Buying or selling Real Estate is a complex transaction, with a language all its own. Your Crestico Real Estate Agent can help you understand the terminology and its implications for you, but we’ve provided the definitions for many frequently used Real Estate terms here. Please scroll down.

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203(b)
A Federal Housing Authority program which provides mortgage insurance that protects lenders from default. Can be used to finance the purchase of new or existing one- to four family housing; generally characterized by low down payments, flexible qualifying guidelines, limited fees, and limits on maximum loan amount.

203(k)
A Federal Housing Authority mortgage insurance program which enables homebuyers to finance both the purchase of a home and its rehab cast via a single mortgage loan.

A

Abstract of title
A history of ownership of a property and any documents that affect the title during that ownership.

Acceptance of sale/sales contract
An offer of purchase that has been signed by both buyer and seller. A firm contract that outlines all details of the property transaction. (Same as “offer to purchase/contract of sale/sales contract.”)

Adjustable Rate Mortgage (ARM) 
A loan with an interest rate that fluctuates according to the movements of a predetermined index.

Agent/sales associate 
A person licensed by the state to sell real estate through a real estate broker.

Amenity
Any feature of a property that is beneficial but not necessary. Amenities may be natural (like location, view, water access) or man-made (walk-in closet, swimming pool, etc.)

Amortization
Gradual payment of a mortgage loan by installments over a period of time

Amortization schedule
A timetable for payment of a mortgage loan. The amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.

Amortization term
The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.

Amortize
To repay a mortgage with regular payments that cover both principal and interest.

Annual Percentage Rate (APR)
Calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.

Application
The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.

Appraisal
An opinion by a licensed real estate appraiser about the fair market value of a home.

Appraiser
A qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.

Appreciation
An increase in the value of a property due to beneficial alterations in market conditions or other reasons.

Assessed value
The valuation placed on property by a public tax assessor for purposes of taxation.

Assessment
The process of placing a value on property for the strict purpose of taxation. May also refer to a levy against property for a special purpose, such as a sewer assessment.

Assessment rolls
The public record of taxable property.

Assessor
A government official who is responsible for determining the value of a property for the purpose of taxation.

Assumable loan 
An existing mortgage that can be taken over by the buyer — usually on the same terms given to the original buyer.

Assumption
Taking over responsibility for payments on a mortgage and meeting any of the other requirements. Typically, a buyer assumes a mortgage from the seller.

B

Balloon payment
A loan with monthly payments too low to pay off the balance in the specified term. The balance must be paid in full when the loan comes due — typically within three to five years.

Bi-Weekly Mortgage
A mortgage with payments due every two weeks, totaling 26 payments per year.

Billing Cycle
The period or number of days shown on a billing statement in which interest is billed.

Bond Program
A state sponsored method of assisting borrowers and first-time buyers in the purchase of a home at a reduced interest rate.

Bridge loan
A form of second trust that is collateralized by the borrower’s present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as “swing loan.”

Broker
A person who has a real estate broker’s license, who may not only make real estate transactions for others in exchange for a fee (or other consideration), but also may operate a real estate business and employ sales associates and other brokers.

Building code
Based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.

Buy down
A method of lowering the interest rates on a mortgage, either temporarily or for the entire term of the loan. Often points are paid up front to make up the difference between the rate actually charged on the mortgage and the rate at which the buyer pays. Practically anyone — sellers, buyers, home builders, relatives, etc. — can buy down rates.

Buyer pool
The entire market of prospective home buyers in a specific area or looking for a type of home.

C

Capital expenditure
The cost of an improvement made to extend the useful life of a property or to add to its value.

Capital improvement
Any structure or component erected as a permanent improvement to real property that adds to its value and useful life.

Caps
A safeguard against excessively high payment increases, some ARMs place a cap on the amount by which either the interest rate or payment may rise at any single adjustment, over the life of the loan, or both. Look at the cap as “the worst case scenario” to determine if the ARM suits your financial capabilities.

Cash reserves
A cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.

Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.

Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage

Certificate of title
A document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims.

Clear or marketable title
A title that doesn’t have any liens or claims against it that would keep it from being transferred, put the buyer in a position to sue for property rights or be obligated for claims.

Closed-End Loan
A credit arrangement in which the borrower and lender agree on the total amount loaned and the number, amount and due dates of each payment; all proceeds are advanced at time of closing.

Closing
Also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.

Closing costs
Customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.

Closing costs
Expenses above the purchase price that buyers and sellers pay at closing.

Collateral
An asset (such as a car or a home) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.

Combined Loan-to-Value (“CLTV”) 
The relationship of the outstanding balances of a first and second mortgage to the appraised value of the security used to determine the maximum lendable amount on real estate.

Commitment
A lender’s offer to grant a mortgage loan outlining the terms, the amount of the loan, the interest rate and other conditions. It can also serve as a communication of the lender’s decision on the borrower’s application.

Comparables
An abbreviation for “comparable properties”; used for comparative purposes in the appraisal process. Comparables are properties like the property under consideration; they have reasonably the same size, location and amenities and have recently been sold. Comparables help the appraiser determine the approximate fair market value of the subject property.

Condominium
A form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.

Conforming Loan
A loan, which meets all requirements to be eligible for sale to Fannie Mae or Freddie Mac.

Construction Loan
A short-term, interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as work progresses.

Contingency
A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.

Contract of purchase
A document that lists the price, conditions and terms under which the buyer is willing to purchase the property. (Each of these means the same thing offer to purchase, or purchase offer, or earnest money agreement, or contract of purchase, or deposit receipt.)

Contract of sale/sales contract
An offer of purchase that has been signed by both buyer and seller. A firm contract that outlines all details of the property transaction. (Same as “offer to purchase/acceptance of sale/sales contract.”)

Conventional loan
A private sector loan, one that is not guaranteed or insured by the U.S. government.

Cooperative (Co-op) 
Residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.

Corporate relocation
Arrangements under which an employer moves an employee to another area as part of the employer’s normal course of business or under which it transfers a substantial part or all of its operations and employees to another area because it is relocating its headquarters or expanding its office capacity.

Credit bureau score
A number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.

Credit history
History of an individual’s debt payment; lenders use this information to gauge a potential borrower’s ability to repay a loan.

Credit Pre-Approval
A process in which an individual can apply for a credit pre-approval decision before he/she actually finds a home and enters into a sales agreement.

Credit Report
A report on the credit standing of a prospective borrower, used to aid in the determination of credit worthiness.

Credit Score
A score based upon present financial condition, experience, and past credit history, used to determine the credit standing and creditworthiness of a prospective borrower.

Current Debt
The amount of money owed on a property, or other secured or unsecured loan balance, such as credit cards or car loans.

D

Debt-to-income ratio
A comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Deed
The legal document that is used to transfer the title from one owner to another.

Delinquent
The state of being one or more months behind the loan payment schedule.

Deposit receipt
A document that lists the price, conditions and terms under which the buyer is willing to purchase the property. (Each of these means the same thing offer to purchase, or purchase offer, or earnest money agreement, or contract of purchase, or deposit receipt.)

Discount point
Normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.

Down payment
The portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan.

Due-on-sale clause
A restriction in a mortgage that has the effect of stopping assumptions. The clause states that the entire balance of the mortgage is due and payable immediately if the property is sold or conveyed.

Earnest money
Money deposited by potential buyers to show their seriousness about buying. It becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.

E

Earnest money agreement
A document that lists the price, conditions and terms under which the buyer is willing to purchase the property. (Each of these means the same thing offer to purchase, or purchase offer, or earnest money agreement, or contract of purchase, or deposit receipt.)

Easement
A right of way giving persons other than the owner access to or over a property.

Encroachment
An improvement that intrudes illegally on another’s property.

Equity 
Equity is the sale price minus selling costs and the remaining principal on the mortgage. The money you are left with after selling your home and paying off the mortgage, selling costs and any other liens. It can also be defined as the amount of ownership that one has in a home. Ownership value is built up by paying down the principal on your mortgage plus the increase in value (appreciation) of your home in the market place.

Escrow account
A separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.

Escrow analysis
The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance and other bills when due.

Escrow collections
Funds collected by the servicer and set aside in an escrow account to pay the borrower’s property taxes, mortgage insurance and hazard insurance.

Escrow disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance and other property expenses as they become due.

Escrow payment
The portion of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments and other items as they become due. Known as “impounds” or “reserves” in some states.

Exclusive agency listing
A listing contract in which the agent has the sole right to sell your home for you, though you are not bound to pay the commission if you produce the buyer. See Listing agreements.

Exclusive right-to-sell contract
A listing contract in which you give the real estate broker the sole right to sell; the person receives a commission, regardless of who produces the buyer. See Listing agreements.

F

Fair Housing Act
A law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Fair market value
The hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.

Federal Home Loan Mortgage Corporation (Freddie Mac) 
A government-sponsored institution that supports the secondary mortgage market by purchasing mortgages from lenders and reselling them as securities.

Federal Housing Administration (FHA)
A federal agency that insures first mortgages, enabling lenders to lend a very high percentage of the sale price.

Federal National Mortgage Association (Fannie Mae) 
A privately owned, congressionally chartered company that is the nation’s largest mortgage investor.

Finance Charge
The cost of interest and other charges involved in borrowing money.

First Mortgage
A mortgage which has priority over all other voluntary liens against a certain property; used in states that secure loans against real property with a mortgage.

Fixed Rate Mortgage
A mortgage in which the interest rate and monthly principal and interest payments remain the same for the life of the loan.

Floating Your Rate
Deciding not to lock in the interest rate at the time of application, and instead to float with the market until a later date at which time you will ask the lender to lock in the interest rate.

Flood insurance
Insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.

Foreclosure
A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

G

General warranty deed
The type of deed considered to provide the most protection to an owner, since the seller guarantees that he or she is the true owner of the property and that no claim will be brought against the property.

Gift Letter
A written statement from friends or family that explains gift funds given to a borrower to purchase a home, and states that no repayment is expected.

Ginnie Mae
Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.

Good faith estimate
An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

H

Hazard insurance
Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.

Home inspection
An examination of the structure and mechanical systems to determine a home’s safety; makes the potential homebuyer aware of any repairs that may be needed.

Home Market Analysis
The Home Market Analysis presents an opportunity to review and evaluate the facts before you decide the price you will ask for your home. It also helps you look at your home from a buyer’s perspective. This process will establish a realistic listing price and increase the percentage of qualified buyers who look at your property.

Home warranty
Offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner’s insurance; overage extends over a specific time period and does not cover the home’s structure.

Homeowner’s insurance
An insurance policy that combines protection against damage to a dwelling and Is contents with protection against claims of negligence, inappropriate action that result in someone’s injury or property damage.

Homeowner’s Association Fees
The fee condominiums and planned unit developments assess monthly for maintaining common areas and service for the development

Housing counseling agency
Provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and homebuying.

Housing Market Index (HMI) 
The HMI is based on a monthly survey of home builders that the National Association of Home Builders (NAHB) has been conducting for over 16 years. Each month, the survey asks builders to rate present sales of single-family detached homes and sales expectations over the next six months as “good,” “fair,” or “poor.” Traffic of prospective buyers is rated as “high to very high,” “average,” or “low to very low.” The HMI is a weighted average of the three seasonally adjusted components. On a scale of 0 to 100, with zero being the worst and 100 the best.

HUD
The U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HUD1 Statement
Also known as the “settlement sheet,” it itemizes all closing costs; must be given to the borrower at or before closing.

HVAC
Heating, Ventilation and Air Conditioning; a home’s heating and cooling system.

I

Index
The rate you pay directly related to a particular interest-rate index.

Inflation
The number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar’s value.

Installment
The regular periodic payment that a borrower agrees to make to a lender.

Insurance
Protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.

Interest
A fee charged for the use of money.

Interest rate
The amount of interest charged on a monthly loan payment; usually expressed as a percentage.

Interest rate ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.

Interest rate floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.

Investment property
A property that is not occupied by the owner.

J

Jumbo loan
A loan that exceeds Fannie Mae’s mortgage amount limits. Also called a nonconforming loan.

Lease
A written agreement between the property owner and a tenant that stipulates the conditions under which the tenant may possess the real estate for a specified period of time and rent.

Lease purchase
Assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

Liabilities
Your debts and other financial obligations.

Lien
A monetary claim against your property. Usually liens must be settled before the seller can take the title.

Line of credit
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower. See home equity line of credit

Liquid asset
A cash asset or an asset that is easily converted into cash.

Listing agreements
Three types of listing agreements: 1. With an exclusive right-to-sell agreement, the seller pays a fee regardless of who produces the buyer. This fee covers many important services that the sales associate performs above and beyond finding a qualified buyer. 2. If the seller finds a buyer, he or she is not obligated to pay the fee in exclusive-agency listing. If the sales associate finds a buyer, then the fee is paid to the real estate company. 3. An open listing is one in which you sign with several real estate firms and give each authority to sell your home. It is typically less effective than exclusive listing because the sales associate lacks the incentive to make and all-out effort to sell your home.

Listing contract
A contract with the broker or firm you hire to represent you in the sale of your home, according to the terms of the sale that you specify. In exchange for producing a ready, willing and able buyer for you, the sales associate is paid a commission. See listing agreements.

Loan
Money borrowed that is usually repaid with interest.

Loan application fee
A lender’s fee that you must pay when applying for a mortgage.

Loan fraud
Purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.

Loan origination fee
A fee, usually one to four points, charged by the lender for processing your mortgage.

Loan-to-Value Ratio (LTV) 
The ratio of mortgage amount to appraised value or sales price of real property. Used by lenders to determine maximum loan amounts set by secondary market investors and/or government insuring agencies.

Lock-in
Since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.

Locking Your Rate
A procedure where a lender agrees to lock-in a specific interest rate (initial interest rate in the case of an adjustable rate mortgage) on a mortgage loan request for a specified period of time.

M

Margin
An amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.

Margin
Most lenders will offer adjustable-rate mortgages that state a margin which is added to the index to get the rate upon which payments are based.

Maturity
The date on which the principal balance of a loan, bond or other financial instrument becomes due and payable.

Mortgage
A lien on the property that secures the Promise to repay a loan.

Mortgage banker
A company that originates loans and resells them to secondary mortgage lenders such as Fannie Mae or Freddie Mac.

Mortgage broker
A firm that originates and processes loans for a number of lenders.

Mortgage insurance
A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price.

Mortgage insurance premium (MIP) 
A monthly payment -usually part of the mortgage payment – paid by a borrower for mortgage insurance.

Mortgage Life Insurance 
Term life insurance paid by the borrower in which the amount of coverage decreases as the mortgage balance declines. In the event the borrower dies while the policy is in force, the debt is automatically satisfied by the insurance proceeds.

Mortgagee
The lender in a mortgage agreement.

Mortgagor
The borrower in a mortgage agreement.

Multiple Listing Service (MLS) 
A networking system, frequently on computer, in which a number of real estate firms share information about their clients’ houses that are for sale.

N

National Association of Home Builders
The National Association of Home Builders (NAHB) is a federation of more than 800 state and local builders associations throughout the United States. The mission of this Washington, D.C.-based trade association is to enhance the climate for housing and the building industry, and to promote policies that will keep housing a national priority. Chief among NAHB’s goals is providing and expanding opportunities for all consumers to have safe, decent and affordable housing. About one-third of NAHB’s 190,000 members are home builders and/or remodelers. The remainder of the membership consists of associates working in closely related fields — such as mortgage finance and building products and services — within the housing industry.

National Association of REALTORS®
Founded in 1908, NAR has grown from its original nucleus of 120 to today’s 720,000 members. NAR is composed of residential and commercial REALTORS®, who are brokers, salespeople, property managers, appraisers, counselors and others engaged in all aspects of the real estate industry. Members belong to one or more of some 1,700 local associations/boards and 54 state and territory associations of REALTORS®. They can join one of many institutes, societies and councils. NAR offers members the opportunity to be active in appraisal and international real estate specialty sections. REALTORS® are pledged to a strict Code of Ethics and Standards of Practice.

Negative amortization
The increasing of a debt. In the case of a mortgage, the principal is increased.

Net worth
The value of all of a person’s assets, including cash, minus all liabilities.

Non-conforming 
A loan that is not eligible to be purchased by Fannie Mae or Freddie Mac.

Nonliquid asset
An asset that cannot easily be converted into cash.

Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Offer to purchase
A document that lists the price, conditions and terms under which the buyer is willing to purchase the property. (Each of these means the same thing offer to purchase, or purchase offer, or earnest money agreement, or contract of purchase, or deposit receipt.)

O

Offer to purchase of sale/sales contract
An offer of purchase that has been signed by both buyer and seller. A firm contract that outlines all details of the property transaction. (Same as “acceptance/contract of sale/sales contract.”)

Open House
When the seller’s real estate agent opens the seller’s house to the public. You don’t need a real estate agent to attend an open house.

Open listing
A listing contract in which you hire more than one firm or person to sell your home, and only the one who produces the buyer is entitled to the commission. See listing agreements.

Origination
The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination fee
The charge for originating a loan; is usually calculated in the form of points and paid at closing.

P

Pest Inspection
May be required on new loans to determine if there is an infestation of termites or other pests in the home.

Piggyback
Borrowers often use a “piggyback” second mortgage in conjunction with a first mortgage so that they do not have to provide a 20 percent down payment in order to avoid PMI.

PITI
Principal, Interest, Taxes, and Insurance – the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

PMI
Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

Point
An amount equal to 1 percent of a mortgage (not sale price) that is paid at closing. A point is usually considered to be prepaid interest — interest paid up front that represents the difference between the interest being charged on the mortgage and the rate the lender wants to receive.

Points
Fees charged by lenders. One point equals one percent of the mortgage amount.

Power of attorney
A legal document that authorizes another person to act on one’s behalf. A power of attorney can grant complete authority or can be limited to certain acts and/or certain periods of time.

Pre-Qualification Letter
A letter from a mortgage lender that states that you’re pre-qualified to buy a home, but does not commit the lender to a particular mortgage amount.

Pre-qualify
A lender informally determines the maximum amount an individual is eligible to borrow.

Preapproved buyer
Preapproval is more in-depth and gives the buyer more buying strength. The lender makes a credit decision based on the information gathered from and about the buyer. The buyer is then preapproved for a mortgage amount of “X,” with maximum interest rate of “Y”. The buyer now has the strength of a cash buyer.

Premium
An amount paid on a regular schedule by a policyholder that maintains insurance coverage.

Prepayment penalties
A penalty charged for paying off a mortgage early.

Prequalified buyer
A buyer can be prequalified for a loan based on non-verified income and credit information provided by the buyer. The prequalification, which is usually done over the phone, is the opinion of the loan originator and does not represent a formal loan approval.

Prime rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Principal
The amount borrowed from a lender; doesn’t include interest or additional fees.

Property Tax 
The tax assessed on the property by the local government (e.g. city, county, village or township) for the various services provided to the property owner. Services may include police and fire department, garbage pick up and snow removal.

PUD (Planned Unit Development)
A real estate project in which each unit owner has title to a residential lot and a nonexclusive easement on the common areas of the project.

Purchase Contract (Purchase Offer)
A document that lists the price, conditions and terms under which the buyer is willing to purchase a property.

Purchase offer
A document that lists the price, conditions and terms under which the buyer is willing to purchase the property. (Each of these means the same thing offer to purchase, or purchase offer, or earnest money agreement, or contract of purchase, or deposit receipt.)

Q

Qualifying ratios
Calculations that are used in determining whether a borrower can qualify for a mortgage. They consist of two separate calculations a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Quitclaim deed
A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.

R

Radon
A radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.

Rate adjustment periods
With most ARMs, any periodic adjustment in the interest rate changes the payment. Adjustment periods tend to reflect the period of the index of the most popular ARMs; currently, annual adjustments are the most common.

Real estate agent
An individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.

REALTOR®
An active member of a local board of realtors. Local boards are affiliated with the National Association of REALTORS®.

Recorder
The public official who keeps records of transactions that affect real property in the area. Sometimes known as a “Registrar of Deeds” or “County Clerk.”

recording
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage or an extension of mortgage, thereby making it a part of the public record.

Recording Fees
Charged by the county recorder’s office for the filing of documents or details of a legal document to make them a matter of public record. Usually requires the witnessing and notarizing of the documents to be recorded.

Refinance
Getting a new mortgage with all or some portion of the proceeds used to pay off the original mortgage.

Refinancing
Paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).

Rehabilitation mortgage
A mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages – like the FHA’s 203(k) – allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.

RESPA
Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships

Revolving Debt
A debt that does not have a fixed payment, although repayment is usually a percentage of the outstanding balance and made at regular intervals; most common are credit cards issued by banks and department stores.

Rural Housing Service (RHS)
An agency within the Department of Agriculture, which operates principally under the Consolidated Farm and Rural Development Act of 1921 and Title V of the Housing Act of 1949. This agency provides financing to farmers and other qualified borrowers buying property in rural areas who are unable to obtain loans elsewhere. Funds are borrowed from the U.S. Treasury.

S

Second Mortgage
A mortgage that is in a second position behind (or subordinate to) the original first mortgage; see also Junior Lien. A second mortgage is a good alternative to refinancing when one has an original first mortgage loan with a low interest rate. A second mortgage will give the borrower a lump sum of funds to use as needed. The qualification process and debt-to-income ratio requirement are the same as refinancing.

Secondary Mortgage market
The buying and selling of existing mortgages.

Secured loan
A loan that is backed by collateral.

Security
The property that will be pledged as collateral for a loan.

Settlement
Another name for closing.

SFR (Single-Family Residence)
A structure intended to house one family.

Special Forbearance
A loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.

Step-Rate Mortgage
A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.

Subdivision
A housing development that is created by dividing a tract of land into individual lots for sale or lease.

Subordinate
To place in a rank of lesser importance or to make one claim secondary to another.

Survey
A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.

Sweat equity
Using labor to build or improve a property as part of the down payment

Title
The right to ownership in real estate, which is transferred by a deed. Evidence of ownership in real estate.

T

Title insurance
Insurance, usually paid through a single premium at closing, that insures the owner against loss because of a claim against the title that was not found in the title search.

Title search
The process of checking all the records relating to the title to see that it doesn’t have any liens or claims against it that would keep it from being transferred.

Truth-in-Lending
A federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.

Two-step Mortgage
An adjustable-rate mortgage (ARM) that has one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term.

U

Underwriting
The process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit history and a judgment of the property value.

Uniform Residential Loan Application
A standard mortgage application your lender will ask you to complete. The form requests your income, assets, liabilities, and a description of the property you plan to buy, among other things.

Unsecured Loan
A loan that is not backed by collateral.

V

VA
Department of Veterans Affairs, formerly known as the Veteran’s Administration- a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.

Warranties
Written guarantees of the quality of a product and the promise to repair or replace defective parts free of charge. See Home Warranties.

Z

Zoning
The creation of districts by local governments in which specific types of property uses are authorized (e.g., commercial, industrial, residential, high density, mixed use).

2/1 Buy Down Mortgage
The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long term rates; however, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.

Acceleration Clause
Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.

Additional Principal Payment
A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.

Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Adjusted Basis
The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.

Adjustment Date
The date that the interest rate changes on an adjustable-rate mortgage (ARM).

Adjustment Period
The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).

Affordability Analysis
An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.

Amortization
The gradual repayment of a mortgage loan, both principal and interest, by installments.

Amortization Term
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

Annual Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.

Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a property.

Appraised Value
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.

Asset
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

Assignment
The transfer of a mortgage from one person to another.

Assumability
An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.

Assumption Fee
The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.

Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of a specific date.

Balloon Mortgage
A mortgage with level monthly payments that amortizes over a stated term but also requires that a lump sum payment be paid at the end of an earlier specified term.

Balloon Payment
The final lump sum paid at the maturity date of a balloon mortgage.

Before-tax Income
Income before taxes are deducted.

Biweekly Payment Mortgage
A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.

Bridge Loan
A second trust that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as “swing loan.”

Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.

Buydown
When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed and adjustable rate mortgages.

Cap
Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning and may cause negative amortization.

Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.

Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.

Change Frequency
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).

Closing
A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called “settlement.”

Closing Costs
These are expenses – over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.

Compound Interest
Interest paid on the original principal balance and on the accrued and unpaid interest.

Consumer Reporting Agency (or Bureau)
An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.

Conversion Clause
A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.

Credit Report
A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.

Credit Risk Score
A credit score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.

Deed of Trust
The document used in some states instead of a mortgage. Title is conveyed to a trustee.

Default
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

Delinquency
Failure to make mortgage payments on time.

Deposit
This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.

Discount
In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.

Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.

Effective Gross Income
A borrowers normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.

Equity
The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.

Escrow
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Escrow Payment
The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

Fannie Mae
A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds.

FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

FICO Score
FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.

First Mortgage
The primary lien against a property.

Fixed Installment
The monthly payment due on a mortgage loan including payment of both principal and interest.

Fixed-Rate Mortgage (FRM)
A mortgage interest that are fixed throughout the entire term of the loan.

Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

GNMA
A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.

Growing-Equity Mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.

Guarantee Mortgage
A mortgage that is guaranteed by a third party.

Housing Expense Ratio
The percentage of gross monthly income budgeted to pay housing expenses.

HUD-1 statement
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.

Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
A combination fixed rate and adjustable rate loan – also called 3/1,5/1,7/1 – can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.

Index
The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time.The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.

Initial Interest Rate
This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It’s also known as “start rate” or “teaser.”

Installment
The regular periodic payment that a borrower agrees to make to a lender.

Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).

Interest
The fee charged for borrowing money.

Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.

Interest Rate Buydown Plan
An arrangement that allows the property seller to deposit money to an account. That money is then released each month to reduce the mortgagor’s monthly payments during the early years of a mortgage.

Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.

Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.

Late Charge
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

Lease-Purchase Mortgage Loan
An alternative financing option that allows low- and moderate-income home buyers to lease a home with an option to buy. Each month’s rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a downpayment.

Liabilities
A person’s financial obligations. Liabilities include long-term and short-term debt.

Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.

Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.

Line of Credit
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.

Liquid Asset
A cash asset or an asset that is easily converted into cash.

Loan
A sum of borrowed money (principal) that is generally repaid with interest.

Loan-to-Value (LTV) Percentage
The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

Lock-In Period
The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.

Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Maturity
The date on which the principal balance of a loan becomes due and payable.

Monthly Fixed Installment
That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn’t cover all of the interest. The loan balance therefore increases instead of decreasing.

Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary mortgage market.

Mortgage Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.

Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.

Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance.

Mortgage Life Insurance
A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.

Mortgagor
The borrower in a mortgage agreement.

Negative Amortization
Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn’t covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.

Net Worth
The value of all of a person’s assets, including cash.

Non Liquid Asset
An asset that cannot easily be converted into cash.

Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Origination Fee
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.

Owner Financing
A property purchase transaction in which the party selling the property provides all or part of the financing.

Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.

Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one adjustment period.

Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.

PITI Reserves
A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).

Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender.Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.

Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.

Pre-Approval
The process of determining how much money you will be eligible to borrow before you apply for a loan.

Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Principal Balance
The outstanding balance of principal on a mortgage not including interest or any other charges.

Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Qualifying Ratios
Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Rate Lock
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Real Estate Agent®
A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Real Estate Agents.

Recording
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.

Refinance
Paying off one loan with the proceeds from a new loan using the same property as security.

Revolving Liability
A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.

Secondary Mortgage Market
Where existing mortgages are bought and sold.

Security
The property that will be pledged as collateral for a loan.

Seller Carry-back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See Owner Financing.

Servicer
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.

Step-Rate Mortgage
A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.

Third-party Origination
When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Treasury Index
An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

Truth-in-Lending
A 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.

Two-step Mortgage
An adjustable-rate mortgage (ARM) with one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term.

Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.

VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.

“Wrap Around” Mortgage
A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the “Wrap Around” mortgagee, who then forwards the payments on the first mortgage to the first mortgagee. These mortgages may not be allowed by the first mortgage holder, and if discovered, could be subject to a demand for full payment.

Private mortgage insurance is a type of insurance that helps protect the mortgage company against losses due to foreclosure. This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed.

Private mortgage insurance also enables mortgage companies to grant loans that would otherwise be considered too risky to be purchased by third party investors like the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The ability to sell loans to these investors is critical to maintaining mortgage market liquidity, which in turn, allows mortgage companies to continue originating new loans.

The Functions of an Escrow
Buying or selling a home (or other piece of real property) usually involves the transfer of large sums of money. It is imperative that the transfer of these funds and related documents from one party to another be handled in a neutral, secure and knowledgeable manner. For the protection of buyer, seller and lender, the escrow process was developed.

As a buyer or seller, you want to be certain all conditions of sale have been met before property and money change hands. The technical definition of an escrow is a transaction where one party engaged in the sale, transfer or lease of real or personal property with another person delivers a written instrument, money or other items of value to a neutral third person, called an escrow agent or escrow holder. This third person holds the money or items for disbursement upon the happening of a specified event or the performance of a specified condition.

Simply stated, the escrow holder impartially carries out the written instructions given by the principals. This includes receiving funds and documents necessary to comply with those instructions, completing or obtaining required forms and handling final delivery of all items to the proper parties upon the successful completion of the escrow.

The escrow must be provided with the necessary information to close the transaction. This may include loan documents, tax statements, fire and other insurance policies, title insurance policies, terms of sale and any seller-assisted financing, and requests for payment for various services to be paid out of escrow funds.

If the transaction is dependent on arranging new financing, it is the buyer’s or the buyer’s agent’s responsibility to make the necessary arrangements. Documentation of the new loan agreement must be in the hands of the escrow holder before the transfer of property can take place. A real estate agent can help identify appropriate lending institutions.

When all the instructions in the escrow have been carried out, the closing can take place. At this time, all outstanding funds are collected and fees–such as title insurance premiums, real estate commissions, termite inspection charges–are paid. Title to the property is then transferred under the terms of the escrow instructions and appropriate title insurance is issued.

Payment of funds at the close of escrow should be in the form acceptable to the escrow, since out-of-town and personal checks can cause days of delay in processing the transaction.

The following items represent a typical list of what an escrow holder does and does not do:

THE ESCROW HOLDER:

• serves as the neutral “stakeholder” and the communications link to all parties in the transaction;
• prepares escrow instructions;
• requests a preliminary title search to determine the present condition of title to the property;
• requests a beneficiary’s statement if debt or obligation is to be taken over by the buyer;
• complies with lender’s requirements, specified in the escrow agreement;
• receives purchase funds from the buyer;
• prepares or secures the deed or other documents related to escrow;
• prorates taxes, interest, insurance and rents according to instructions;
• secures releases of all contingencies or other conditions as imposed on any particular escrow;
• records deeds and any other documents as instructed;
• requests issuance of the title insurance policy;
• closes escrow when all the instructions of buyer and seller have been carried out;
• disburses funds as authorized by instructions, including charges for title insurance, recording fees, real estate commissions and loan payoffs;
• prepares final statements for the parties accounting for the disposition of all funds deposited in escrow (these are useful in the preparation of tax returns).

THE ESCROW HOLDER DOES NOT:

• offer legal advice;
• Negotiate the transaction;
• offer investment advice.
• Your local title company should be happy to provide additional information.
• Article by CLTA
• Closing and Title Costs

It’s the big day.

The day you go to the title or escrow company, sign your name on the dotted line, hand over a check and prepare to take ownership of your new home.

It’s also the day that you and the seller will pay “closing” or settlement costs, an accumulation of separate charges paid to different entities for the professional services associated with the buying and selling of real property.

It’s too often a day filled with uncertainty and stress.

To help you better understand this confusing subject, the Land Title Association has answered some of the questions most commonly asked about title, closing and closing costs.

What services will I be paying for when I pay closing costs?
You will usually be paying for such things as real estate commissions, appraisal fees, loan fees, escrow charges, advance payments such as property taxes and homeowner’s insurance, title insurance premiums, pest inspections and the like.

How much should I expect to pay in closing costs?
The amount you pay for closing costs will vary; however, when buying your home and obtaining a new loan, an estimate of your closing costs will be provided to you pursuant to the Real Estate Settlement Procedures Act after you submit your loan application. This disclosure provides you with a good faith estimate of what your closing costs will be in the real estate process. An itemized list of charges will be prepared when you close your transaction and take title to your new property.

Can I pay for my closing costs in installments?
No, and it is easy to understand why. Many different parties will have fulfilled their responsibilities and be awaiting payment upon closing. The title or escrow company will disburse money to those parties, pursuant to the escrow instructions, when funds are available.

Will I be allowed to write a personal check to cover my closing cost?
Your closing funds should be in the form of a cashier’s check, issued by an institution from the state of your purchase, made payable to the title company or escrow office in the amount requested. A personal check may delay the closing or may be unacceptable to the title or escrow company. An out-of-state check could also cause a delay in your closing due to possible delays in clearing the check.

How much can I expect to pay for Title Insurance?
This point is often misunderstood. Although the title company or escrow office usually serves as a meeting ground for closing the sale, only a small percentage of total closing fees are actually for title insurance protection.

Your title insurance premium may actually amount to less than one percent of the purchase price of your home, and less than ten percent of your total closing costs. The title policy is good for as long as you and your heirs own the property with the payment of only one premium.

Why are separate owner’s and lender’s title insurance policies issued?
Both you and your lender will want the security offered by title insurance.

Your home is an important purchase, and you will want to be certain your home is yours, all yours. Title insurance companies insure your rights and interests in order to protect you against claims.

Your lender is looking to insure the enforceability of their lien on your property and marketability. What is meant by “marketability”? Local lenders will “originate” a loan here, and, often, sell it to an out-of-state investor. This investor, who may never see the property, needs to know that he has a valid and enforceable lien. Title insurance is the way of making certain. Without a current title policy, the loan is essentially unmarketable.

What does my Title dollar pay for?
Title insurers, unlike property or casualty insurance companies, operate under the theory of “risk elimination.”

Risk elimination can only be accomplished after an intensive period of risk identification.

Title companies spend a high percentage of their operating revenue each year collecting, storing, maintaining and analyzing official records for information that affects title to real property. The issuance of a title insurance policy is highly labor-intensive. It is based upon the maintenance of a title “plant” or library of title records, in many cases dating back over a hundred years. Each day, recorded documents affecting real property are posted to these plants so that when a title search on a particular parcel is requested, the information is already organized for rapid and accurate retrieval.

Trained title experts are able, with the aid of their extensive title plants, to identify the rights others may have in your property, such as recorded liens, legal actions, disputed interests, rights of way or other encumbrances on your title. Before closing your transaction, you can seek to “clear” those encumbrances which you do not wish to assume.

The goal of title companies is to conduct such a thorough search and evaluation of public records that no claims will ever arise. Of course, this is impossible–we live in an imperfect world, where human error and changing legal interpretations make 100 percent risk elimination impossible. When claims do arise, title insurance companies have professional claims personnel to make sure that your property rights are protected pursuant to the terms of your policy.

To conclude, when you pay for your title insurance policy, you are paying for a team of professionals who have worked together to deliver you a title insurance policy which represents protection for your ownership of real property.

Who can I look for straight answers on Title, Closing, and closing costs?

Title or escrow company personnel are available to review and explain your title policy and your closing statement.

Understanding Title Insurance

What is title insurance? Newspapers refer to it in the weekly real estate sections and you hear about it in conversations with real estate brokers. If you’ve purchased a home you may be familiar with the benefits of title insurance. However, if this is your first home, you may wonder, “Why do I need yet another insurance policy?” While a number of issues can be raised by that question, we will start with a general answer.

The purchase of a home is one of the most expensive and important purchases you will ever make. You and your mortgage lender will want to make sure the property is indeed yours and that no one else has any lien, claim or encumbrance on your property.

The Land Title Association, in the following pages, answers some questions frequently asked about an often misunderstood line of insurance — title insurance.

What is the difference between title insurance and casualty insurance?
Title insurers work to identify and eliminate risk before issuing a title insurance policy. Casualty insurers assume risks.

Casualty insurance companies realize that a certain number of losses will occur each year in a given category (auto, fire, etc.). The insurers collect premiums monthly or annually from the policy holders to establish reserve funds in order to pay for expected losses.

Title companies work in a very different manner. Title insurance will indemnify you against loss under the terms of your policy, but title companies work in advance of issuing your policy to identify and eliminate potential risks and therefore prevent losses caused by title defects that may have been created in the past.

Title insurance also differs from casualty insurance in that the greatest part of the title insurance premium dollar goes towards risk elimination. Title companies maintain “title plants” which contain information regarding property transfers and liens reaching back many years. Maintaining these title plants, along with the searching and examining of title, is where most of your premium dollar goes.

Who needs title insurance?
Buyers and lenders in real estate transactions need title insurance. Both want to know that the property they are involved with is insured against certain title defects. Title companies provide this needed insurance coverage subject to the terms of the policy. The seller, buyer and lender all benefit from the insurance provided by title companies.

What does title insurance insure?
Title insurance offers protection against claims resulting from various defects (as set out in the policy) which may exist in the title to a specific parcel of real property, effective on the issue date of the policy. For example, a person might claim to have a deed or lease giving them ownership or the right to possess your property. Another person could claim to hold an easement giving them a right of access across your land. Yet another person may claim that they have a lien on your property securing the repayment of a debt. That property may be an empty lot or it may hold a 50-story office tower. Title companies work with all types of real property.

What types of policies are available?
Title companies routinely issue two types of policies: An “owner’s” policy which insures you, the Homebuyer for as long as you and your heirs own the home; and a “lender’s” policy which insures the priority of the lender’s security interest over the claims that others may have in the property.

What protection am I obtaining with my title policy?
A title insurance policy contains provisions for the payment of the legal fees in defense of a claim against your property which is covered under your policy. It also contains provisions for indemnification against losses which result from a covered claim. A premium is paid at the close of a transaction. There are no continuing premiums due, as there are with other types of insurance.

What are my chances of ever using my title policy?
In essence, by acquiring your policy, you derive the important knowledge that recorded matters have been searched and examined so that title insurance covering your property can be issued. Because we are risk eliminators, the probability of exercising your right to make a claim is very low. However, claims against your property may not be valid, making the continuous protection of the policy all the more important. When a title company provides a legal defense against claims covered by your title insurance policy, the savings to you for that legal defense alone will greatly exceed the one-time premium.

What if I am buying property from someone I know?
You may not know the owner as well as you think you do. People undergo changes in their personal lives that may affect title to their property. People get divorced, change their wills, engage in transactions that limit the use of the property and have liens and judgments placed against them personally for various reasons.

There may also be matters affecting the property that are not obvious or known, even by the existing owner, which a title search and examination seeks to uncover as part of the process leading up to the issuance of the title insurance policy.

Just as you wouldn’t make an investment based on a phone call, you shouldn’t buy real property without assurances as to your title. Title insurance provides these assurances.

The process of risk identification and elimination performed by the title companies, prior to the issuance of a title policy, benefits all parties in the property transaction. It minimizes the chances that adverse claims might be raised, and by doing so reduces the number of claims that need to be defended or satisfied. This process keeps costs and expenses down for the title company and maintains the traditional low cost of title insurance.

Why Do You Need Title Insurance?
Title Insurance.

It’s a term we hear and see frequently — we see reference to it in the Sunday real estate section, in advertisements and in conversations with real estate brokers. If you’ve purchased a home before, you’re probably familiar with the benefits and procedures of title insurance. But if this is your first home, you may wonder, “Why do I need another insurance policy? It’s just one more bill to pay.”

The answer is simple: The purchase of a home is most likely one of the most expensive and important purchases you will ever make. You, and your mortgage lender, want to make sure that the property is indeed yours — lock, stock and barrel — and that no individual or government entity has any right, lien, claim to your property.

Title insurance companies are in business to make sure your rights and interests to the property are clear, that transfer of title takes place efficiently and correctly and that your interests as a homebuyer are protected to the maximum degree.

Title insurance companies provide services to buyers, sellers, real estate developers, builders, mortgage lenders and others who have an interest in a real estate transfer. Title companies routinely issue two types of policies — “owner’s,” which cover you, the homebuyer; and “lender’s,” which covers the bank, savings and loan or other lending institution over the life of the loan. Both are issued at the time of purchase for a modest, one-time premium.

Before issuing a policy, however, the title company performs an extensive search of relevant public records to determine if anyone other than you has an interest in the property. The search may be performed by title company personnel using either public records or more likely, information gathered, reorganized and indexed in the company’s title “plant.”

With such a thorough examination of records, any title problems usually can be found and cleared up prior to your purchase of the property. Once a title policy is issued, if for some reason any claim which is covered under your title policy is ever filed against your property, the title company will pay the legal fee involved in defense of your rights, as well as any covered loss arising from a valid claim. That protection, which is in effect as long as you or your heirs own the property, is yours for a one-time premium paid at the time of purchase.

The fact that title companies work to eliminate risks before they develop makes the title insurance decidedly different from other types of insurance you may have purchased. Most forms of insurance assume risks by providing financial protection through a pooling of risks for losses arising from an unforeseen event, say a fire, theft or accident. The purpose of title insurance, on the other hand, is to eliminate risks and prevent losses caused by defects in title that happened in the past. Risks are examined and mitigated before property changes hands.

This risk elimination has benefits to both you, the homebuyer, and the title company: it minimizes the chances adverse claims might be raised, and by so doing reduces the number of claims that have to be defended or satisfied. This keeps costs down for the title company and your title premiums low.

Buying a home is a big step emotionally and financially. With title insurance you are assured that any valid claim against your property will be borne by the title company, and that the odds of a claim being filed are slim indeed.

Isn’t sleeping well at night, knowing your home is yours, reason enough for title insurance?

Title Insurance – Where Does Your Dollar Go?

Title Insurance: As a homebuyer, the term is probably familiar — but is it understood? What is your dollar actually paying for when you purchase a title policy?

Title Insurers, unlike property or casualty insurance companies, operate under the theory of risk elimination. Title companies spend a high percentage of their operating income each year collecting, storing, maintaining and analyzing official records for information that affects title to real property. Their technical experts are trained to identify the rights others may have in your property, such as recorded liens, legal actions, disputed interests, rights of way or other encumbrances on your title. Before closing your transaction, the title company will proceed to “clear” those encumbrances which you do not wish to assume.

This theory is different from that of most other insurance where, for example, rates and anticipated losses are based on actuarial studies and premiums are pooled on the assumption that a certain number of claims will be made. The distinction is important: title insurance premiums are paid to identify and eliminate potential risks and claims before they happen. Medical and casualty insurance premiums, for example, are paid to insure against an unpredictable future event, knowing that risks exist and claims will occur. Furthermore, title insurance involves a one-time premium, paid when you close the real estate transaction, while property, casualty and medical insurance require regular renewal premiums.

The goal of title companies is to conduct such a thorough search and evaluation of public records that no claims will ever arise. Of course, this is impossible — we live in an imperfect world, where human error and changing legal interpretations make 100 percent risk elimination impossible. When claims arise, professional claims personnel are assigned to handle them according to the terms of the title insurance policy.

As in all competitive business environments, rates vary from company to company, so you should make comparisons before deciding on a particular title company. Your real estate professional can help you do this. In addition, there are many helpful customer services provided by title companies which you and your real estate professional may find helpful to your transaction.

The issuance of a title insurance policy is highly labor-intensive. It is based upon the maintenance of a title “plant,” or library of title records, in many cases dating back over a hundred years. Each day, recorded documents affecting real property and property owners are posted to these title plants so that when a title search on a particular parcel is requested, the information is already organized for rapid and accurate retrieval. This investment in skilled personnel and advanced data processing represents a major part of the title insurance premium dollar.

Understanding Preliminary Reports

After months of searching, you’ve finally found it — your perfect dream home. But is it perfect?

Will you be purchasing more than just a beautiful home? Will you also be acquiring liens placed on the property by prior owners? Have documents been recorded that will restrict your use of the property?

The preliminary report will provide you with the opportunity, prior to purchase, to review matters affecting your property which will be excluded from coverage under your title insurance policy unless removed or eliminated before your purchase.

To help you better understand this often bewildering subject, the Land Title Association has answered some of the questions most commonly asked about preliminary reports.

What is a Preliminary Report?

A preliminary report is a report prepared prior to issuing a policy of title insurance that shows the ownership of a specific parcel of land, together with the liens and encumbrances thereon which will not be covered under a subsequent title insurance policy.

What role does a Preliminary Report play in the real estate process?
A preliminary report contains the conditions under which the title company will issue a particular type of title insurance policy.

The preliminary report lists, in advance of purchase, title defects, liens and encumbrances which would be excluded from coverage if the requested title insurance policy were to be issued as of the date of the preliminary report. The report may then be reviewed and discussed by the parties to a real estate transaction and their agents.

Thus, a preliminary report provides the opportunity to seek the removal of items referenced in the report which are objectionable to the buyer prior to purchase.

When and how is the Preliminary Report produced?
Shortly after escrow is opened, an order will be placed with the title company which will then begin the process involved in producing the report.

This process calls for the assembly and review of certain recorded matters relative to both the property and the parties to the transaction. Examples of recorded matters include a deed of trust recorded against the property or a lien recorded against the buyer or seller for an unpaid court award or unpaid taxes.

These recorded matters are listed numerically as “exceptions” in the preliminary report. They will remain exceptions from title insurance coverage unless eliminated or released prior to the transfer of title.

What should I look for when reading my Preliminary Report?
You will be interested, primarily, in the extent of your ownership rights. This means you will want to review the ownership interest in the property you will be buying as well as any claims, restrictions or interests of other people involving the property.

The report will note in a statement of vesting the degree, quantity, nature and extent of the owner’s interest in the

real property. The most common form of interest is “fee simple” or “fee” which is the highest type of interest an owner can have in land.

Liens, restrictions and interests of others which are being excluded from coverage will be listed numerically as

“exceptions” in the preliminary report. These may be claims by creditors who have liens or liens for payment of taxes or assessments. There may also be recorded restrictions which have been placed in a prior deed or contained in what are termed CC&Rs–covenants, conditions and restrictions. Finally, interests of third parties are not uncommon and may include easements given by a prior owner which limit your use of the property. When you

buy property you may not wish to have these claims or restrictions on your property. Instead, you may want to clear the unwanted items prior to purchase.

In addition to the limitations noted above, a printed list of standard exceptions and exclusions listing items not covered by your title insurance policy may be attached as an exhibit item to your report. Unlike the numbered exclusions, which are specific to the property you are buying, these are standard exceptions and exclusions appearing in title insurance policies. The review of this section is important, as it sets forth matters which will not be covered under your title insurance policy, but which you may wish to investigate, such as governmental laws or regulations governing building and zoning.

Will the Preliminary Report disclose the complete condition of the title to a property?
No. It is important to note that the preliminary report is not a written representation as to the condition of title and may not list all liens, defects, and encumbrances affecting title to the land, but merely report the current ownership and matters that the title company will exclude from coverage if a title insurance policy should later be issued.

Is a Preliminary Report the same thing as title insurance? Definitely not.

A preliminary report is an offer to insure, it is not a report of a complete history of recorded documents relating to the property. A preliminary report is a statement of terms and conditions of the offer to issue a title insurance policy, not a representation as to the condition of title.

These distinctions are important for the following reasons: first, no contract or liability exists until the title insurance policy is issued; second, the title insurance policy is issued to a particular insured person and others cannot claim the benefit of the policy.

Can I be protected against title risks prior to the close of the real estate transaction?
Yes, you can. Title companies can protect your interest through the issuance of “binders” and “commitments.”

A binder is an agreement to issue insurance giving temporary coverage until such time as a formal policy is issued. A commitment is a title insurer’s contractual obligation to insure title to real property once its stated requirements have been met.

Discuss with your title insurer the best means to protect your interests.

How do I go about clearing unwanted liens and encumbrances?
You will wish to carefully review the preliminary report. Should the title to the property be clouded, you and your agents will work with the seller and the seller’s agents to clear the unwanted liens and encumbrances prior to taking title.

Who can I turn to for further information regarding Preliminary Reports?
Your real estate agent and your attorney, should you choose to use one, will help explain the preliminary report to you. Your escrow and title company can also be helpful sources.

CONCLUSION: In a business which is directed at risk elimination, the efforts leading to the production of the preliminary report, which is designed to facilitate the issuance of a policy of title insurance, is perhaps the most important function undertaken.

Required Reporting to the I.R.S.
Sellers of real property will have certain information regarding the sale reported to the Internal Revenue Service.

This required reporting is a consequence of the Tax Reform Act of 1986; it is intended to encourage taxpayer compliance and aid in audit and enforcement efforts by the I.R.S.

To help you better understand this subject, the Land Title Association has answered some of the questions most commonly asked about Required Reporting to the I.R.S.

Who is required to report to the I.R.S.?
Sellers of real property, under guidelines established by the I.R.S., are required to have their gross proceeds from the sale reported on a Form 1099S. When a settlement agent is used, the I.R.S. makes this agent responsible for the delivery of the information on the Form 1099S.

The settlement agent generally will be the escrow agent or title company; however, it may be an attorney, real estate broker or other person providing settlement services.

What is an I.R.S. Form 1099S, and what will be reported?
The Form 1099S is the reporting form adopted by the I.R.S. for submitting the information required by law.

The information will be transferred onto magnetic media by the settlement agent who will store the information and make the required report to the I.R.S. The settlement agent is also responsible for keeping a master copy of all transactions reported.

In general, information required by the I.R.S. falls into the following categories:

1. The name, address and taxpayer ID number (social security or tax identification number) of the seller(s)
2. A general description of the property (in most cases an address)
3. The closing date of the transaction
4. The gross proceeds of the transaction (even though gross proceeds do not correspond to taxable income)
5. Any property involved as part of the transaction other than cash or cash equivalent
6. The name, address and taxpayer identification number of the settlement agent.

On what type of transactions is a Form 1099S required?

Currently, typical homeowner transactions covered include sales and exchanges of 1-4 family residential properties such as houses, townhouses, and condominiums. Also reportable is stock in cooperative housing corporations and mobile homes without wheels.

Specifically excluded from reporting are foreclosures and abandonment of real property and financing or refinancing of properties.

What happens if the seller(s) refuses to provide the taxpayer identification number for the Form 1099S?

Should the seller fail to provide the identification number and certify its correctness, the settlement agent may choose to:

1. Delay the closing of the transactions until the information is furnished, or
2. Complete the transaction and report to the I.R.S. that an attempt was made to obtain the information from the seller.

How is the sale reported when there is more than one seller involved or when multiple sellers do not own equal interests in the property?

Multiple sellers may allocate the gross proceeds among themselves for purposes of reporting. If there is no allocation, an incomplete allocation or conflicting allocations, then the entire gross proceeds will be reported for each seller.

Where can I go for further information on taxation of real property?

The I.R.S. provides free publications that explain the tax aspects of real estate transactions. You may wish to order:

• Publication #523 “Tax Information on Selling Your Home”
• Publication #530 “Tax Information for Home Owners”
• Publication #544 “Sales and Other Dispositions of Assets”
• Publication #551 “Basis of Assets”

To place your order, phone toll-free (800) 829-3676

Statements of Information

What’s in a name?
When a title company seeks to uncover matters affecting title to real property, the answer is, “Quite a bit.”

Statements of Information provide title companies with the information they need to distinguish the buyers and sellers of real property from others with similar names. After identifying the true buyers and sellers, title companies may disregard the judgments, liens or other matters on the public records under similar names.

To help you better understand this sensitive subject, the Land Title Association has answered some of the questions most commonly asked about Statements of Information.

What is a Statement of Information?
A Statement of Information is a form routinely requested from the buyer, seller and borrower in a transaction where title insurance is sought. The completed form provides the title company with information needed to adequately examine documents so as to disregard matters which do not affect the property to be insured, matters which actually apply to some other person.

What does a Statement of Information do?
Every day documents affecting real property–liens, court decrees, bankruptcies–are recorded.

Whenever a title company uncovers a recorded document in which the name is the same or similar to that of the buyer, seller or borrower in a title transaction, the title company must ask, “Does this document affect the parties we are insuring?” Because, if it does, it affects title to the property and would, therefore, be listed as an exception from coverage under the title policy.

A properly completed Statement of Information will allow the title company to differentiate between parties with the same or similar names when searching documents recorded by name. This protects all parties involved and allows the title company to competently carry out its duties without unnecessary delay.

What types of information are requested in a Statement of Information?
The information requested is personal in nature, but not unnecessarily so. The information requested is essential to avoid delays in closing the transaction.

You, and your spouse if you are married, will be asked to provide full name, social security number, year of birth, birthplace, and information or citizenship. If you are married, you will be asked the date and place of your marriage.

Residence and employment information will be requested, as will information regarding previous marriages if you are divorced.

Will the information I supply be kept confidential?
The information you supply is completely confidential and only for title company use in completing the search of records necessary before a policy of title insurance can be issued.

What happens if a buyer, seller or borrower fails to provide the requested Statement of Information?
At best, failure to provide the requested Statement of Information will hinder the search and examination capabilities of the title company, causing delay in the production of your title policy.

At worst, failure to provide the information requested could prohibit the close of your escrow. Without a Statement of Information, it would be necessary for the title company to list as exceptions from coverage judgments, liens or other matters which may affect the property to be insured. Such exceptions would be unacceptable to most lenders, whose interest must also be insured.

Conclusion
Title companies make every attempt in issuing a policy of title insurance to identify known risks affecting your property and to efficiently and correctly transfer title so as to protect your interests as a homebuyer.

By properly completing a Statement of Information, you allow the title company to provide the service you need with the assurance of confidentiality.

Title Insurance Requirements for Insuring Trusts

In today’s world of busy probate courts and exorbitant death taxes, the living trust has become a common manner of holding title to real property. The following may help you understand a few of the requirements of the title insurance industry if title to property is conveyed to the trustee of a living trust.

What is a trust?
An agreement between a trustor and trustee for the trustee to hold title to and administer designated assets of the trustor for the use and benefit of one or more beneficiaries.

Can a trust itself acquire and convey interests in real property?
No. The trust is an arrangement between a trustee and the trustor. Only the trustee, on behalf of the trust, may own and convey any interest in real property. The trustee may only exercise the powers granted in the trust.

What will the title company require if a trustee holds the title to the property which is part of the trust?

First, a certification that the Trust and amendments (if any) are complete, the names of the present trustees of the trust, and a statement that the trustees are empowered by the trust to complete the proposed transaction.

Second, at the discretion of the title company, a full copy of the trust and any amendments.

My trust contains certain amounts of money to be given to various charities which is none of your business. Can I omit these pages?
Because many different provisions may be on the same page, the answer must be no — but if the title company requires a copy of the trust, it may accept a copy with those amounts blacked out.

If there is more than one trustee, can just one sign?
Maybe. The trust must specifically provide for less than all to sign.

Can the trustee give someone a power-of-attorney?
Only if the trust specifically provides for the appointment of an attorney-in-fact.

What will the title company require if all the trustees have died or are unwilling to act?
If the trustor is not able to do so, or the trust provisions prohibit the trustor from appointing a new trustee, the court may do so.

How does a notary acknowledge the signature of the trustee?
Title is vested in the trustee. Hence, if the trustee is an individual or a corporation, then the new general form of acknowledgment will be prepared to reflect the intrinsic nature of the trustee.

How would the deed to the trustee ordinarily be worded to transfer title to the trustee?

“John Doe and Mary Doe, as trustees of the Doe family trust, under declaration of trust dated January 1,1992.”

Are there any limitations on what a trustee may do?
Yes, the trustee is limited principally and most importantly by the provisions of the trust and, thus, may only act within the terms of the trust. The probate code contains general powers which, unless limited by the trust agreement, are sufficient for title insurers to rely on for sale, conveyance, and refinance purposes.

Title Insurance When Refinancing Your Loan
Lower interest rates have motivated you to refinance your home loan. The lower rate may save you a tremendous amount of money over the life of the loan, but you should also expect to pay the lender the typical closing costs associated with any new loan, including service fees, points, title insurance protection and other expenses.

Why do I need to purchase a new title insurance policy on a refinanced loan?
To the lender, a refinance loan is no different than any other home loan. So, your lender will want to insure that their new loan is protected by title insurance, just as the original lender required. Therefore, when you refinance you are buying a title policy to protect your lender.

Why does a Lender need title insurance?
Most lenders generate loans and then immediately sell those loans to secondary market investors, such as FannieMae.

FannieMae, in order to protect its security interest in the loan, requires title insurance coverage. Even those lenders who keep original loans in their portfolio are wise to get a lenders policy to protect their investment against title related defects.
When I purchased my home, didn’t I also buy a lender’s policy?
Perhaps. Who pays for the lender’s policy on a purchase loan varies regionally and by the terms of individual contracts.

However, even if you did buy a lender’s policy when you purchased your home, the lender’s policy remains in force only during the life of the loan that was insured. If you refinance, the old loan is paid off (the “life” of the loan expires) and a new loan is issued for which the lender will require a new title insurance policy.

What about my original title insurance policy?
When you bought your home, you purchased a Homeowners title policy. The Homeowners’ policy stays in force as long as you or your heirs own the home. When you refinance, your lender will often require that you purchase a new lender’s policy to protect their new security interest in the property. Thus, you are buying a policy to protect your lender, not a new Homeowner’s policy.

What could possibly have happened since I purchased my home which warrants a new lender’s policy?
Since the time that the original loan was made, you may have taken out a second trust deed on the house or had mechanic’s liens, child support liens or legal judgments recorded against you – events that could result in serious financial losses to an unprotected lender. Regardless if it has been only 6 months or less since you purchased or refinanced your home, a myriad of title defects could have occurred. While you may not have any title defects, many Homeowners do. The only way for a lender to adequately protect itself is to get a new lender’s policy each time you purchase or refinance your home.

Are there any discounts available for title insurance on a refinance transaction?

Yes. Title companies offer a refinance transaction discount or a short-term rate. Discounts may also be available if you use the same lender for your refinance loan and your original loan. Be sure to ask your title company how they can save you money.

Creative financing
Creative financing: You’ve heard of it, and, as a seller, the idea sounds pretty attractive. But, do you know everything you need to know about carrying back a second; essentially, about becoming a lender? You better know the same things that financial institutions know – you better know about lender’s title insurance.

It’s time to sell your $150,000 home, a home that you have owned for fifteen years, a home in which you have substantial equity. The loan terms call for a $20,000 down payment from your buyer, a new $100,000 loan from a local savings and loan, and for you, the seller, to carry back a note for the remaining $30,000.

Will you, the seller, need title insurance?
Yes, you will. Everyone who retains an interest in the property needs title insurance. When you took on the role of lender, you retained a record title interest which you will want to protect for the term of the loan.

But, why would you need lender’s title insurance when the repayment of your loan is assured by a lien in the form of a recorded deed of trust against the property? What could possibly go wrong?

You must insure yourself for the same reason that financial institutions obtain title insurance – for the protection of your investment. You must be assured that your lien on the property cannot be defeated by a prior lien or other interest in the property, which, if exercised, would wipe out your security.

Anything that involves the new buyer’s ownership rights to the property is of direct interest to you because you are holding the second mortgage. If such ownership rights are in question or defective, you may have trouble collecting your monthly mortgage payments. But, you say, there is nothing in your property’s history that could cause problems: no problems with easements, no problems with boundaries, no problems with rights-of-way.

Contrary to what may be popular belief, these matters are not the only source of title problems; a large proportion of title problems arise out of man’s interaction with man. The fact of a marriage, a divorce, a death, a forgery, a judgment for money damages, a failure to pay state or federal taxes – these occurrences can and usually will affect your rights as a mortgage lender.

As an example of what can befall the lender, did you know that a federal tax lien recorded against your “buyer” before the loan transaction is concluded may result in the loss of security in “your” home? Sophisticated mortgage lenders are aware of this possibility as well as many others which could jeopardize their loan security and seek the protection afforded by a lender’s title insurance policy.

If you are considering carrying back a second, be sure to get all the facts regarding the benefits of lender’s title insurance. Your local title insurance company should be happy to provide the information you need.

Article by CLTA