Real Estate Legal Forms

Real Estate transactions are often the largest and longest-lasting an individual or business may enter. These Real Estate forms include all those you will need for the sale, purchase or management of your real properties.

Real Estate transaction are often the largest and longest-lasting an individual or business may enter. Our Real Estate forms are designed to fit a variety of real estate related needs. By having everything in writing you can minimize or all-together avoid any potential problems at a later time. These forms cover areas like:
  • Purchasing or leasing property or land
  • Building and construction
  • Managing properties
  • Transferring property
Common Real Estate forms include:
  • Contracts for sale and purchase
  • Mortgage agreements and assignments
  • Liens
  • Contractors and construction forms
  • Real estate disclosures
  • Property management agreements

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Purchasing Real Estate - the Easy Way vs. the Hard Way

Real estate can comprise some of the most powerful investments you make in your lifetime. That’s why it’s so important that you understand exactly what you get yourself into with every purchase.



But there are easy ways and hard ways to purchase real estate, which anyone experienced in the field will tell you. The easy way to make a real estate purchase is to rely on time-tested legal forms that apply to your specific situation, guaranteeing a quick and relatively easy transaction.

The hard way? Well, let’s put it this way: the hard way involves unclear documentation, unwritten contracts, and a lot of legal mumbo jumbo.

You need to avoid the hard way. Here’s how.

Getting Everything in Writing

There are a number of ways to get your real estate purchase in writing because there are so many different ways to actually acquire real estate. So it’s important that if you’re starting out in this new field of endeavor, you need to consult with experienced experts who can point you in the direction of the right forms to use, the right contracts to sign, and the right paperwork to file.

After all, getting everything in writing does compromise the core premise of purchasing real estate the easy way. Having everything in writing doesn’t necessarily make an agreement much more ironclad than a verbal agreement – but it does, for all intents and purposes, provide just that. How? Because a written agreement also doubles as proof of the agreement. It’s hard to get more ironclad than that.

That’s the easy way to purchase real estate: get everything in writing. But there’s one type of situation you’ll want to avoid…

Common Pitfalls to Beware Of

Although having everything in writing seems like a single, one-stop principle to ensuring every real estate purchase works smoothly, remember that not all paperwork is created equal. There are some written contracts that might promise you the sale of the property – but don’t necessarily promise that the person selling you the property even owns the property. In other words, you need to match the paperwork you’re using with the specific situation you face.

That’s why you’ll want to know the individual uses of forms like quitclaim deeds and every other piece of paperwork you come across in the real estate field. It might sound like a lot to study at first but believe us – it will start to make sense as you draw the distinctions between each type of real estate form that you use.

If this sounds like the “hard way” to buy real estate, you’re not looking at things from a long-term perspective. Sure, doing a lot of research to ensure that all your paperwork is on the up-and-up is time-consuming at first, but it will lead to a lot less headaches in the long run. If you remember that medicine doesn’t always taste good, you can prevent yourself a lot of potential future troubles. Get the paperwork right and your real estate purchase should go off without a hitch.

Are You Ready to Buy?

There are many reasons that make buying your own home a good idea. You can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes, too. Interest will compose nearly all of your monthly payments, for over half the number of years you’ll be paying your mortgage. This adds up to hefty savings at the end of each year. You’re also allowed to deduct the property taxes you pay as a homeowner. If you rent, you write your monthly check and it’s gone forever. Another financial plus in owning a home is the possibility that its value will go up through the years.

If you have had bad credit, and don’t have much for a down payment, you may still be able to become a home buyer. You may be a good candidate for one of the federal mortgage programs that are available. A good place for you to start is by contacting one of the HUD-funded housing counseling agencies (HUD is the U.S. Department of Housing and Urban Development) [www.hud.gov]. They can help you sort through your options. In addition, contact your local government to see if there are any local home ownership programs that might work for you. Look in the blue pages of your phone directory for your local office of housing and community development.

Most people who rent the home that they are living in can afford to buy a home with the right planning. In order to know about your home-buying potential, it will be useful for you to take a look at your income, savings, monthly expenses, and debt. All of these are important factors in how much mortgage you can afford and also in how purchasing a home can affect your monthly budget. Together the following four categories are a guide that will give you a better understanding of your financial situation.

Income: Review your income. Purchasing a home may require that you have a certain amount in savings that can be applied to your down payment and closing costs. If you don’t have a lot of cash available, there are loan programs available, especially through FHA (Federal Housing Administration) and VA (Veteran’s Administration) mortgage programs that do not require much cash payment at closing. Some questions to consider:

• On average, what is your monthly income?
• Will your income remain stable in the near future?
• Are you expecting any increase or decrease in income in the near future?

Savings: Review your savings. A little savings can help a great deal when planning to purchase a home. There are some costs that you cannot finance through your loan; you have to pay those at closing, the day that you buy your home. Some questions to consider:

• What portion of your income are you saving?
• Can you save more money than you are now?

Monthly expenses: Monthly expenses may increase. The purchase of your home will likely change how much you will need to spend on expenses every month. If you have trouble saving now, your finances may be too tight after the purchase of a home. Some questions to ask yourself:

• How will buying a home affect my monthly budget and my ability to save?
• Can I support the additional expenses that the purchase of a home will bring?
• Do I expect to maintain a stable income for the foreseeable future?

Debt responsibilities: Review your debt responsibilities. Consider how your debt, in relation to your income, will influence a lender’s decision on your mortgage loan amount. Carefully consider how additional debt from house payments, on top of your existing debt, will restrict your lifestyle. Some questions to ask yourself:

• How much debt can I afford to manage comfortably?
• Will I be able to manage my debt responsibilities through the life of my loan? **

Common Mortgage Definitions And Calculations

Following are some definitions and calculations that will help you understand some of the terms and figures that lenders use to determine if you can afford to purchase a particular home. Mortgage lenders use many of the following basic mortgage calculations in their mortgage qualification process.

- Cash Required (or funds required at closing): This is the total of a buyer’s closing costs and down payment amount.

Total Closing Costs + Down Payment = Cash Required

- Debt Ratio: This is the percentage of monthly income that can be applied toward monthly long-term debt obligations. Loan programs have different guidelines on debt ratio percentages. Government loan programs typically have higher debt ratio percent- ages, allowing more home-buyers to qualify for loans.

Debt Ratio = PITIO ÷ Total Monthly Income

- Down Payment: The Down Payment can be shown as the difference between the Home

- Front-End Ratio: This is the percentage of your monthly income that can be applied toward monthly house payments. Each loan program has different guidelines on front- end ratio percentages. Typically, government loan programs have higher front-end ratio percentages, allowing more home-buyers to qualify for loans.

Front-End Ratio = PITI ÷ Total Monthly Income

- Interest Rate: The interest rate determines the monthly interest payments over the lifetime of the loan.

- Interest Rate Point: A “point” or “discount point” is equivalent to 1 percent of the loan amount and usually reduces or “discounts” the loan rate by an eighth of a percentage point. For example: You want to get a loan for $100,000 to buy a home. Each “point” would cost you 1 percent of $100,000 or $1,000 but would reduce your loan’s interest rate by .125 percent. The lender might offer you an 8.0 percent loan with zero points, a 7.875 percent loan with one point, or a 7.75 percent loan with 2 points. Points are an up-front payment, in addition to the down payment that is required upon closing. In some cases, lenders will allow borrowers to finance the points over the term of the loan. Lenders sometimes use points to make their interest rates appear lower. Be aware that lower interest rate offered by a lender may translate into higher points requirements.

- Maximum Loan Amount: This figure is the sum of the total loan amount and other financed fees. It represents the maximum amount that the lender is willing to offer based on constraints including income, debt, and cash available. This maximum loan amount is set by the lender or by the specific type of loan. For example, a lender offering to finance a $100,000 home with a LTV (Loan to Value ratio) of 97 percent approves a maximum loan amount of $97,000. The buyer must include the remaining 3 percent ($3,000 in this example) in the down payment.

Home Sales Price × Loan to Value (LTV) percent = Maximum Loan Amount

- PITI: This figure is the sum of Principal, Interest, Property Taxes, and Insurance payments. For most homeowners, PITI represent the amount of their monthly mortgage payment.

Principal + Interest + Property Tax + Insurance = PITI

- PITIO: This figure is the sum of Principal, Interest, Taxes, Insurance, and Other monthly non-housing costs, basically all of the money that you usually spend in a month.

Principal + Interest + Property Tax + Insurance + Total Other Costs = PITIO

- Sales Price and the Loan Amount: This is one of the main parts of the “up-front” cash required at closing. It represents a percentage of the home sales price paid at closing. For example: a 20 percent down payment on a $100,000 sales price is equivalent to a down payment of $20,000 at closing.

Home Sales Price – Loan Amount = Down Payment

 

Finding the Perfect Home

Your home should fit the way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities, including things like location and size. For example, should the house be:

• Close to certain schools?

• Close to your job?

• Close to public transportation?

• How large should the house be?

• What type of lot do you prefer?

• What kinds of amenities are you looking for?

Establish a set of minimum requirements and a “wish list.” Minimum requirements are things that a house must have for you to consider it, while a “wish list” covers things that you’d like to have but that aren’t essential. Select a community that will allow you to best live your daily life. Many people choose communities based on schools. When you find places that you like, talk to people who live there. They know the most about the area and will be your future neighbors. More than anything, you want a neighbor- hood where you feel comfortable. For example:

• Do you want access to shopping and public transportation?

• Is access to local facilities like libraries and museums important to you?

• Do you prefer the peace and quiet of a rural community?

If you ever feel that you are being excluded from certain neighborhoods, sections of a community, or a particular house, immediately contact the U.S. Department of Housing and Urban Development (HUD). Also, contact HUD if you believe you are being discriminated against on the basis of race, color, religion, sex, nationality, familial status, or disability. HUD’s Office of Fair Housing has a hotline for reporting incidents of discrimination: 1-800-669-9777 (or on the HUD website at: www.hud.gov).

You can get information about school systems by contacting the city or county school board or the local schools. Your real estate agent may also be knowledgeable about schools in the area. Contact the local chamber of commerce for promotional literature or talk to your real estate agent about welcome kits, maps, and other information. You may also want to visit the local library. It can be an excellent source for information on local events and resources, and the librarians will probably be able to answer many of the questions you have.

You should look at each home for its individual characteristics. Generally, older homes may be in more established neighborhoods, offer more ambiance, and have lower property tax rates. People who buy older homes, however, shouldn’t mind maintaining their home and making some repairs. Newer homes tend to use more modern architecture and systems, are usually easier to maintain, and may be more energy-efficient. People who buy new homes often don’t want to worry initially about upkeep and repairs. In addition to comparing the home to your minimum requirement and wish lists, consider the following:

• Is there enough room for both the present and the future? • Are there enough bedrooms and bathrooms?

• Is the house structurally sound?

• Do the mechanical systems and appliances work?

• Is the yard big enough?

• Do you like the floor plan?

• Will your furniture fit in the space?

• Is there enough storage space? (Bring a tape measure to better answer these questions.)

• Will the seller repair or replace the items?

• Imagine the house in good weather and bad, and in each season.

• Will you be happy with it year-round?

• Does anything need to be replaced?

• What things require ongoing maintenance (e.g., paint, roof, heating, air conditioning, appliances, carpet)?

• Also ask about the house and neighborhood, focusing on quality of life issues.

Be sure the seller’s or real estate agent’s answers are clear and complete. Ask questions until you understand all of the information they’ve given. Making a list of questions ahead of time will help you organize your thoughts and arrange all of the information you receive. Take your time and think carefully about each house you see. Ask your real estate agent to point out the pros and cons of each home from a professional stand- point. Many of your questions should focus on potential problems and maintenance issues. If possible, take photographs of each house: the outside, the major rooms, the yard, and extra features that you like or ones you see as potential problems. And don’t hesitate to return for a second look. Visit as many homes as it takes to find the one you want. On average, home buyers see fifteen houses before choosing one. Just be sure to communicate often with your real estate agent about everything you’re looking for. It will help avoid wasting your time. **

Home Buyer’s Rights

Here is an overview of some important rights you have as a homebuyer:

Consumer Credit Protection Act (1960): Guarantees confidentiality of credit reports and allows customers to correct inaccurate information in their reports.

Equal Credit Opportunity Act of 1975 (ECOA): Prohibits the discrimination in any credit action based on race, sex, marital status, color, religion, age, handicap, or national origin.

Equal Housing Opportunity Act: Prohibits housing discrimination based on race, sex, marital status, color, religion, age, handicap, family status or national origin.

Fair Housing Act: Prohibits the discrimination based on race, sex, marital status, handicap, or national origin in any real estate transaction.

Federal Consumer Credit Protection Act (commonly known as the Truth in Lending Act) (1969): Requires that lenders disclose the actual terms and conditions of a loan before an applicant commits to the loan.

Federal Interstate Land Sales Disclosure Act (1968): Requires land developers to register subdivisions of 100 or more non-exempt lots with HUD and to provide each purchaser with a disclosure document that contains relevant information about the subdivision.

Home Mortgage Disclosure Act (1975): Provides information to help determine whether public institutions are assisting the housing needs of their communities and neighborhoods.

Real Estate Settlement Procedures Act of 1974 (RESPA): Encouraging home ownership through consumer protection, this act regulates certain lending actions related to closing/settlement. Some of its provisions are:

-RESPA requires lenders to provide buyers a good faith estimate of the cost of the loan, including disclosure of the Annual Percentage Rate (APR).
-RESPA requires lenders to provide buyers with general information about settlement costs. Lenders must provide buyers a copy of the Mortgage Servicing Disclosure Statement, regarding loan servicing and transfer. Within three days after receiving the loan application, lenders must provide the buyer with an estimate of closing costs and monthly payments.
-RESPA provides the borrower the opportunity to see the HUD-1 Settlement Statement one day before the actual settlement. Prohibits kickbacks between Real Estate professionals for referrals and prohibits fee-splitting and receiving unearned fees for services not rendered.

Regulation B of the Consumer Credit Protection Act: Requires lenders to inform potential borrowers of any adverse actions taken on their loan applications.

Regulation Z: Includes regulations related to consumer credit disclosures identified in the Consumer Credit Protection Act.

Veterans Housing Benefits Act (1978): Increases the housing benefits for eligible veterans including increased loan amounts. **

Making an Offer on a Home

You have found the right house. Now, there are several things you should consider:

• Is the asking price in line with prices of similar homes in the area?
• Is the home in good condition or will you have to spend a substantial amount of money making it the way you want it? You probably want to get a professional home inspection before you make your offer.

• How long has the home been on the market? If it’s been for sale for awhile, the seller may be more eager to accept a lower offer?
• How much mortgage will be required? Make sure you really can afford whatever offer you make.
• How much do you really want the home? The closer you are to the asking price, the more likely your offer will be accepted. In some cases, you may even want to offer more than the asking price, if you know you are competing with others for the house.

If you use a real estate agent, they will assist you in making an offer, which will include the following information:

• Complete legal description of the property
• Amount of earnest money
• Down payment and financing details
• Proposed move-in date
• Price you are offering
• Proposed closing date (date when you will pay final price and seller will give you the keys to the home)
• Length of time the offer is valid
• Details of the deal

If your offer is rejected, you begin negotiating. You may have to offer more money, but you may ask the seller to cover some or all of your closing costs or to make repairs that wouldn’t normally be expected. Often, negotiations on a price go back and forth several times before a deal is made. Just remember, don’t get so caught up in negotiations that you lose sight of what you really want and can afford.

Remember that a sale commitment depends on negotiating a satisfactory contract with the seller, not just making an offer. Other ways to lower insurance costs include insuring your home and car(s) with the same company, increasing home security, and seeking group coverage through alumni or business associations. Insurance costs are always lowered by raising your deductibles, but this exposes you to a higher out-of-pocket cost if you have to file a claim.

Unless you have a buyer’s agent, remember that the agent works for the seller. Make a point of asking him or her to keep your discussions and information confidential. Listen to your real estate agent’s advice, but follow your own instincts on deciding a fair price. Calculating your offer should involve several factors: what homes sell for in the area, the home’s condition, how long it’s been on the market, financing terms, and the seller’s situation. By the time you’re ready to make an offer, you should have a good idea of what the home is worth and what you can afford. Be prepared for give- and-take negotiations, which are very common when buying a home. The buyer and seller may often go back and forth until they can agree on a price.

Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5 percent of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal, you may have to forfeit the entire amount. If your offer is accepted, your next step is to secure financing from a lender. The issues involved in financing have already been covered. With your financing secure, you then proceed to your “closing” on the property. **

What Should I Expect at the Closing?

Closing is the final step in buying a home. It is the meeting in which the buyer will pay closing costs and sign a mortgage or deed of trust and the seller will turn over the deed to the property and the keys. Before a closing the buyer will have a final walk-through of the home. This will likely be the first opportunity to examine the house without furniture, giving the buyer a clear view of everything. Check the walls and ceilings carefully, as well as any work the seller agreed to do in response to the inspection. Any problems discovered previously that you find uncorrected should be brought up prior to closing. It is the seller’s responsibility to fix them.

RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process, By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing, escrow account practices, and business relationships between closing service providers and other parties to the transaction. For more information on RESPA, visit the web page at: http://www.hud.gov/fha/sfh/res/respa_hm.html or call 1-800-217-6970 for a local counseling referral.

At your closing, you’ll sit at a table with your broker, the broker for the seller, probably the seller, and a closing agent. The closing agent will have a stack of papers for you and the seller to sign. While he or she will give you a basic explanation of each paper, you may want to take the time to read each one and/or consult with your agent to make sure you know exactly what you’re signing. After all, this is a large amount of money you’re committing to pay for a lot of years. Before you go to closing, your lender is required to give you a booklet explaining the closing costs, a “good faith estimate” of how much cash you’ll have to supply at closing, and a list of documents you’ll need at closing. If you don’t get those items, be sure to call your lender before you go to closing.

Don’t hesitate to ask questions. You can also look over all of the forms included in this book to get an idea of the basic type of forms that you will be signing at your closing. You’ll present your paid homeowner’s insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc. ) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proof of any inspection, warranties, etc.

Once you’re sure you understand all the documentation, you’ll sign the mortgage, agreeing that if you don’t make payments the lender is entitled to sell your property and apply the sale price against the amount you owe plus expenses. You’ll also sign a mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed. You’ll pay the lender’s agent all closing costs and, in turn, he or she will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage will then be recorded in the state or county Registry of Deeds, and you will be a homeowner.

At closing, you should get the following:

• HUD Settlement Statement (itemizes services provided and the fees charged; it is filled out by the closing agent and must be given to you at or before closing).
• Truth-in-Lending Statement
• Any required disclosure statements (Many states require various disclosures about the condition of the property, home, or local problems, such as proximity to a landfill.
• Promissory Note
• Bill of Sale for any personal property included with the sale
• Mortgage or Deed of Trust
• Keys to your new home! **

Abstract of title: A historical summary provided by a title insurance company of all records affecting the title to a property.

Acceleration clause: Allows a lender to declare the entire outstanding balance of a loan immediately due and payable should a borrower violate specific loan provisions or default on the loan.

Adjustable rate mortgage (ARM): A variable or flexible rate mortgage with an interest rate that varies according to the financial index it is based upon. To limit the borrower’s risk, the ARM may have a payment or rate cap. See also cap.

Amenities: Features of your home that fit your preferences and can increase the value of your property. Some examples include the number of bedrooms, bathrooms, or vicinity to public transportation.

Amortization: The liquidation of a debt by regular, usually monthly, installments of principal and interest. An amortization schedule is a table showing the payment amount, interest, principal and unpaid balance for the entire term of the loan.

Annual cap: See cap.

Annual percentage rate (APR): The actual interest rate, taking into account points and other finance charges, for the projected life of a mortgage. Disclosure of APR is required by the Truth-in-Lending Law and allows borrowers to compare the actual costs of different mortgage loans.

Appraisal: An estimate of a property’s value as of a given date, determined by a quali- fied professional appraiser. The value may be based on replacement cost, the sales of comparable properties or the property’s ability to produce income.

Appreciation: A property’s increase in value due to inflation or economic factors.

APR: See annual percentage rate.

ARM: See adjustable rate mortgage.

Assessment: Charges levied against a property for tax purposes or to pay for municipality or association improvements such as curbs, sewers, or grounds maintenance.

Assignment: The transfer of a contract or a right to buy property at given rates and terms from a mortgagee to another person.

Assumption: An agreement between a buyer and a seller, requiring lender approval, where the buyer takes over the payments for a mortgage and accepts the liability. Assuming a loan can be advantageous for a buyer because there are no closing costs and the loan’s interest rate may be lower than current market rates.

Balloon mortgage: Mortgage with a final lump sum payment that is greater than pre- ceding payments and pays the loan in full.

Biweekly mortgage: A loan requiring payments of principal and interest at two-week intervals. This type of loan amortizes much faster than monthly payment loans. The payment for a biweekly mortgage is half what a monthly payment would be.

Bond: A certificate serving as security for payment of a debt. Bonds backed by mortgage loans are pooled together and sold in the secondary market.

Bridge loan: A loan to “bridge” the gap between the termination of one mortgage and the beginning of another, such as when a borrower purchases a new home before receiving cash proceeds from the sale of a prior home. Also known as a “swing loan.”

Broker: An intermediary between the borrower and the lender. The broker may represent several lending sources and charges a fee or commission for services.

Buy-down: Where the buyer pays additional discount points or makes a substantial down payment in return for a below market interest rate; or the seller offers 3-2-1 interest payment plans or pays closing costs such as the origination fee.

Cap: A limit in how much an adjustable rate mortgage’s monthly payment or interest rate can increase. A cap is meant to protect the borrower from large increases and may be a payment cap, an interest cap, a life-of-loan cap or an annual cap. A payment cap is a limit on the monthly payment. An interest cap is a limit on the amount of the interest rate. A life-of-loan cap restricts the amount the interest rate can increase over the entire term of the loan. An annual cap limits the amount the interest rate can increase over a twelve-month period.

Certificate of reasonable value (CRV): A Veteran’s Administration appraisal that establishes the maximum VA mortgage loan amount for a specified property.

Certificate of title: Document rendering an opinion on the status of a property’s title based on public records.

Closed-end mortgage: A mortgage principal amount that is fixed and cannot be increased during the life of the loan. See also open-end mortgage.

Closing costs: Costs payable by both seller and buyer at the time of settlement, when the purchase of a property is finalized.

Cloud: A claim to the title of a property that, if valid, would prevent a purchaser from obtaining a clear title.

Collateral: Something of value pledged as security for a loan. In mortgage lending, the property itself serves as collateral for a mortgage loan.

Commitment fee: A fee charged when an agreement is reached between a lender and a borrower for a loan at a specific rate and points and the lender guarantees to lock in that rate. Co-mortgagor: One who is individually and jointly obligated to repay a mortgage loan and shares ownership of the property with one or more borrowers. See also co-signer.

Condominium: An individually owned unit within a multi-unit building where others or a condominium owners association share ownership of common areas such as the grounds, the parking facilities, hallways, etc.

Conforming loan: A loan that conforms to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. See also non-conforming loan.

Construction loan: A short-term loan financing improvements to real estate, such as the building of a new home. The lender advances funds to the borrower as needed while construction progresses. Upon completion of the construction, the borrower must obtain permanent financing or pay the construction loan in full.

Consumer handbook on adjustable rate mortgages (CHARM): A disclosure required by the federal government to be given to any borrower applying for an adjustable rate mortgage (ARM).

Conventional loan: A mortgage loan that is not insured, guaranteed or funded by the Veterans Administration (VA), the Federal Housing Administration (FHA) or Rural Economic Community Development (RECD) (formerly Farmers Home Administration).

Convertible mortgage: An adjustable rate mortgage (ARM) that allows a borrower to switch to a fixed-rate mortgage at a specified point in the loan term.

Co-signer: One who is obligated to repay a mortgage loan should the borrower default but who does not share ownership in the property. See also co-mortgagor.

Covenants: Rules and restrictions governing the use of property.

CRV: See certificate of reasonable value.

Curtailments: The borrower’s privilege to make payments on a loan’s principal before they are due. Paying off a mortgage before it is due may incur a penalty if so specified in the mortgage’s prepayment clause.

Debt: Money owed to repay someone.

Debt-to-income ratio: The ratio between a borrower’s monthly payment obligations divided by his or her net effective income (FHA or VA loans) or gross monthly income (conventional loans).

Deed of trust: A document, used in many states in place of a mortgage, held by a trustee pending repayment of the loan. The advantage of a deed of trust is that the trustee does not have to go to court to proceed with foreclosure should the borrower default on the loan.

Department of Housing and Urban Development (HUD): The U. S. government agency that administers FHA, GNMA and other housing programs.

Discount points: Amounts paid to the lender based on the loan amount to buy the interest rate down. Each point is one percent of the loan amount; for example, two points on a $100,000 mortgage is $2,000.

Down payment: The difference between the purchase price and mortgage amount. The down payment becomes the property equity. Typically it should be cash savings, but it can also be a gift that is not to be repaid or a borrowed amount secured by assets.

Due-on-sale: A clause in a mortgage or deed of trust allowing a lender to require immediate payment of the balance of the loan if the property is sold (subject to the terms of the security instrument).

Duplex: Dwelling divided into two units.

Earnest money: Deposit in the form of cash or a note, given to a seller by a buyer as good faith assurance that the buyer intends to go through with the purchase of a property.

Easement: The right one party has in regard to the property of another, such as the right of a public utility company to lay lines.

Equal Credit Opportunity Act: A federal law prohibiting lenders and other creditors from discrimination based on race, color, sex, religion, national origin, age, marital status, receipt of public assistance or because an applicant has exercised his or her rights under the Consumer Credit Protection Act.

Equity: The value of a property beyond any liens against it. Also referred to as “owner’s interest.”

Escape clause: A provision allowing one party or more to cancel all or part of the contract if certain events fail to happen, such as the ability of the buyer to obtain financing within a specified period.

Escrow: Money placed with a third party for safekeeping either for final closing on a property or for payment of taxes and insurance throughout the year.

Fair market value: The price a property can realistically sell for, based upon comparable selling prices of other properties in the same area.

Fannie Mae: Nickname for Federal National Mortgage Association (FNMA).

Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac): A quasi-govern- mental, federally-sponsored organization that acts as a secondary market investor to buy and sell mortgage loans. FHLMC sets many of the guidelines for conventional mortgage loans, as does FNMA.

Federal Housing Administration (FHA): An agency within the Department of Housing and Urban Development that sets standards for underwriting and insures residential mortgage loans made by private lenders. One of FHA’s objectives is to ensure affordable mortgages to those with low or moderate income. FHA loans may be high loan-to-value, and they are limited by loan amount.

Federal National Mortgage Association (FNMA or Fannie Mae): A private corporation that acts as a secondary market investor to buy and sell mortgage loans. FNMA sets many of the guidelines for conventional mortgage loans, as does FHLMC. The major purpose of this organization is to make mortgage money more affordable and more available.

Fee simple: The maximum form of ownership, with the right to occupy a property and sell it to a buyer at any time. Upon the death of the owner, the property goes to the owner’s designated heirs. Also known as “fee absolute.”

FHA: See Federal Housing Administration.

Fifteen-year mortgage: A loan with a term of 15 years. Although the monthly payment on a 15-year mortgage is higher than that of a 30-year mortgage, the amount of interest paid over the life of the loan is substantially less.

Fixed-rate mortgage: A mortgage whose rate remains constant throughout the life of the mortgage.

Flood insurance: The Federal Flood Disaster Protection Act of 1973 requires that federally- regulated lenders determine if real estate to be used to secure a loan is located in a Specially Flood Hazard Area (SFHA). If the property is located in a SFHA area, the borrower must obtain and maintain flood insurance on the property. Most insurance agents can assist in obtaining flood insurance.

FNMA: See Federal National Mortgage Association.

Freddie Mac: Nickname for Federal Home Loan Mortgage Corporation (FHLMC).

Gift: This includes amounts from a relative or a grant from the borrower’s employer, a municipality, non-profit religious organization, or non-profit community organization that does not have to be repaid.

Ginnie Mae: Nickname for Government National Mortgage Association (GNMA).

Good faith: Estimate on closing costs and monthly mortgage payments provided by the lender to the homebuyer within 3 days of applying for a loan.

Government National Mortgage Association (GNMA or Ginnie Mae): A government organization that participates in the secondary market, securitizing pools of FHA, VA, and RHS loans.

Graduated payment mortgage (GPM): A fixed-interest loan with lower payments in the early years than the later years. The amount of the payment gradually increases over a period of time and then levels off at a payment sufficient to pay off the loan over the remaining amortization period.

Hazard insurance: A form of insurance that protects the insured property against physical damage such as fire and tornadoes. Mortgage lenders often require a borrower to maintain an amount of hazard insurance on the property that is equal at least to the amount of the mortgage loan.

Home equity loan: A mortgage on the borrower’s principal residence, usually for the purpose of making home improvements or debt consolidation.

Home inspection: A thorough review of the physical aspects and condition of a home by a professional home inspector. This inspection should be completed prior to closing so that any repairs or changes can be completed before the home is sold.

Homeowners insurance: A form of insurance that protects the insured property against loss from theft, liability and most common disasters.

Housing and Urban Development (HUD): The U. S. government agency that administers FHA, GNMA and other housing programs.

Housing affordability index: Indicates what proportion of homebuyers can afford to buy an average-priced home in specified areas. The most well known housing affordability index is published by the National Association of Realtors.

Housing expenses-to-income ratio: See debt-to-income ratio.

HUD: See Housing and Urban Development.

Income approach to value: A method used by real estate appraisers to predict a property’s anticipated future income. Income property includes shopping centers, hotels, motels, restaurants, apartment buildings, office space and so forth.

Income-to-debt ratio: See debt-to-income ratio.

Index: A published interest rate compiled from other indicators such as U.S. Treasury bills or the monthly average interest rate on loans closed by savings and loan organizations. Mortgage lenders use the index figure to establish rates on adjustable rate mortgages (ARMs).

Insurance: As a part of PITI, the amount of the monthly mortgage payment that does not include the principal, interest, and taxes. See also homeowners insurance.

Interest: The amount of the entire mortgage loan which does not include the principal. Also, as a part of PITI, the amount of the monthly mortgage payment which does not include the principal, taxes, and insurance.

Interest cap: See cap.

Interest rate: The simple interest rate, stated as a percentage, charged by a lender on the principal amount of borrowed money. See also Annual Percentage Rate.

Joint tenancy: See tenancy.

Jumbo loan: A nonconforming loan that is larger than the limits set by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines.

Key lot: Real estate deemed highly valuable because of its location.

Lien: A claim against a property for the payment of a debt. A mortgage is a lien; other types of liens a property might have include a tax lien for overdue taxes or a mechanics lien for unpaid debt to a subcontractor.

Life-of-loan cap: See cap.

Liquidity: The capability of an asset to be readily converted into cash.

Loan discount: See points.

Loan origination fee: See origination fee.

Loan-to-value ratio (LTV): The relationship, expressed as a percentage, between the amount of the proposed loan and a property’s appraised value. For example, a $75,000 loan on a property appraised at $100,000 is a 75 percent loan-to-value.

Lock-in: The guarantee of a specific interest rate and/or points for a specific period of time. Some lenders will charge a fee for locking in an interest rate.

Maintenance costs: The cost of the upkeep of the house. These costs may be minor in cost and nature (replacing washers in the faucets) or major in cost and nature (new heating system or a new roof) and can apply to either the interior or exterior of the house.

Margin: The amount a lender adds to the index of an adjustable rate mortgage to establish an adjusted interest rate. For example, a margin of 1. 50 added to a 7 percent index establishes an adjusted interest rate of 8. 50 percent.

Market value: The price a property can realistically sell for, based upon comparable selling prices of other properties in the same area.

Modification: A change in the terms of the mortgage note, such as a reduction in the interest rate or change in maturity date.

Mortgage: A legal instrument in which property serves as security for the repayment of a loan. In some states, a deed of trust is used rather than a mortgage.

Mortgage banker: A lender that originates, closes, services and sells mortgage loans to the secondary market.

Mortgage broker: An intermediary between a borrower and a lender. A broker’s expertise is to help borrowers find financing that they might not otherwise find themselves.

Mortgage insurance: Money paid to insure the lender against loss due to foreclosure or loan default. Mortgage insurance is required on conventional loans with less than a 20 percent down payment.

Mortgage interest: Interest rate charge for borrowing the money for the mortgage. It is a used to calculate the interest payment on the mortgage each month.

Mortgage term: The length of time that a mortgage is scheduled to exist. Example: a 30-year mortgage term is for 30 years.

Mortgagee: The lender.

Mortgagor: The borrower.

Negative amortization: A situation in which a borrower is paying less interest than what is actually being charged for a mortgage loan. The unpaid interest is added to the loan’s principal. The borrower may end up owing more than the original amount of the mortgage.

Non-assumption clause: In a mortgage contract, a statement that prohibits a new buyer from assuming a mortgage loan without the approval of the lender.

Non-conforming loan: A loan that does not conform to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. Jumbo loans are nonconforming. See also conforming loan.

Note: A signed document that acknowledges a debt and shows the borrower is obligated to pay it.

Open-end mortgage: A mortgage allowing the borrower to receive advances of principal from the lender during the life of the loan. See also closed-end mortgage.

Origination fee: The amount charged by a lender to originate and close a mortgage loan. Origination fees are usually expressed in points.

Payment cap: See cap.

P&I: Abbreviation for principal and interest.

PITI: Abbreviation for principal, interest, taxes and insurance.

Points: Charges levied by the lender based on the loan amount. Each point equals one percent of the loan amount; for example, two points on a $100,000 mortgage is $2,000. Discount points are used to buy down the interest rate. Points can also include a loan origination fee, which is usually one point.

Pre-qualification: Tentative establishment of a borrower’s qualification for a mortgage loan amount of a specific range, based on the borrower’s assets, debts, and income.

Prime rate: The interest rate commercial banks charge their most creditworthy customers.

Principal: The amount of the entire mortgage loan, not counting interest. Also, as a part of PITI, the amount of the monthly mortgage payment which does not include the interest, insurance, and taxes.

Private mortgage insurance (PMI): See mortgage insurance.

Property appraisal: See appraisal.

Property tax: The amount which the state and/or locality assesses as a tax on a piece of property.

Prorate: To proportionally divide amounts owed by the buyer and the seller at closing. Qualification: As determined by a lender, the ability of the borrower to repay a mortgage loan based on the borrower’s credit history, employment history, assets, debts and income.

Rate cap: See cap.

RESPA: Abbreviation for the Real Estate Settlement Procedures Act, which allows consumers to review settlement costs at application and once again prior to closing.

Reverse annuity mortgage: A type of mortgage loan in which the lender makes periodic payments to the borrower. The borrower’s equity in the home is used as security for the loan.

RHCDS: Rural Housing and Community Service.

Right of first refusal: Purchasing a property under conditions and terms made by another buyer and accepted by the seller.

Right of rescission: When a borrower’s principal dwelling is going to secure a loan, the borrower has three business days following signing of the loan documents to rescind or cancel the transaction. Any and all money paid by the borrower must be refunded upon rescission. The right to rescind does not apply to loans to purchase real estate or to refinance a loan under the same terms and conditions where no additional funds will be added to the existing loan.

Rural Housing and Community Development Service: A federal agency that administers mortgage loans for buyers in rural areas.

Second mortgage: A loan that is junior to a primary or first mortgage and often has a higher interest rate and a shorter term.

Secondary market: A market comprising investors like GNMA, FHLMC and FNMA, which buy large numbers of mortgages from the primary lenders and sell them to other investors. Servicing: The responsibility of collecting monthly mortgage payments and properly credit- ing them to the principal, taxes and insurance, as well as keeping the borrower informed of any changes in the status of the loan.

Settlement costs: See closing costs.

Survey: A physical measurement of property done by a registered professional showing the dimensions and location of any buildings as well as easements, rights of way, roads, etc.

Tax deed: A written document conveying title to property repossessed by the government due to default on tax payments.

Tax savings: The amount of money that the homeowner is not required to pay the government in taxes because he or she owns a home.

Taxes: As a part of PITI, the amount of the monthly mortgage payment which does not include the principal, interest, and insurance.

Tenancy: Joint tenancy: equal ownership of property by two or more parties, each with the right of survivorship. Tenancy by the entireties: ownership of property only between husband and wife in which neither can sell without the consent of the other and the property is owned by the survivor in the event of death of either party. Tenancy in common: equal ownership of property by two or more parties without the right of survivorship. Tenancy in severalty: ownership of property by one legal entity or a sole party. Tenancy at will: a license to use or occupy a property at the will of the owner.

Title: A formal document establishing ownership of property.

Title insurance: A policy issued by a title insurance company insuring the purchaser against any errors in the title search. The cost of title insurance may be paid for by the buyer, the seller or both.

Trust deed: See deed of trust.

Truth In Lending Act: The Truth In Lending Act requires lenders to disclose the Annual Percentage Rate and other associated costs to homebuyers within three working days of the loan application.

Underwriter: A professional who approves or denies a loan to a potential homebuyer based on the homebuyer’s credit history, employment history, assets, debts and other factors such as loan guidelines.

Uniform Settlement Statement: A standard document prescribed by the Real Estate Settle- ment Procedures Act containing information for closing which must be supplied to both buyer and seller.

Utility costs: Periodic housing costs for water, electricity, natural gas, heating oil, etc.

VA loan: See Veterans Administration.

Vacation home: See secondary residence.

Variable rate mortgage (VRM): See adjustable rate mortgage.

Veterans Administration (VA): The federal agency responsible for the VA loan guarantee program as well as other services for eligible veterans. In general, qualified veterans can apply for home loans with no down payment and a funding fee of 1 percent of the loan amount.

Walk-through: An inspection of a property by the prospective buyer prior to closing on a mortgage.

Warranty deed: A document protecting a homebuyer against any and all claims to the property.

Yield: The rate of earnings from an investment.

Zoning: The ability of local governments to specify the use of private property in order to control development within designated areas of land. For example, some areas of a neighborhood may be designated only for residential use and others for commercial use such as stores, gas stations, etc.

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