The following are just some basic real estate legal terms to be familiar with. Your real estate attorney will protect your best interest and assist you with navigating the home buying process:
Abatement: Abatement refers to a reprieve from or reduction in a debt, tax or other payment obligation faced by an individual or company. In real estate, a request for tax abatement is filed with the Massachusetts city or town usually when the home owner feels the assessed value determined by the town is too high.
Acceleration Clause: A stipulation in a contract that allows for the lender to declare a loan due and payable on demand. The most common occurrence is when the borrower fails to make monthly mortgage payments and the lender calls the entire sum due and institutes foreclosure proceedings.
Adjustable Rate Mortgage (ARM): Any mortgage where the interest rate changes periodically based on published pre-selected market rate – e.g. LIBOR.
Amortization Schedule: This shows how much of each of your loan payments is attributed to principal and how much is attributable to interest based on your loan amount and interest rate.
Annual Percentage Rate (APR): An interest rate reflecting the cost of a mortgage as a yearly rate. This rate should NOT be confused with the loan’s interest rate. The APR is the best way to compare the true cost of credit when loan options have differing interest rates and closing costs.
Appraisal: An appraisal is the process of inspecting a home’s condition and assessing the fair market value of the home as compared with other similar homes in the area that have sold. Appraisals are completed by licensed appraisers who regularly practice in a certain geographic area. The appraised value of the home will determine in large part the amount of the loan.
Assessment: The determination by a city or town of a value on property for real estate tax purposes.
Assumable Mortgage: A mortgage that can be assumed – i.e. the payments can be taken over by the home buyer when a home is sold. Usually, the borrower must qualify in order to assume the loan.
Chain of Title: The Chain of Title is a history of ownership of a particular piece of real property. Chain of Title runs from the original owner to a current owner, showing dates when property was sold and names of buyers/sellers. It also reflects any encumbrances placed on the real property. The chain of title is a report of the series of transactions recorded at the county registry of deeds.
Closing or “Passing Papers”: The closing is a meeting of buyer, seller, real estate agents and attorneys where all of the documents are signed, money changes hands and the documents are recorded at the registry of deeds.
Closing Costs: These are the costs associated with procuring a mortgage. These fees may include a processing fee, credit report fee, flood certification, title insurance, appraisal, attorney fees, and recording fees.
Common Areas: Those portions of a building, land, and amenities owned (or managed) by a planned unit development (PUD) or condominium project’s homeowners’ association (or a cooperative project’s cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance.
Contingency: When there is a contingency on an agreement, it means that it isn’t legally binding until a certain condition is met. The most common contingency is a mortgage contingency. If the buyer does not able to obtain a mortgage, they are not obligated to purchase the home.
Covenants, Conditions, & Restrictions (CC&Rs): Restrictions on the use of land enforced by a homeowner’s association. These are common in planned developments which can restrict the types of houses built, minimum square footage, etc
Debt to Income Ratio (DTI): This is the maximum a lender will lend to a borrower based on a percentage of their gross income.
Declining Market: Certain geopgraphic areas of the country that have been determined by lenders to have been hardest hit by the housing downturn have been placed in a “declining market” and the ability to lend to high loan amounts is restricted.
Deed: A written document conveying title to land.
Department of Veterans Affairs (VA): A division of the U.S. government that oversees and guarantees the lending of money to military veterans under low or no down payment loan programs.
Discount Points: A discount point is equal to 1% of the loan amount and is prepaid at closing in order to obtain a lower than market interest rate.
Due-on-Sale Clause: A provision in the mortgage that provides the owner cannot transfer title to the property unless the loan is repaid.
Earnest Money Deposit (EMD): A deposit made by the buyer to a seller showing the buyer’s good faith in the transaction. The deposit serves as consideration, making the offer binding. Earnest money is typically held by the listing agent or seller attorney in a trust or escrow account.
Easement: A right to use another person’s land for a particular use. Telephone pole and electric easements are a common example. The electric company has the right to maintain a pole on your property to provide you with electric power.
Encumbrance: An issue that prevents title from a property to be clear and marketable, such as a mortgage or tax lien. Often these are paid from the seller proceeds at closing to allow the property to be transferred.
Escrow/Impound Account:An account held by a lender or servicer in which the borrower pays into on a monthly basis, and taxes and insurance are paid out of on a quarterly, semi-annual or yearly basis for tax and insurance bills.
Federally Insured: A guarantee by the U.S. government in the form of insurance which protects the lender in cases of default. Typically in a conventional mortgage setting it is through non-payment by the borrower.
FHA County Lending Limits: FHA has set maximum limits for loan amounts that they will insure. This is determined on a county level.
FHA Loan: A loan insured by the Federal Housing Administration that requires an up-front and monthly mortgage premium the benefit of which is a smaller down payment requirement of 3.50%.
Homeowners’ Association (HOA): An organization of homeowners of a given community who control the daily management of a community property.
Home Equity: Home equity is the fair market value of your home minus any balance on any mortgages or other liens on the house.
The Department of Housing and Urban Development (HUD): It is a federal department committed to increasing homeownership. Through the Federal Housing Administration (FHA) loans are given by lenders to borrowers who would not otherwise qualify for a loan, or who would qualify for a less favorable loan.
Initial Interest Rate: The rate that is shown on the signed note at the closing. In a fixed rate mortgage this stays the same for the entire term of the mortgage. In an adjustable mortgage, this rate will change based on the index upon which it is based.
Inspection: The opportunity afforded a buyer to have a professional assess the condition of the property. This usually occurs after an “offer” has been accepted but before a purchase and sale agreement has been signed.
Interest Rate Caps: Interest Rate Caps are a preset minimum and maximum interest rate that may be charged over the life of the loan.
Jumbo Loan: A loan that is in excess of $417,000 (on a single family home). These loans are not insured by Fannie Mae or Freddie Mac and therefore have a higher interest rate.
The Department of Housing and Urban Development (HUD): It is a federal department committed to increasing home ownership. Through the Federal Housing Administration (FHA) loans are given by lenders to borrowers who would not otherwise qualify for a loan, or who would qualify for a less favorable loan.
Initial Interest Rate: The rate that is shown on the signed note at the closing. In a fixed rate mortgage this stays the same for the entire term of the mortgage. In an adjustable mortgage, this rate will change based on the index upon which it is based.
Inspection: The opportunity afforded a buyer to have a professional assess the condition of the property. This usually occurs after an “offer” has been accepted but before a purchase and sale agreement has been signed.
Interest Rate Caps: Interest Rate Caps are a preset minimum and maximum interest rate that may be charged over the life of the loan.
Jumbo Loan: A loan that is in excess of $417,000 (on a single family home). These loans are not insured by Fannie Mae or Freddie Mac and therefore have a higher interest rate.
Lien: A lien is a legal claim against property that acts as security against payment of debts. A mortgage loan is the most common type of lien. Others types are second mortgages and IRS tax liens.
Loan-To-Value Ratio (LTV): This is a ratio of how much is owed on the home v. how much the home’s fair market value is. Loans which have a L.T.V. in excess of 80% will require some form of mortgage insurance.
Loan Commitment: An offer on the part of the lender to lend money to a borrower on specific terms and conditions.
Margin: A fixed number that is added to the applicable index to determine the loans interest rate on an adjustable rate mortgage.
Mortgage: This is often referred to as the “security instrument” because this is the document taken to the county recorder office and filed there as public notice that the lender is taking an interest in the property in order to assure the loan is paid back in full. A mortgage signifies the security interest in the property.
Note (Promissory Note): This is the document which is the borrowers “promise” to pay back the loan amount. This is a critical document in that it sets out the loan amount, interest rate, payment amount, first payment date and any other pertinent loan terms.
Offer: The document submitted to the seller which sets out the terms and conditions upon which the buyer is willing to purchase the property. The offer is submitted with a deposit it order to “bind” the offer and make it a legally binding contract.
Power of Attorney: A document which authorizes one person to sign and act for another.
Prepaid Items: These are additional money expended by the borrower associated with obtaining a loan that are not a fee for services to the lender or closing attorney. These items include prepaying taxes and homeowners insurance.
PITI: Principle, Interest, Taxes, & Insurance
Purchase & Sales Agreement (“P&S”): A legal contract that obligates a buyer to buy and a seller to sell. P & S’s are found in all types of businesses but are most often associated with real estate deals as a way of finalizing the interests of both parties before closing the deal.
Quit Claim Deed: A deed that transfers whatever interest in the owner had in the real estate at the time of transfer. A quit claim deed is the standard form of property transfer in Massachusetts.
Recording Fees: A fee charged by the county to record a real estate document in the local registry of deeds and make that document a permanent part of the public records.
Right of Rescission: The right of a borrower in a refinance transaction to cancel a loan within three business days of closing without penalty.
Short Sale: A sale is where the seller owes more on the mortgage loan than the sale proceeds. The seller must get approval from their lender to sell the house for less than is owed.
Title: The right to ownership of a particular property
Title Examination: A search of the public records to determine who owns a property and if there are any mortgages, liens, easements or other documents that affect the property.
Title Insurance: An insurance policy written guaranteeing the title to the property meets insurability guidelines. There are lender’s policies and owner’s policies.
Underwriting: The process performed by a lender in which they review all of the documents provided by the borrower to determine whether or not they will lend money to the borrower.
Upfront Mortgage Insurance: A fee paid by the homeowner to HUD in order for the loan to be guaranteed to the lender. The mortgage insurance premium is a percentage of the loan and is the same for all homeowners. The current FHA insurance fee for a purchase is 2.25% of the base loan amount.
Zoning: The activity of a city to regulate the use of property within its jurisdiction.
