Below are brief descriptions of common words used in California real estate. You may find words that you are familiar with but have a meaning that is new to you. If you find you are still confused, please talk to Larry about it and he will clarify the term.
Accelerated Clause: Loan verbiage that provides the lender with the right to demand payment of the entire outstanding balance on your home loan, if you miss a monthly payment, sell the home, or otherwise fail to perform as promised under terms of your mortgage.
Adjustment Period: How often the rate of an adjustable rate mortgage (see below) adjusts. Typically, ARMs will adjust twice a year, but may adjust as often as once a month.
Adjustable Rate Mortgage (ARM): A mortgage that permits the lender to adjust the interest rate periodically on the basis of changes in a specified index. Compares to a fixed-rate mortgage.
Adjustable Period: The length of time between interest rate changes on an 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 per year.
Affidavit: A sworn statement in writing, made before an authorized official.
ALTA: Abbreviation for the American Land Title Association.
Amortization: Repayment of a loan in equal installments of principal and interest rather than interest only payments.
Annual Percentage Rate (APR): The total finance charge (interest, loan fees, points expressed as a percentage of the loan amount).
Appraisal: A written analysis of the estimated value of a property prepared by a qualified appraiser.
Appreciation/depreciation: Refers to either the increase (appreciation) or the decrease (depreciation) in a home’s value.
Assessments: Specific and special taxes (in addition to normal taxes) imposed on real property to pay for public improvements within a specific geographic area.
Assessed value: The value of a property according to your local tax assessor; determines how much you will pay in property taxes.
Assumption of Mortgage: A buyer’s agreement to assume the liability on an existing note that is secured by a mortgage or deed of trust. The lender must approve the buyer in order to assume the loan.
Attorney-in-Fact: An agent authorized to act for another under a power of attorney.
Balloon Loan: Require level payments just as a 15-year or 30-year fixed rate loan. But well before the date they become due, the full remaining balance of the loan comes due. Though they can be economical at the outset, beware of balloon loans – you may not be able to refinance the loan.
Balloon Payment: A lump sum principal payment due at the end of some mortgages or other long-term loans.
Beneficiary: As used in a trust deed, the lender is designated as the Beneficiary, i.e. obtains the benefit of the security.
Binder: Sometimes known as an offer to purchase or an earnest money request. A binder is the acknowledgement of a deposit along with a brief written agreement to enter into a contract for the sale of real estate.
Biweekly payment mortgage: A mortgage requiring payments every two weeks instead of the standard monthly payment. The result is a substantial savings in interest.
Bridge loan: If you close on a home before completing the sale of your existing home (not an ideal circumstance by anyone’s estimation), you may need to obtain a bridge loan.
Broker: A person who, for a commission or fee, brings parties together and assists in negotiating contracts between them.
Buyer’s agent: A person licensed to negotiate and transact the sale of real estate on behalf of the buyer. The buyer’s broker or agent only owes allegiance to the buyer and does not have an agent relationship with the sellers.
Buydown: A Veteran’s Administration loan plan available only in some new housing developments. A builder agrees to pay part of the mortgage for the first few yeas. Sellers also may create buydowns by paying lenders a predetermined amount of money so lenders will reduce their interest rates.
CLTA: Abbreviation for the California Land Title Association.
Cap: The limit of how much the interest rate or monthly payment can change either at each adjustment or over the life of the mortgage.
Cash reserves: Lenders typically require buyers to have enough cash left over after purchasing a home to make two mortgage payments, to cover a financial emergency.
CC & R’s: Covenants, Conditions and Restrictions. A document that controls the use, requirements and restrictions of a property.
Certificate of Reasonable Value (CRV): A document that establishes the maximum value and loan amount for a VA guaranteed loan.
Certificate of Title: A statement provided by an abstract company title or attorney stating that the title to real estate is legally held by the current owner.
Closing: A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs.
Closing Costs: Generally total from 2 percent to 5 percent of the home’s purchase price; separate from the down payment. Covers a number of costs including loan document processing fees, appraisal report fees, credit report fees etc.
Closing Statement: The financial disclosure statement that accounts for all of the funds received and expected at the closing of the escrow, including deposits or taxes, hazard insurance and mortgage insurance.
Collateral: An asset (such as a car or home) that guarantees the repayment of a loan.
Community Property: One way to hold title to your home.
Conventional Loan: A mortgage loan, which is not insured or guaranteed by a governmental agency.
Contingencies: Conditions contained in the Purchase Agreement, which outlines the obligations, the seller and buyer must fulfill before sale of the property is completed. Can concern the results of your effort to obtain financing, an inspector’s opinion of the condition of the property, etc.
Commission: The fee charged by a broker or agent for providing services related to a real estate transaction such as procuring the property, bringing the parties together and negotiating a purchase contract or loan.
Condominium: A form of real estate ownership. 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 surfaces (walls, floors, and ceilings) serve as its boundaries.
Contingency: A condition that must be satisfied before a contract is binding. For instance, a sales agreement may be contingent upon the buyer obtaining financing.
Conversion Clause: A provision in some ARMs that enables you to change an ARM to a fixed rate loan, usually after the first adjustment period. The new fixed rate is generally set at the prevailing interest rate for fixed rate mortgages. This conversion feature may cost extra.
Cooperative: A form of multiple ownership in which a corporation or business trust entity holds title to a property and grants occupancy rights to shareholders by means of proprietary leases or similar agreements.
Cosigner: If your credit is less than stellar, it may be necessary for you to have a cosigner – that is a friend or relative willing to assume the risk (and actual indebtedness for) your mortgage.
Credit Report: The main basis for a lender to determine your "credit worthiness." A historical list of your credit use and bill payment performance.
Debt-to-income Ratio: When you apply for a mortgage, the lender looks at the amount of debt you will have relative to your income. Acceptable limits generally range from 33 to 40 percent.
Deed: Written instrument by which the ownership of land is transferred from one person to another.
Deed of Trust: Written instrument by which title to land is transferred to a trustee as security for a debt or other obligation.
Default: You are officially in default when you fail to make two or more monthly mortgage payments on time. This does not automatically indicate that you will lose your home, however. Many lenders will help you work to find a solution, as foreclosure (see below) is expensive for the lender.
Delinquency: Comes before default. What happens when you fail to provide one month’s mortgage payment.
Deposit Receipt: Used when accepting "Earnest Money" to bind an offer for property by a prospective purchaser; also includes terms of a contract.
Down Payment: Percentage of the purchase price you will provide in cash up front.
Due on Sale Clause: An acceleration clause that requires full payment of a mortgage or deed of trust when secured property changes ownership.
Earnest Money: The portion of the down payment delivered to the seller or escrow agent by the purchaser with a written offer as evidence of good faith.
Easement: A right created by grant, reservation, agreement, prescription, or necessary implication, which one has in the land of another.
Escrow: A procedure in which a third party acts as a stakeholder for both the buyer and the seller, carrying out both parties’ instructions and assuming responsibility for handling all of the paperwork and distribution of funds.
Equity: A homeowner’s financial interest in a property. Also can mean the difference between the market value of your home and how much you owe on the property.
Exclusive listing: A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time, but reserving the owner’s right to sell the property himself without the payment of a commission.
Fair Credit Reporting Act: A consumer protection law that regulates the disclosure of consumer reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one’s credit record.
Federal National Mortgage Association: Popularly known 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 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 wishes, including leaving by will or inheritance. It is the greatest interest a person can have in real estate.
FHA Loan (Federal Housing Administration): A federal agency, create by the National Housing Act of 1934, for the purpose of expanding and strengthening home ownership by making private mortgage financing possible on a long-term, low down payment basis. The vehicle is a mortgage insurance program, with premiums paid by the homeowner, to protect lenders against loss on these higher risk loans. Since 1965, FHA has been part of the newly created department of Housing and Urban Development (HUD).
Finance Charge: The total cost a borrower must pay, directly or indirectly, to obtain credit. Fixed-rate Mortgage: A mortgage whose interest rate is locked in for the life of the loan, which commonly ranges from 15 to 30 years in duration. Compares to Adjustable Rate Mortgages (ARMs).
Formula: The way in which interest rates are calculated on Adjustable Rate Mortgages. Add the margin to the index to get the interest rate.
Foreclosure: The legal process of the mortgage lender taking possession of and selling the property. When you default on a loan and the lender determines you are incapable of making payment, you may lose your house to foreclosure. Graduated Payment Mortgage: A residential mortgage with monthly payments that start at a low level and increase at a predetermined rate.
Grant: A transfer of real property.
Grantee: The person to whom a grant is made.
Grantor: The person who makes a grant.
Home Inspection: A thorough inspection that evaluates the structural and mechanical condition of a property.
Home Inspection Report: A qualified inspector’s report on a property’s overall condition. The report usually covers an evaluation of both the structural and mechanical systems. Homeowner’s Insurance: Absolutely required to obtain a mortgage, it covers the cost to rebuild your home.
Home Warranty Policy: Insurance that covers repairs to the home, generally for one year. Covers smaller aspects of the home including electrical, plumbing, pest control etc.
Index: The measure of interest rate changes used to determine adjustments in an ARM’s interest rate over the term of the loan.
Interest Rate: The percentage fee lenders charge you to use their money. The higher the rate of interest, the higher the risk. For fixed rate mortgages, the interest rate has a corresponding relationship with the points. A high number of points will lower the rate and vice versa. With an adjustable rate mortgage, understand the formula (the index plus the margin) that determines how the interest rate is calculated, after the teaser rate expires.
Joint Tenancy: An equal undivided ownership of property by two or more persons. Upon death of any owner, the survivor receives the decedent’s interest in the property.
Late Charge: What the mortgage company will add on to your payment if it is received late. Can be as high as 5 percent of the total payment.
Lien: A legal hold or claim on property as security for a debt or charge.
Life Cap: Determines the total amount that your adjustable mortgage interest rate and monthly payment can fluctuate during the duration of the loan. Different from the Periodic Cap, which limits the extent to which your interest rate can fluctuate during a predetermined adjustment period.
Loan Commitment: A written promise to make a loan for a specified amount on specific terms.
Loan to Value Ratio: The relationship between the amount of the appraised value of the property, expressed as a percentage of the appraised value.
Lock-in: A written agreement in which the lender guarantees a specified interest rate if a mortgage goes to closing within set period of time.
Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Banker: A company or individual engaged in the business of originating mortgage loans with its own funds. Selling those loans to long term investors and servicing the loans for the investor until they are paid in full.
Mortgage Broker: A person who buys mortgages wholesale from lenders and then sells them to buyers. Can "shop your loan around" to find the best rate. Good for people with less-than-stellar credit histories.
Mortgage Insurance: A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage.
Multiple Listing Service (MLS): A cooperative listing of nearly all the homes on the market for real estate agents.
Negative Amortization: This occurs when monthly payments fail to cover the interest cost. The interest not covered is added to the unpaid principle balance so that even after several payments, you could owe more than you did at the beginning of the loan.
Net worth: The value of all of a person’s assets, including cash, minus all liabilities. Origination Fee: A fee or charge for establishing a loan. See Points.
Partnership: Way in which unmarried individuals can take title to a property. Can include domestic partners or business partners. It’s recommended that a real estate lawyer first draw up a written partnership agreement before the purchase.
Periodic Cap: Limits the amount that the interest rate of an adjustable-rate mortgage can change in one adjustment period.
PITI: Principal, interest, taxes and insurance. The basics of your monthly mortgage payment.
Planned Unit Development (PUD): A zoning designation for property developed at the same or slightly greater overall density than conventional developments, sometimes with improvements clustered between open, common areas.
Point: An amount equal to one percent of the principal amount of the investment or note. The lender assesses loan discount points at closing to increase the yield on the mortgage to a position competitive with other types of investments.
Pre-Payment Penalty: A fee charged to a mortgagor who pays a loan before it is due. Not allowed for FHA or VA loans.
Prime rate: The interest that banks charge to their preferred customers.
Principal: The amount borrowed or remaining unpaid.
Private Mortgage Insurance (PMI): Insurance written by private companies protecting the lender against loss if the borrower defaults on the mortgage.
Probate sale: Sale of a home after a homeowner dies and the property is to be divided among inheritors or sold to pay debts. The executor of the estate organizes the sale, and a probate court judge oversees the process. The highest bidder receives the house.
Property Tax: Averages between 1 and 2 percent of a home’s value but may vary by county.
Prorations: Items that must be prorated between you and the seller at the close of escrow. Can include Homeowner’s dues, property taxes and other expenses. Generally, you will be responsible for paying a percentage of these taxes and fees beginning on the day in which you take title.
Real Estate Agent: Real estate salespeople who are supervised by a real estate broker. Licensed by the state and typically receive income from commissions.
Real Property: Land and buildings as opposed to property or chattels.
Realtor®: A real estate broker or associate active in a local real estate board affiliated with the National Association of Realtors®.
Recordation: Filing for record in the office of the county recorder.
Refinance: Taking out a new mortgage loan to receive more favorable terms. Generally recommended for fixed-rate mortgages if rates drop below 1 percent of what you’re currently paying. (However, refinancing can be expensive and time-consuming, so you’ll want to consider this carefully, and to ask yourself how long you plan to own the property.
Survey: A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachment and other physical features.
Tax Deductible: Payments that you may deduct against your federal and state taxable income, and includes the interest portion of your mortgage payments, loan points and property taxes.
Teaser Rate: Introductory, lower rate on an adjustable rate mortgage. The loan’s formula is a better way to determine its affordability, however.
Tenancy-in-common: A method of taking title to a property generally used among unmarried co-borrowers. See the Escrow section of this guide for more information.
Title: Evidence of a person’s right or the extent of his or her interest in the property. Title Insurance Policy: A policy that protects the purchaser, mortgagee or other party against loss.
Truth in Lending: a federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate and other charges.
Underwriting: The process of evaluating a loan application to determine the risk involved for the lender.
VA Loan: A loan that is partially guaranteed by the Veterans Administration and made by a private lender.
Veterans Administration (VA): An independent agency of the federal government created by the Service Men’s Readjustment Act of 1944 to administer a variety of benefit programs designated to facilitate the adjustment of returning veterans to civilian life. Among the program’s benefit’s is the home loan guaranty program designated to encourage mortgage lenders to offer long term low down payment financing to eligible veterans by guaranteeing the lender against loss on these higher-risk loans.