Lending & Loan Terms
Adjustable Rate Mortgage (ARM)
A type of mortgage with an interest rate that changes over time, often when the prime rate changes.
Amortize
The act of calculating your mortgage payments given all the terms and factors in your specific case.
APR
Annual percentage rate, which is the interest rate for the entire year on a loan or debt
Cash-out Refinance
A form of refinance where you get money back, or cash out. Usually occurs when you have equity in your home and can borrow more than you owe, refinancing the balance and receiving the overage as cash.
Conventional Mortgage Loan
A type of private mortgage loan that follows conventional terms, which typically require a good or better credit score and some type of down payment.
Down Payment
The amount of cash payment you put down when you buy a home; it’s a portion of the home price that you do not finance. Some mortgage loans and lenders require a down payment and often can’t use funds you borrowed from another source for this purpose, so it’s important to save before you shop for a home.
Escrow
A portion of your mortgage payments that the lender puts aside and holds in trust to pay property tax, homeowners insurance and other expenses.
FHA Loans
Loans that are backed, all or in part, by the Federal Housing Authority. People who can’t qualify for conventional loans can often qualify for FHA loans as the credit requirements are less strict and you don’t have to have as large a down payment.
Fixed-rate Mortgage
A mortgage where the interest rate is fixed and stays the same over the entire term of the loan.
Home Equity
The difference between how much your home is worth and how much you owe on it. If the number is positive, you have equity in your home. For example, if a home is worth $100,000 and you only owe $80,000, you have equity in the amount of around $20,000.
Home Improvement Loan
A loan you take out to remodel or otherwise improve your home. If you have equity in your home, you may be able to use it as security for a home improvement loan.
Interest Rate
How much you’re being charged for a debt or loan, usually expressed as a percentage.
Interest Rate Cap
A maximum amount that can be charged on an adjustable or variable mortgage loan. Usually, this is detailed in the terms of the loan.
Maturity Date
With regard to a mortgage or other loan, the maturity date is the date by which the entire loan should be paid off or any remaining amount might come immediately due.
Mortgage
A loan specifically used to fund the purchase of a home or other piece of property.
Mortgage Interest Rates
Interest rates specifically associated with loans to buy a home.
Mortgage Term
The length of time someone will take to pay back a mortgage loan. Common terms are 15 and 30 years.
Option ARM
Payment options for an adjustable rate mortgage. Typically includes paying interest only, payment a minimum amount, or paying both principal and interest.
Points
The ability to reduce the interest you pay on a mortgage slightly by paying an upfront fee.
Pre-approval
A contingent approval for a certain amount of money as long as a full credit check and other factors, including home valuation and underwriting, checks out.
Pre-qualification
A process by which a lender does a soft credit check to prequalify you as a good candidate for various offers.
Principal Balance
How much you owe on the home or loan not including any interest. Typically, this is close to the total amount you owe or what your payoff on the home would be at any given time.
Principal Payment
A payment completely toward the principal on the loan or the amount of your payment that is put toward the principal amount. Usually, the mortgage payments you make are split between interest, principal and escrow.
Private Mortgage Insurance
Also known as PMI. This is a requirement that you carry homeowners insurance and that it’s paid for through your mortgage, which increases the monthly amount you pay. PMI is usually required unless you make a 20% or higher down payment or have 22% or more equity in your home.
Rate
Usually refers to the APR or interest rate on a mortgage loan. Ex. “Can I get a good rate on my mortgage?”
Rate Lock
A temporary freeze on the interest rate being offered. A mortgage lender may approve you at a certain APR, for example, and lock that offer in for 30 days while you shop for or work to close on a home.
Refinance
Borrowing via a new loan to pay off the existing mortgage. This is typically done to reduce the monthly payment or get a better interest rate to save money.
Start Rate
The beginning or opening rate you pay at the start of an adjustable rate mortgage.
Title
The legal document showing who has current ownership of a property. The bank or lender has it until you pay off the mortgage, and then, it transfers to you.
Title Company
A third party that ensures the seller of a home has a legal right to sell it and transfer the title to someone else.
Title Fraud
Misrepresenting legal ownership of a title with the intent of defrauding someone of money.
Title Insurance
Insurance that protects the owner of a home from title fraud, whether they own the home outright or are still paying a mortgage.
Title Search
The act of searching for any other owners or liens against a title to ensure it is in the free and clear before a home purchase is finalized.
Underwriting
The process of evaluating how much risk a borrower represents so a lender can make an informed approval and offer. Underwriting decides whether someone will be approved for a loan and what rate may be appropriate.
VA Loans
Loans backed fully or in part by the Veteran’s Administration. They are limited to qualifying vets and family members and can make buying a home easier for some people.
Title Insurance Terms
Title
A document that shows a person’s right to property. When you have a title, you have evidence that you have the right to use, live in, sell, or dispose of the property, as you’re the owner.
Title Insurance
A type of insurance that protects the insured if the title of property turns out to be defective. More specifically, a lender’s title insurance policy protects the lender from financial loss if it’s discovered that someone besides the insured has rights to the house. And an owner’s title insurance policy protects the owner from financial loss if it turns out someone else has rights to the property.
Title defect
A claim or right to the property that will prevent a buyer from taking ownership of the house, as a title defect shows someone already has a right to it. Common title defects include liens, missing heirs, boundary disputes, and mistakes on public records. Such title defects need to be cleared up before you can claim you legally own the house.
Title Fraud
What happens when someone forges your signature on a bill of sale to make it look like you sold your home—and transferred legal ownership—to them. Once they have documents stating they own the house, they can refinance it, take out home equity loans, or even try to sell it while you’re still living there.
Abstract of Title
A summary of all the public records that might affect your home’s title. These records can include recorded deeds, leases, mortgages, liens, easements, and more.
Clear Title
A title that’s free of title defects, such as liens or other issues that might bring into question who legally owns the property.
Adverse Possession
A way to acquire a title that someone else owns after meeting certain conditions. Every state has its own requirements you must meet, such as evidence that you paid property taxes and used or lived on the property for a specific amount of time. Once you meet the requirements, you may be considered the owner.
Back Title Letter
A letter that states what the condition of the title was as of the last time it was examined. So if a title company ran a title search five years ago, it might issue a letter stating the results up to that point, allowing another title company to do a new search that doesn’t go farther back than that date. This letter is also called a starter in some areas.
Binder
A written document confirming that title insurance will be issued for the property once certain conditions have been met. This is called a commitment.
Bond for Title
A written agreement that states that the seller will retain the legal title until the buyer is done paying off the house. While they make the installment payments, the buyer gets all the benefits of being a homeowner but won’t get possession of the deed until the house is paid off.
Certificate of Title
A document that identifies the property owner, ensuring the ownership rights are recorded.
Quitclaim Deed
A deed that releases the title, interest, or claims someone may have in a property. This way, the person can’t claim to own the property in the future. Quitclaim deeds are often used when transferring property between family, such as when removing a spouse from the title after a divorce or clarifying who owns the property after someone inherits it.
Cloud on Title
An irregularity or mistake on the title that would affect the owner’s rights. For instance, if the wrong tract is recorded as sold to someone on a deed, there’s a cloud on the title that will need to be fixed before the title is correct.
Commitment
A document that guarantees a title company will issue title insurance on the property once conditions are met. This is also called a binder.
Conveyance
The process of transferring a title for a property from one person to another. A common instrument of conveyance is a deed.
Deed
A document that transfers a property’s title from one person to another.
Draw
Disbursement of part of a construction loan during the construction process. This allows contractors, subcontractors, or suppliers to be paid along the way, so the homeowner doesn’t have to use personal funds to pay as the project progresses.
Endorsement/Rider
An addition or change made to a title insurance policy to expand or adjust coverage.
Examination of Title
The study of the instruments—such as legal records—used in a chain of title to determine if it’s clear.
Insurable Title
A title to a property that a title insurance company is willing to provide insurance for, even though it might have a known defect. In such cases, the title company is aware of any defects but sees them as minor or easy to correct, and thus the property is still eligible for title insurance.
Insured Closing Service
An agreement that the title insurance company will cover any losses in settlement funds if there’s any fraud or mistakes on the agent’s part. This letter is required by closing day.
Lien
A legal claim against real estate that has to be paid off once the property sells. When a homeowner owes a debt, such as taxes or medical bills, the creditor can have a lien placed on the home to get paid when the home is sold in the future.
Marketable Title
A title that’s clear of any defects, meaning there’s no doubt about who owns the property. This type of title is the most appealing kind since it can easily be transferred to another owner due to a lack of title defects.
Plat Map
A map that divides a parcel of land into lots.
Quiet Title
A legal action that a homeowner can bring to cancel minor claims or interests that could cloud the title.
Recording
Documenting the details of a legal contract in a registrar’s office to ensure it’s part of public records. For example, mortgages and deeds need to be recorded with the local registrar’s office.
Redemption
The right of a homeowner to reclaim the title of their property from someone who has taken the legal title. They might do this after paying any debts within a specific period of time, ensuring they once again have the rights to the property.
Special Warranty Deed
A real estate deed in which the seller guarantees the title against defects only when they’ve owned the property. But it doesn’t guarantee that the title had no defects before they took ownership.
ALTA Policies
The American Land Title Association (ALTA) is a group that represents title insurance companies, real estate attorneys, and title agents across the nation. ALTA policies are the standards this group has created and that its members have agreed to ensure its forms and coverage are the same in many states throughout the country.
Standard Coverage Policy
A title insurance policy that has different standards and forms than ALTA.
Insurance Terms
Policy
A written contract that outlines which damages are covered for the insured individual.
Homeowners Insurance
A policy that protects you financially if your home or belongings are damaged in a covered catastrophe or if someone is injured on your property.
Primary Home
The home you live in, as opposed to one you’re renting out to someone else or leaving vacant. If you live in more than one house, your primary home is usually the one you spend the most time at and have listed as your address on your driver’s license, tax returns, etc.
Secondary Residence
A home where you don’t spend most of your time. This is usually a vacation property that you don’t rent out or a home in a city you visit for business, meaning it will sit vacant more than your primary home does.
Condo Insurance
A homeowner’s insurance policy meant specifically to provide coverage for your condo and the personal property inside it in case it’s damaged or lost. Like traditional homeowner’s insurance, condo insurance also offers personal liability for you if someone is injured or suffers property damage while at your condo.
Renter's Insurance
An insurance policy that’s sold to people who rent, rather than own, a home. It covers their personal belongings and liability, but not the structure itself.
Mobile Home Insurance
An insurance policy for mobile homes. It usually includes coverage for the dwelling, personal property, and personal liability.
Landlord Insurance
A homeowner’s insurance policy that protects property owners who rent out their homes. It usually covers repairs and replacement for the dwelling and any permanent structures on the property, as well as personal liability in case the tenant is injured at the house. It can also protect your personal property if you leave appliances or furniture for tenants to use and they end up damaged. Additionally, if you lose rental income while the house is being repaired or rebuilt, landlord insurance can make up some or all of it.
Umbrella Policy
Additional liability coverage with limits above your primary insurance policy. This way, if a loss costs more to fix than your primary coverage, your umbrella policy will kick in with extra coverage that you won’t have to pay out of pocket.
Personal Liability
The responsibility you have to pay for any damages that result from your negligence, including injuries to another person or damages to personal property.
Actual Cash Value
Also called ACV, this is an estimation of your property’s fair market value prior to the loss. Basically, this is the amount it will cost to rebuild your house minus any depreciation that’s caused your home to lose some of its value over time.
Claim
A request you make to your insurance company to compensate you after a covered loss. When you contact your insurance company to report that a fire, natural disaster, vandalism, etc. has damaged your house, you’re making a claim on your insurance policy.
Rider/Endorsement
An attachment to an insurance policy that adds coverage.
Floater
An insurance policy that covers personal belongings that you might move from one location to another. In most cases, floaters are purchased to cover jewelry, electronics, furs, and other valuable items that you might lose or damage when you’re outside your home, such as when you’re traveling.
Replacement Value
The amount it will cost to replace or repair a property or personal belongings at today’s prices, without taking depreciation into account.
Act of God
A disastrous incident that occurs due to natural causes and is therefore outside of your control. Common examples include storms, tornadoes, and lightning strikes that result in fires. Basically, anything you couldn’t foresee or prevent is an act of God and will usually be covered by homeowner’s insurance.
Exclusions
Conditions or situations that are not covered by your homeowner’s insurance policy. These should be listed in your policy so you know ahead of time what’s not covered, giving you a chance to buy separate coverage for them when possible. Some examples of common exclusions include flooding and earthquakes, and you typically need to buy separate policies for these perils.
Valued Policy
An insurance policy in which the insurer has to pay the full amount listed in the contract, rather than paying the actual cash value after a loss.
Declarations Page
The section of your policy that lists important information, starting with your name and address. It should also state the policy period, the amount of coverage you have, and the premium amount. Finally, this page should specify the property that’s insured, along with a description and location.
Additional Living Expense
Coverage that applies when you have to move out of your house temporarily as it’s being repaired or rebuilt after a covered loss. Examples of living expenses that you may be reimbursed for include hotel rooms, meals, and laundry costs. This is also often called loss of use coverage.
Appraisal
An estimate of the value of your property to determine the amount that insurance will need to cover for repair or replacement.
Wind/Hurricane Deductible
The amount you will have to pay before insurance will cover the damage done to your property by a hurricane or extreme winds. It differs from a standard deductible because it’s a percentage of your home’s value, rather than a flat amount. The average wind/hurricane deductible is 1% to 5% of the home’s value, though it could be more in areas that are prone to this type of natural disaster.
Deductible
The amount you have to pay before your insurer will cover a loss. The standard deductible is usually $500 or $1,000, though you can choose a higher deductible to lower your insurance premium on your homeowner’s policy.
Personal Property
All your belongings in your home are called personal property. This means furniture, appliances, clothing, electronics, jewelry, and other items you own fall under the personal property coverage part of your policy. But there’s a limit to how much is covered, so if you have extremely valuable items — like jewelry or artwork — you should add coverage just for them.
Assessed Value
The estimated value of your property for purposes of property tax.
Betterments/Improvements
Changes you’ve made to the property that may increase its value. New fixtures, additional bedrooms, and major repairs can all improve the property enough that the value changes.
Blanket Coverage
An insurance policy that offers coverage for more than one person or piece of property, with just one limit for everything. For example, instead of having a policy that covers $110,000 for one property and $90,000 for another, you can get blanket coverage with a limit of $200,000 for both properties.
Flood Insurance
A homeowner’s policy that covers damage to the property due to flooding. If your house is in a designated flood zone, you’ll be required to get flood insurance.
Limit of Liability
The max amount of damages to your home that your insurance company is required to pay after a loss.
Standard Coverage Policy
A title insurance policy that has different standards and forms than ALTA.
Real Estate Terms
As-is
You are buying or selling the property as it is. There is no warranty that there are no problems with the property. If there are problems, the seller is not responsible for fixing them or discounting the selling price. The buyer takes the risk of buying the property without conditions.
Closing
The final legal process of buying and selling real estate. Both parties sign the legal documents to complete the sale and transfer the title. The buyer finalizes their mortgage and/or releases escrow money. The seller gets paid or has their mortgage paid off.
Closing Costs
These are the costs other than the purchase price that the buyer and/or seller will pay. The broker’s fee is sometimes described as a closing cost or referred to separately. Closing costs also include legal fees, insurance, deed filing fees, final inspections, and other fees needed to complete the sale.
Cash-out Refinance
A form of refinance where you get money back, or cash out. Usually occurs when you have equity in your home and can borrow more than you owe, refinancing the balance and receiving the overage as cash.
Due Diligence
Doing your due diligence means that you’re making sure everything about a purchase is as you expect. This includes physical inspections of the property as well as legal checks like a title search.
Escrow
Escrow is a special way of holding money while a sale is finalized. A third party holds the funds so the seller can be sure that the buyer has the funds but the buyer doesn’t have to be worried about getting ripped off by the seller if something is wrong with the deal.
Homeowner's Association (HOA)
A group of homeowners may form an HOA to set rules for the community and maintain common areas. If a home is in an HOA community, joining the HOA and paying HOA fees is typically a mandatory condition of buying the home.
Multiple Listing Service (MLS)
Not to be confused with Major League Soccer, a multiple listing service is a database real estate agents use to list properties for sale or to find other listed properties to show to their clients. There is also usually a pre-determined agreement on how brokers using the service will share fees when they cooperate on each other’s listings.
Short Sale
A short sale is when a seller sells for less than the amount they owe on the mortgage.The lender’s approval is required, and the seller is still responsible for the balance unless they work out an agreement with the lender.
Trust Sale
A trust sale is when the home is legally owned by a trust for estate planning or other reasons. This doesn’t really impact the buyer except for extra paperwork.
Conventional Sale
A sale is conventional when it doesn’t have one of the special circumstances described here. This just means that it’s a normal sale.
Probate Sale
When a person dies and their estate sells their home in order to settle the estate, it’s a probate sale. This is usually to pay off debts but could also be to divide the cash proceeds between the heirs.
Rent Back
In a rent back, the seller completes the sale but continues to rent the property to live in it. This is usually undesirable for the buyer because they take on the risks of becoming a landlord.
Subject to Inspection
The buyer makes an offer pending the results of the inspection. If the inspection checks out, the buyer and seller are bound to the sale. If the inspection finds problems, the buyer has a contractually defined amount of time to back out or negotiate a solution (repair or discount) with the seller.
Debt-to-income Ratio
In order to qualify for a mortgage, the buyer’s debt as a percentage of their income can’t be too high. The maximum is 43%, but many lenders prefer around 1/3 instead. The debt-to-income ratio includes all of the buyer’s debt payments plus their proposed mortgage payment.
Equity
Equity is the amount of your home that you actually own. If you bought a $100,000 home and owe $70,000 on your mortgage, you have $30,000 in equity.
Natural Hazards Disclosure Report
This is a California requirement for sellers to disclose whether the property is in a designated hazard area such as for earthquakes, floods, or fires. Non-California buyers may receive similar disclosures or can check government maps.
Pre-approval
A pre-approval means your bank intends to give you a mortgage based on information that you provided. However, they can back out of the mortgage after performing additional checks before closing. Banks can also cancel a pre-approval due to business considerations independent of anything the buyer did such as having recently issued too many mortgages.
Appraisal
A third-party appraiser often provides a formal opinion of the value of the home. The value may be different for tax or lending purposes. The mortgage lender may require a higher down payment if the appraisal is too low.
Blind Offer
A buyer makes a blind offer when they make an offer without seeing the property. They may or may not add contingencies. This is usually done by real estate investors rather than someone intending to live in the home.
Backup Offer
If the seller has already accepted an offer, another potential buyer may make a backup offer in case the deal falls through. However, it locks the buyer into waiting on that deal, so this is usually only done when you’ve found your dream home and aren’t in a rush to move.
Contingency
A contingency is an automatic out in a contract. For example, a financing contingency released the buyer from their offer without penalty if they don’t get approved for a mortgage. Contingencies mainly protect the buyer, but the seller usually needs to accept standard contingencies or face a lower offer price.
Inspection
An inspector checks the property for things like termites, other pest infestations, and structural damage. Most offers are contingent on the results of the inspection.
Seller Concession
A concession is something the seller gives the buyer to convince them to buy the home. A common concession is part or all of the closing costs. The purpose is usually to make the home more marketable and get a faster sale. The seller may also use concessions to get a buyer to waive a contingency.
Offer/Counter Offer
An offer is when a buyer proposes to buy a home at a given price and with a given set of contingencies. If the seller wants changes to the offer, they can make a counter offer with the proposed changes. A new offer by the buyer would be a counter offer. This can go back and forth until the latest counter offer is accepted or one party backs out of negotiations.
Option Period
An option period gives the buyer time to back out of a deal unilaterally and without penalty. This may or may not be together with contingencies or inspections. Sometimes, the buyer just wants to hold a property while they decide. The buyer usually pays a non-refundable fee for the option period in consideration of the seller holding the property. The fee is higher if the option period is longer.