some limited way, the condition of the home. For the sale of a new home, typically a builder will give a comprehensive limited warranty providing that the house is built free of defects and workmanship and materials for a period of a year. Typical terms for such warranties may be found in the “Forms” section of this site.