Real Estate 101
At Julie Wright Realty Group, we want our clients aware of the myriad of terms used in real estate transactions. Here are some of those terms you might come across during your real estate transactions. However, these definitions are very brief and may not cover all the nuances involved in real estate transactions. We highly recommend that you ask for help if you do not understand something involving your real estate process. If we do not have the answer, we will help you find the right person to ask.
As with any real estate situation, we strongly advise that clients consult a real estate attorney to clarify any legal questions that clients may have about real estate.
Adjustable-Rate Mortgage (ARM)
An Adjustable-Rate Mortgage, commonly called an ARM, is a mortgage in which the interest rate changes periodically, according to corresponding changes in the index listed in the mortgage agreement. This interest rate usually has a specific “cap” where it can only go up or down a certain amount.
Annual Percentage Rate (APR)
The annual percentage rate, often seen on documents and advertisements as the APR, is the percentage of interest paid on a yearly basis including any additional costs a loan contains, such as discount points, closing costs, primary mortgage insurance, and, of course, the actual interest to be paid. This percentage is used to calculate the monthly payment expected for the mortgage. It is usually slightly higher than the actual interest rate on the loan because it includes these extra costs.
Appraisal, Appraiser, and Appraised Value
An appraisal is a written justification of the price paid for a property, primarily based on an analysis of comparable sales of similar homes nearby. A licensed professional who completes the appraisal, known as an appraiser, will estimate the value of real estate and personal property. The appraisal contains an “appraised value” which is the appraiser’s calculated opinion of the property’s fair market value.
Assessment, Assessor, and Assessed Value
An assessment is the value placed on real estate to determine the cost of taxes. An assessor is a public official establishing this, the assessed value. The assessed value is used, with the tax rate of the government entities (e.g. state, county, city, and local) to determine the amount of taxes to be collected.
Balloon Payment, Balloon Mortgage
A balloon mortgage is a mortgage that requires a final, lump sum payment, at the end of a period of time usually shorter than a traditional mortgage. In most balloon mortgages, the monthly payments due are similar to a traditional mortgage and are calculated as if the mortgage were to last a long time, but after a shorter period of monthly payments, the remaining balance is due. For example, the monthly payment may be calculated based on a 30-year mortgage, but after 10 years of paying that monthly payment, the remaining balance, known as the “balloon payment,” is due.
Anyone acting as an agent for a party in a transaction and earns a fee for his services is a broker.
A mortgage interest rate can be “bought down” by making a lump sum payment at closing. The amount and duration the interest rate is reduced is negotiated with the lender. If a seller pays the buy down cost at losing, the purchase price of the house is usually increased as a result. This lump sum payment is usually held in escrow during the duration of the lower interest rate.
Closing, Closing Costs, Settlement
Settlement, in North Carolina, is the meeting at which all real estate transaction documents are signed and money has exchanged hands, and it is usually conducted by a real estate attorney chosen by and paid for by the buyer. Closing is the point at which the documents signed at settlement are filed with the local government (e.g. the Clerk of Courts or Registrar of Deeds). This is usually done immediately after settlement or as closely after settlement as is possible (sometimes closing of the Registrar’s office or courthouse can delay filing). Closing costs contain both one-time fees, paid at the time of settlement, and pre-paid items, which are advanced payments of those costs that occur regularly as a result of purchasing real estate and/or obtaining financing. Some one-time fees include sales commission, credit report, and title insurance premium. Some pre-paid items include homeowners insurances, taxes, and interest. Pre-paid items are usually broken out, or prorated, over a period of time determined by the lender and often include the beginning funds needed for escrow. These costs must be calculated in advanced and provided through a Good Faith Estimate under strict federal guidelines.
Commission is the percentage earned by persons who complete work on a real estate transaction. Although the real estate agent’s commission is usually the largest single one-time fee for a real estate transaction, it is usually shared between all real estate agents involved in the transaction as well as with their firms (employers). Most other people involved in real estate transactions receive a flat fee for their work, such as pest companies, home warranty companies, inspectors, and attorneys, to name a few.
Comparable sales are a collection of recent sales of similar properties used to help determine the market value of a property. Also referred to as "comps."
Comparative Market Analysis (CMA)
A Comparative Market Analysis, sometimes called simply a CMA, is the analysis and report completed by a real estate agent which will show a recommended price range for a seller’s home based on comparative sales in the area which have recently sold.
A condominium is a type of ownership in real property where all of the owners own the property, common areas and buildings together, with the exception of the interior of the unit to which they have title. Often mistakenly referred to as a type of construction or development, it actually refers to the type of ownership.
A construction loan is a short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses.
A condition that must be met before a contract is legally binding is called a contingency. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser sells his home in another area.
A contract is an oral or written agreement to do or not to do a certain thing. A written contract has specific remedies in cases where it is not honored based on the contents of the contract and the laws which govern it.
Conventional mortgages are those mortgages through banks that are not secured by government agencies like FHA or VA.
Credit, Credit History, Credit Report, Credit Worthiness, Creditor
The agreement a person makes to borrow money from a lender and its repayment terms establishes credit. Credit history is the historical record of those agreements a person has made with lenders. A credit report is a report of this history. Credit worthiness is the determination a lender makes regarding the history a person has in handling credit, and usually it is different with different lenders. A creditor is a person or entity to which money is owed.
Deed, General Warranty Deed, Quitclaim Deed, Non-Warranty Deed, Special Warranty Deed
The legal document conveying title to a property is known as a deed. A General Warranty Deed provides the greatest protection to buyers. In a General Warranty Deed, the seller is affirms that he, as legal owner, is providing a title free of liens, encumbrances such as liens and mortgages, and claims by others regarding ownership. Further, the seller is assuming liability should issues occur with the title after the transfer to the buyer. A Quitclaim Deed, or Non-Warranty Deed, provides no affirmations or protections to any party. It basically provides a way for one person to “quit claiming” ownership of a property; this is often used to either clear up a defect in a title (e.g. spelling errors), or to remove one person from a title (e.g. divorce or other parting of the ways by joint owners). In a Special Warranty Deed, the seller affirms he received the title and that he, personally, has placed no encumbrances on the title other than those listed within; he is not affirming the status of the title prior to his ownership.
Deed of Trust
A deed of trust is the legal document which gives the legal ownership of property to a third party (trustee) during the time period a contract, such as a mortgage or home equity loan, is unsatisfied (unpaid). Borrowers have permission to use the property as he sees fit as long as it meets the guidelines in the contract (equitable title). If the borrower does not satisfy the contract as agreed, the trustee has permission from all parties to foreclose and sell the property to pay off the contract.
Discount points are actually a form of interest pre-payment; each point is a fee equal to 1% of the loan amount.
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage is known as a down payment.
Due Diligence Period, Due Diligence Fee
The due diligence period is a length of time in which a buyer will use to obtain the information needed to determine if the real estate is a purchase he wishes to make. Tests and inspections are completed during this time so that physical defects with the real estate can be found prior to full commitment to the purchase. The buyer must complete his decision-making process by the date specified as the end of the due diligence period in order to obtain his earnest money deposit back if he decides against purchasing. The due diligence fee is a fee paid to the seller to hold the property off the market during the due diligence period and is not refundable at the end of the due diligence period. It is, however, credited to the buyer at closing.
Earnest Money Deposit
An earnest money deposit is a deposit made by the potential home buyer to show that he or she is serious about buying the house, and it is held in escrow by a third party, usually one of the firms of the real estate agents or the closing attorney. It is credited to the buyer at closing; in some cases, if the purchase does not complete, it can be returned to the buyer under specific circumstances.
An easement is a right of way giving persons other than the owner access to or over a property, such as for power lines, underground utilities, or access to adjoining property.
An encroachment is an improvement that intrudes illegally on another's property.
Anything that restricts title to a property, such as mortgages, leases, easements, or other restrictions is an encumbrance.
Equity, Home Equity Line Of Credit (HELOC), Second Mortgage
Equity is the net value of real estate after all mortgages and liens are deducted from its value. A home equity line of credit, or HELOC, is a loan in which the borrower may draw up to a specified amount of money against the equity available in his home. The home is used as collateral against default, but the account acts like a credit card in that smaller amounts may be used and repaid repeatedly over time. A second mortgage, in contrast, is a single amount borrowed against the value of the home after deducting the primary mortgage that is paid over time; it is not available again until the entire balance is paid in full.
Escrow, Escrow Account, Escrow Analysis
Escrow is any item of value, money, or documents given to a third party to be delivered when a condition is fulfilled. Earnest money is “in escrow” with a third party until a real estate transaction is completed or terminated. The third party simply holds the item until instructed otherwise. An escrow account is the location in which a third party can hold money until a condition is fulfilled, such as the account in which earnest money lies “in escrow,” or extra amounts paid to a lender are held until that lender pays for (disburses) your property taxes or homeowners insurance. The escrow analysis is an annual accounting of escrow accounts to verify accurate handling of another’s money.
Exclusive Listing, Exclusive Right to Sell
An exclusive listing, or Exclusive Right to Sell contract, is a written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time.
Fair Market Value
Fair market value is the highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.
A fixed-rate mortgage is one in which the interest rate does not change during the entire term of the loan.
Personal property that becomes real property when attached in a permanent manner to real estate is known as a fixture. Examples include but are not limited to: dishwashers, chandeliers, stoves (even if free-standing), shades, and drapery rods.
Insurance that compensates for physical property damage resulting from flooding is known as flood insurance. It is required for properties located in federally designated flood areas.
Foreclosure is 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.
The person receiving transfer of real property is the grantee.
The grantor is the person transferring real property.
Hazard Insurance, Homeowner's Insurance, Personal Liability Insurance
Hazard Insurance is insurance coverage covering physical damage to a property from fire, wind, vandalism, or other hazards (outside of flood). Personal liability insurance offers protection against claims alleging that a property owner's negligence or inappropriate action resulted in bodily injury or property damage to another party. Hazard and liability insurance are usually combined under one, Homeowner’s Insurance, policy.
Home Inspection, Inspector
A home inspection is a thorough examination of a home by a professional to evaluate the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser and is usually completed during the due diligence period. An inspector is a licensed professional trained in different trades used in home construction, such as electrical, plumbing, structural engineering, etc.
A type of insurance often purchased by homebuyers that will cover repairs to certain items, such as heating or air conditioning, should they break down within the coverage period is a home warranty. The buyer often requests the seller to pay for this coverage as a condition of the sale, but either party can pay.
Homeowners' Association, HOA Dues
A nonprofit association that manages the common areas of a neighborhood or condominium project is a Homeowners’ Association. In a condominium project, it has no ownership interest in the common elements. In a neighborhood, it holds title to the common elements. HOA Dues are the fees paid to the Homeowner’s Association for its management of the common areas and their expenses.
HUD-1 Settlement Statement, Closing Statement, Settlement Statement
The HUD-1 Settlement statement, created and provided by the Department of Housing and Urban Development (HUD), provides an itemized listing of the buyer’s and seller’s expenses in a real estate transaction. Some of the items shown on the HUD-1 are real estate commission, escrow amounts, fees, etc. Sometimes called a closing statement or settlement sheet, the HUD-1 should match the final Good Faith Estimate if a loan is used in conjunction with the purchase. References such as closing statement or settlement statement are referring to this document created by HUD.
The term lender can refer to the institution making a loan or to the individual representing the firm making a loan.
A lien is a legal claim against a property that must be paid off when the property is sold. A deed of trust is considered a lien the mortgage company has against a property.
Loan Origination, Origination Fees, Origination Points
Loan origination is the process of obtaining new loans with a lender; the origination fee is the payment made for obtaining the loan. Each origination point is 1% of the loan amount and is paid as origination fees.
The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower) is used as the loan-to-value ratio.
Lock-In, Rate Lock
Lock-In, or rate lock, is the guarantee of a specific loan interest rate for a specific period of time.
Mortgage Insurance (MI), Mortgage Insurance Premium (MIP), Private Mortgage Insurance
Mortgage insurance covers the lender against some of the losses a lender incurs if a mortgage is not paid as agreed. PMI is one of the larger mortgage insurers, but the acronym is often used to indicate “private mortgage insurance.” Mortgage insurance is usually required on any loan that is higher than 80% of the value of the property being mortgaged. Some lenders will offer “No MI” mortgages for loans over that percentage, but the interest rate is higher to absorb the lender’s payment of mortgage insurance held by the lender, not the borrower. FHA loans require mortgage insurance regardless of the loan-to-value ratio in some cases. This insurance is paid to the FHA directly. MIP is the premium paid on a mortgage insurance policy. MIP is usually included in the total amount paid to a lender each month. FHA mortgage insurance is paid through the life of the loan; other lenders have their own guidelines followed regarding if and/or when mortgage insurance is no longer required.
Offer to Purchase, Purchase Agreement
A purchase agreement, or Offer to Purchase and Contract, is a written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Owner financing means that the seller is providing all or part of the financing (lending) to the buyer to complete a property purchase.
Pre-approval indicates that a borrower has completed a preliminary loan application with a lender, providing debt, income, and savings documentation to the lender for review. The pre-approval is usually based on certain assumptions, such as loan amount, interest rate, and escrow estimates. The pre-approval letter is stronger than a pre-qualification letter; however, it is not a guarantee that a borrower will obtain a loan. Pre-approval applies to the borrower alone; review by the lender’s underwriter will occur when the property to be purchase is actually chosen. Pre-qualification indicates that a borrower has spoken with a lender regarding his ability to procure a loan. The lender may have simply spoken to the borrower or may have verified some of the information a borrower provided, and the lender will issue a pre-qualification letter to indicate his opinion of the ability for the borrower to obtain a loan. Pre-qualification does not guarantee that a loan will be issued.
Principal, Interest, Taxes, and Insurance (PITI)
PITI (an acronym for Principal, Interest, Taxes, and Insurance) refers to a mortgage payment and how it breaks down:
o Principal indicates how much of the payment is put towards the original balance of the mortgage.
o Interest indicates how much of the payment is put towards the interest due on the mortgage.
o Taxes and insurance indicates how much is put into escrow each month to cover annual property taxes and homeowner’s insurance.
Calculations that are used in determining whether a borrower can qualify for a mortgage are known as qualifying ratios. There are two ratios. The "top" or "front" ratio is a calculation of the borrower's monthly housing costs (principle, taxes, insurance, mortgage insurance, and homeowner’s association fees) as a percentage of monthly income. The "back" or "bottom" ratio includes housing costs as well as all other monthly debt.
Real Estate Agent, Real Estate Broker, Realtor®
A real estate agent is a general term for a person licensed to negotiate and transact the sale of real estate. A real estate broker is the official term used in North Carolina for a licensed professional who negotiates and transacts real estate. Because North Carolina has three types of brokers, the terms “agent” and “salesperson” are not used in official titles. A Realtor® is a real estate agent, broker or an associate who holds active membership in the local real estate board that is affiliated with the National Association of Realtors.
Servicing, Servicer (of Loans)
After you obtain a loan, the company to which you send payments is "servicing" or managing the execution of your loan. They process payments, send statements, manage the escrow account, and many other services required to be sure that a loan is properly managed for the lender. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
A survey is a formal drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features. Usually a survey is completed by a licensed surveyor, who is trained and licensed to properly map out land, and often recorded with the appropriate Registrar’s Office.
Title, Clear Title, Clouded Title (Cloud on Title), Title Company, Title Insurance, Title Search
A title is the document on file in the public record that shows ownership of property. A clear title is one without legal questions or financial ties giving full ownership of the property. A clouded title, or cloud on the title, has legal questions that must be resolved before ownership is transferred. A company that specializes in examining and insuring titles to real estate is a title company. Title insurance protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property. A title search is a check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.
Transfer Tax, Revenue Stamps
A transfer tax is a state or local tax payable when title passes from one owner to another. At one time, the transfer tax was known as Revenue Stamps in North Carolina.
A trustee is a person or financial entity who holds or controls property for the benefit of another.
Truth-in-lending refers to federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
Veterans Administration (VA), VA Mortgage
The VA, or Veterans Administration, is an agency of the federal government that, among other duties, 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 VA Mortgages to veterans.