Resources: Glossary

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Note.—Are you relying on a website for legal advice? DON’T DO THAT!
This glossary is meant as a general introduction to help you
understand local real estate jargon. For substantive issues, please
consult a sensible legal, building, and/or other professional.

Adjustable Rate Mortgage (ARM): A mortgage in which the rate changes over time in line with prevailing interest rates. ARMs are also referred to as AMLs (adjustable mortgage loans) or VRMs (variable rate mortgages).

Adjustment Period: The length of time between interest rate changes on an ARM. For example, a loan with an adjustment period of one year is called a one-year ARM, which means that the interest rate can change once a year.

Amortization: Repayment of a loan in installments of principal and interest, rather than interest-only payments, so the debt is gradually reduced over time.

Annual Percentage Rate (APR): The total finance charge (interest, loan fees, points) expressed as a percentage of the loan amount.

Assumption of Mortgage: A buyer’s agreement to assume the liability under an existing note secured by a mortgage or deed of trust. The lender must first approve the buyer in order to release the original borrower (usually the seller) from liability.

Balloon Payment: A final lump-sum principal payment due at the end of some mortgages or other long-term loans.

Binder: Sometimes known as an “offer to purchase” or an “earnest money request.” A binder is the acknowledgment of a deposit along with a brief written agreement to enter into a contract for the sale of real estate.

Cap: The limit on how much interest rates or monthly payments can change, either at each adjustment or over the life of the mortgage.

CC&Rs: Covenants, Conditions, & Restrictions. A document that controls the use, requirements, and restrictions of owning a property.

Certificate of Reasonable Value (CRV): A document that establishes the maximum value and loan amount for a VA guaranteed loan.

Closing Statement: The financial disclosure statement that accounts for all of the funds received and due at the closing, including deposits for taxes and insurance.

Condominium: A type of ownership of a multi-unit building in which an owner receives separate title to a particular unit and has a proportionate interest in commonly owned areas such as lobbies, hallways, roofs, and yards. The interior surfaces of a unit (walls, ceiling, and floor) usually serve as the boundaries of a condo. Owners are governed by CC&Rs and other rules and regulations. A monthly maintenance and repair fee is usually collected, especially for larger buildings with elevators, door attendants, recreation facilities, and common HVAC systems.

Contingency: A condition that must be satisfied before a contract becomes binding. For instance, a sales agreement is usually contingent upon the buyer obtaining financing.

Conversion Clause: A provision in some ARMs that enables a borrower to change an ARM to a fixed-rate loan, usually after the first adjustment period. The new fixed rate is generally set at the prevailing interest rate for fixed-rate mortgages. This conversion feature may cost extra.

Co-operative or Co-Op: A form of multiple ownership in which a corporation or business trust holds title to an entire property. Residents purchase shares of stock in the ownership and are thereby entitled to live in a specific unit. Prospective buyers typically must be approved by the co-op board, which can lead to some lively exchanges.

CRS: Certified Residential Specialist. To be certified, an agent must be a member of the National Association of Realtors’ Residential Sales Council, have completed at least 50 residential transactions and have completed five required Residential Division courses. Luba was awarded this certification.

Documentary Transfer Tax: See Transfer Tax.

Due-on-Sale Clause: An acceleration clause that requires full payment of a mortgage or deed of trust when the secured property changes ownership.

Earnest Money: The portion of the downpayment delivered to the seller or escrow officer by the buyer, along with the written offer, as evidence of good faith.

Escrow: A procedure in which a third party acts as a stakeholder for both the buyer and the seller, carrying out both parties’ instructions and assuming responsibility for handling all of the paperwork and distribution of funds.

FHA Loan: A loan insured by the Insuring Office of the Department of Housing and Urban Development, the Federal Housing Administration.

Federal National Mortgage Association (FNMA): Popularly known as Fannie Mae. A privately owned corporation created by Congress to support the secondary mortgage market. It purchases and sells residential FHA and VA mortgages, as well as conventional home mortgages.

Fee Simple: An estate in which owners have unrestricted power to dispose of the property as they wish, including leaving by will or inheritance. It is the greatest or highest interest a person can have in real estate.

Finance Charge: The total cost a borrower must pay, directly or indirectly, to obtain credit according to federal Regulation Z.

Graduated Payment Mortgage: A residential mortgage with monthly payments that start at a low level and increase at a predetermined rate.

Home Inspection Report: A qualified inspector’s report on a property’s overall condition. The report usually includes an evaluation of both the structure and major mechanical systems, but not necessarily more specialized things like the roof, sewer lateral, or hot tub.  A home inspector may recommend such further inspections after completing the general home inspection. It is also known as a “Contractor’s Report,” but that is a less accurate term because home inspectors are not necessarily licensed contractors in the State of California.

Home Warranty Plan: A warranty that protects against failure of mechanical systems within a property, such as plumbing, electrical, heating systems, and installed appliances.

Index: A benchmark upon which changes to an ARM’s interest rate are based. Common indices include: industry cost of funds, 6-month Libor, and treasury notes.

Joint Tenancy: An equal undivided ownership of property by two or more persons. Upon the death of any owner, the survivors take the decedent’s interest in the property.

Libor: The average rate of interest charged by major London banks. Stands for “London Interbank Offered Rate,” to be precise.

Lien: A legal hold or claim on property as security for a debt or charge. One common form of lien (a mechanic’s lien) can be attached to a property if construction work remains unpaid.

Loan Commitment: A written promise to make a loan for a specified amount on specified terms.

Loan-to-Value (LTV) Ratio: The relationship between the amount of the mortgage and the appraised value of the property, expressed as a percentage of the appraised value.

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

Mortgage Life Insurance: A type of term life insurance often bought by mortgagors. The coverage decreases as the mortgage balance declines. If the borrower dies while the policy is in force, the debt is automatically covered by insurance proceeds.

Negative Amortization: Negative amortization occurs when monthly payments fail to cover the interest. The interest that isn’t covered is added to the unpaid principal balance, which means that even after several 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 that aren’t high enough to cover the interest.

Origination Fee: A fee or charge for work involved in evaluating, preparing, and submitting a proposed mortgage loan.

PITI: Principal, Interest, Taxes, and Insurance. Sometimes also includes private mortgage insurance and homeowner’s association dues.  PITI is an important amount for determining a buyer’s monthly budget.

Planned Unit Development (PUD): A zoning designation for property developed at the same or slightly greater overall density than conventional development, sometimes with improvements clustered between open, common areas. Users may be residential, commercial or industrial.

Point: An amount equal to 1 percent of the loan principal. Lenders charge loan points to increase their yield on a mortgage. Points are considered prepaid interest.

Prepayment Penalty: A fee charged to a borrower  who pays a loan before it is due.

Private Mortgage Insurance (PMI): Insurance written by a private company protecting the lender against loss if the borrower defaults on the mortgage. Generally required for loans exceeding 80% LTV.

Purchase Agreement: A written document in which the buyer agrees to buy certain real estate and the seller agrees to sell it under stated terms and conditions. Also called a sales contract, earnest money contract, or agreement for sale.

Realtor: A real estate broker or associate active in a local real estate board affiliated with the National Association of Realtors.

Regulation Z: The set of rules governing consumer lending issued by the Federal Reserve Board of Governors in accordance with the Consumer Protection Act.

TIC or Tenancy in Common: A type of ownership of a multi-unit building by two or more parties, each of whom has an undivided interest in the whole building. The whole building is owned as one legal “thing.” The units are not legally separate as in the case of condominiums. So the right to use a particular unit is established by a contract among the co-owners, not by a deed. No right of survivorship is created with this type of ownership: If one co-owner dies, his or her interest passes to heirs or beneficiaries and not to other co-owners. In San Francisco, TICs do not have to meet the more stringent building standards of a condominium, and they consistently sell for lower prices than condos and especially single-family homes. Recently, fractional or separate financing has allowed co-owners to have individual mortgages and thus dramatically reduce the financial risk and complexity of TIC ownership. So TICs remain a real possibility, if done with care and with proper review of the TIC’s finances, to get into the SF housing market at a more affordable price.

Title Insurance Policy: A policy that protects the purchaser, mortgagee, or other party against losses concerning title to the property and matters such as easements, encroachments, and liens.

Transfer Tax or Documentary Transfer Tax: A tax charged by the county recorder at the time of most sales and transfers of real property. The tax rate and who pays both vary from county to county. The transfer tax in San Francisco is based on the sale or transfer price, and it is customarily paid by the seller (with some important exceptions):

SALES PRICE                                   TRANSFER TAX
$100.01 to $250,000 . . . . . . . . . .  $5 per $1,000
$250,000.01 to $999,999.99 . . . .  $6.80 per $1,000
$1M to $4,999,999.99 . . . . . . . . .   $7.50 per $1,000
$5M to $9,999,999.99  . . . . . . . . .  $20 per $1000
$10M or more . . . . . . . . . . . . . . . .  $25 per $1000

VA Loan: A loan that is partially guaranteed by the Veterans Administration and made by a private lender.