When buying or selling a house, you will be introduced to many words and phrases not used in everyday situations. It is important to understand the language being used in order to make the best decisions for you. Here is a list of 56 common legal terms used in the real estate industry.
Adjustable Rate Mortgage: Also called an ARM or adjustable, this type of mortgage typically starts off with a lower "teaser" interest rate that stays fixed for a specified time, then adjusts periodically depending on changes in the market interest rate.
Appraisal: A report made by a certified or licensed expert that states an opinion of the fair market value and quality of the property following a personal visit and examination of the property.
Appraiser: A certified or licensed expert who states his or her opinion of the fair market value and quality of the property following a physical review of the property and the market condition.
Appreciation: An increase over time in the market value of a home, further adding to the homeowner's equity.
Assumable Mortgage: A type of mortgage that is set up so that the buyer can take over the seller's payments.
Bill of Sale: An instrument conveying title to personal property.
Closing (Settlement): The final step of a property sale transaction, in which the legal ("closing") documents, (e.g., deed, note, mortgage, affidavits) are executed and funds disbursed in accordance with the terms of the sales contract or loan commitment.
Closing Agent (Settlement Agent): The agent who oversees and conducts the many steps involved in the real estate transaction during the closing or "settlement" process, including controlling the down payment and all documents related to the sale.
Commitment Letter: A written agreement in which the lender agrees to lend money if the borrower meets certain conditions.
Comparative Market Analysis: A written CMA compares a home to comparable homes in the neighborhood that are either presently on the market or have sold in the last six months.
Contingencies: Conditions (or escape clauses) that buyers put in their purchase offer, and sellers add in the counter-offer so that, if the contingency isn't fulfilled, the party that made it is free to walk away from the deal.
Contract: A legally binding document in which the buyer agrees to purchase specific property and the seller agrees to sell under stated conditions. Also called a contract for purchase and sale, purchase and sale agreement, binder, or earnest money contract.
Curb Appeal: The attractiveness of a home and its property to perspective buyers viewing it from the street as compared with other homes on that same street or within that same neighborhood.
Deed: The formal written document that transfers real property ownership rights from the seller to the buyer. It contains an accurate, specific legal description of the property and is delivered at closing.
Default: The failure of a buyer to pay the monthly mortgage payment which includes the loan principal, interest and possibly additional charges for taxes and insurance.
Discount Broker: A transactional agent who works at a discount by providing only certain services.
Earnest Money: Funds the buyer offers the seller as a sign of "good faith" that he or she intends to buy the home. Earnest money is typically 5% to 10% of the purchase price and is placed into an escrow or trust account, never given directly to the seller.
Endorsements: Additional title insurance coverage that protects you from situations that are not already included in your policy.
Equity: The market value of a home minus what the homeowner owes on it. Homeowners sometimes borrow against their equity, taking out a home equity loan (also called a second mortgage), with tax-deductible interest, to pay for whatever they choose.
Escrow: Money that is set aside so that the lender can pay taxes: hazard, flood, mortgage insurance, and other special costs connected with owning property.
Fair Market Value: The value of a home based on a comparison of that home with comparable homes in the same neighborhood that are either presently on the market or have sold in the last six months.
FHA Loan: Federal Housing Administration. A federal agency within the U.S. Department of Housing and Urban Development (HUD). Using loan insurance programs to insure mortgages for lenders, the FHA stimulates the availability of housing for low- and moderate-income families.
Fixed-Rate Mortgages: A type of mortgage in which the interest rate remains the same, or "fixed," throughout the term of the loan. Lenders typically charge a higher interest rate for these mortgages. The most common fixed-rate mortgages are 15-year and 30-year.
Foreclosure: When the lender gets a judgment ordering a public sale of the property to pay off the loan because the borrower has defaulted on the mortgage payments.
Hidden Defect: Any claim on a property that does not appear in the public records, for example, an unknown heir or an unrecorded municipal utility lien.
Homeowners Insurance: Required for all homeowners, it protects against accidents and theft that might occur on your property.
Homestead Tax Exemption: A tax credit for Florida residents on their principal residence. The exemption basically takes $25,000 off the tax-assessed value of the property, giving the homeowner a tax reduction of about $500.
Inspection: Examination of a property to see that it meets the standards of the contract, the lender, and the buyer.
Interest: A charge for a loan—usually a percentage of the amount loaned. The IRS lets homeowners deduct mortgage interest and real property taxes, within limits, on annual income tax returns.
Lien: A legal claim on the property that acts as a security for the payment of a debt. If the debt is not repaid as promised, the lender or the lienholder can foreclose its claim on the property and force a public sale to pay the debt.
Marketable Title: Property is said to have marketable title when the title, or rights to a property, has no problems or only minor problems that any well-informed and prudent buyer would accept.
Material Defect: Defects, including any property damage, malfunctions of major systems and environmental hazards affecting the condition of a home, which should be readily disclosed to a buyer.
Mortgage: A document that places a lien on property. The lender holds the lien as security for the money borrowed.
Mortgage Note: A promissory note that is secured by a mortgage.
Mortgage Policy: A title insurance policy issued to the lender. It protects the lender for the amount of the mortgage loan.
Multiple Listing Service (MLS): A computer-based resource used by real estate agents that lists and contains descriptions of houses that are for sale in a particular area.
Owner's Policy: A title insurance policy issued to a property's owner; it protects the owner's equity against hidden title defects.
Points: Up-front interest to compensate the lender for processing a mortgage. Also known as "loan origination fees." Each point equals 1% of the loan. Points are also referred to as "discount points" because usually the more points paid, the lower the interest rate.
Pre-Approval: Initiating the loan approval process before finding a home. Pre-approval involves providing information regarding employment, income and debts to a lender to prove the buyer is a good risk. A more complex process than pre-qualification, pre-approval sometimes involves a fee.
Pre-Qualification: Pre-qualifying entails speaking with a lender who offers an opinion of the loan amount the buyer is eligible to borrow, without providing any supporting paperwork or credit history. There's no charge for pre-qualification.
Principal: The amount of money borrowed in a loan upon which interest is charged.
Private Mortgage Insurance: Typically required by lenders if a down payment is less than 20% of the purchase price. This can tack several hundred dollars each year to the buyer's loan costs until the equity in the home reaches 22%, when the insurance is no longer needed.
Property Taxes: Taxes paid by homeowners annually to local and state governments — on average, about 1.5% to 2% of the appraised value of the home, as determined by the county property appraiser.
Real Estate Sales Agent/Broker: A person tested and licensed by the state to put buyers and sellers together for a commission. Brokers have taken an additional test, generally following several years in the business, and are authorized to operate a private real estate firm.
Real Property: Refers to a parcel of land and any permanent improvements to it.
REALTOR®: A licensed real estate professional who is a member of the National Association of REALTORS®, a trade organization with its own educational standards and ethics in addition to those required by the state.
Seller Disclosure: Requires sellers to inform buyers about known problems with the house that would lower its value.
Survey: A procedure whereby land is located and measured, and its boundaries are verified by a registered land surveyor.
Title: Title can refer to two things: 1) the rights of ownership and possession of a particular property; 2) the document that shows evidence of those rights.
Title Agency: Similar to other insurance agents, a title agency is authorized to issue title policies and prepare documents in connection with transactions for which it issues policies. Staff members of the title agency do not represent either party and cannot give legal advice.
Title Defect: Any legal right to a property claimed by a person other than the owner. Examples include unpaid real estate taxes or claims to the property, such as those of an unknown heir.
Title Examination: An examination of public records, laws, and court actions to make sure that a property's seller is the legal owner and to disclose all other claims or encumbrances on the property affecting its ownership.
Title Exception: As part of the title search, a real estate attorney will list any "exceptions" to the title—situations where the title owner relinquishes control or use of some part of their property.
Title Insurance: A type of insurance that protects the policyholder against loss sustained through title defects.
Transfer Tax: One of the expenses paid by the seller on closing day as part of the closing costs, the transfer tax is based on a property's sale price.
Trust Account: Escrow maintained by an attorney.
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