Real Estate Terms

Get a quick vocabulary lesson in some real estate and mortgage terms. This list consists of just a few of the real estate and mortgage terms you may encounter in the process of buying a home.

Amortization
A method of paying off the mortgage which pays part of the principal along with interest,
rather than just paying off the interest first.

Appraisal
A written report by a qualified appraiser estimating the value of a property.

Assessed Value
The dollar value of an asset assigned by a public tax assessor for the purposes of taxation.

Binder
An offer to purchase or earnest money receipt, acknowledging a deposit along with agreement
to enter into a contract for the sale of real estate.

Cash Reserves
The money the buyer has left over after the down payment and all those closing costs.

CC&Rs
Covenants, Conditions and Restrictions, which control the use of the property.

Closing
The meeting at which the sale of a property is finalized. The buyer signs the lender agreement
for the mortgage and pays closing costs and escrow amounts. The buyer and seller sign documents to transfer ownership of the property. Also known as the settlement.

Contingency
A condition that must be satisfied before a contract is binding. Inspection and obtaining
financing are the two most common.

Debt Ratios
Also called debt-to-income ratio. It is the percentage of a person’s monthly earnings used
to pay off debt obligations. Lenders consider two ratios, constructed in slightly different ways.
The first, called the front-end ratio, is the ratio of the monthly housing expenses—including principal, interest, property taxes and insurance (PITI) is compared to the borrower’s gross
pretax monthly income. In the back-end ratio, a borrower’s other debts, such as auto loans
and credit cards, are also figured in. Lenders usually take both into account and set an
acceptable ratio, which might be expressed as 33/39. Some lenders, and some lending
qualifying agencies such as FHA, take only the back-end ratio into account.

Equity
Equity is the difference between the home’s fair market value and the unpaid balance of the mortgage and any outstanding liens. Equity increases as the mortgage is paid down or as the property appreciates.

Earnest Money
A deposit made by potential home buyers during negotiations with the seller. The sum shows
a seller that a buyer is serious about purchasing the property. The money usually is counted
toward the down payment.

Escrow Account
Most lenders set up this account that receives monthly payments from home buyers to pay for obligations such as insurance, taxes and assessments.

HOA
Homeowners association.

Home Warranty
Like any other warranty, this guarantees the property against failure of mechanical systems,
such as plumbing, electrical, heating and installed appliances.

Jumbo Loan
A loan that exceeds the amount acceptable for sale in secondary market.

Leverage
The use of financing to buy a large investment with a small amount of money.

Lien
A legal claim on the property as security for a debt or charge.

Lock
Fixing of an interest rate or points at a certain level.

Mortgage Broker
An independent individual who brings borrowers and lenders together. Unlike a mortgage
banker, a mortgage broker does not fund the loan. Instead, the broker originates and processes
the loan, and places it with a funding source, such as a bank or thrift. Brokers typically require
a fee or a commission for their services.

Origination Fee
A fee paid to a lender for processing a loan application, usually computed as a percentage
of face value of the loan.

PITI
Principal. Interest. Taxes. Insurance. The things that generally make up a monthly payment.

Point
A point equals 1 percent of a mortgage loan. Lenders charge points as a way to make a profit.

Private Mortgage Insurance (PMI)
Insurance that protects mortgage lenders against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the down payment is less than 20 percent of the sale price. Home buyers pay for the coverage in
monthly installments. PMI should be terminated when the home buyer has built up
20 percent equity in the property.

Recording Fee
A charge from the city or county for recording the transfer of the property.

Title Insurance
Insurance that protects against loss from disputes over ownership of a property.
A policy may protect the mortgage lender, the home buyer, or both.