What is a short sale?

By Jeffrey A. Hill

In some areas of the country, and from time to time, real estate values decline. In such situations it sometimes happens that owners need to move but the value of the mortgage is greater than the value of the property. The owner is said to be financially “upside down.”

If the property is sold at a loss, the owner is still responsible for repaying the entire mortgage. But, sometimes owners do not have enough cash to re-pay the loan and so they try to work out a deal with the lender to pay less than is owed — a short sale.

The lender, of course, wants back every dime loaned to the borrower. That was the deal. And lenders point out, properly, that if the value of the property rose the borrower would not turn around and offer some of that profit to the mortgage company.

Lenders will sometimes allow a short sale if it is a better alternative than a foreclosure sale in a down market. However, before making such a decision, a lender will want to see how such a deal can be structured. Perhaps the borrower has other assets, or perhaps the short-fall can be made up with a note to the lender.

If the lender takes a loss, that loss may be reported to the IRS as income to the borrower — money not actually received by the borrower, but money that is taxable. There are exceptions to the discharged debt from being taxable income! Please Google Internal Revenue Code Section 108. In addition to Section 108 of the Internal Revenue Code, the Government passed H.R. 1876: Mortgage Cancellation Relief Act of 2007. See a tax professional for details before making any decisions.

In the event that a borrower faces a short sale situation, if you would like to keep your home, one approach is to have an attorney contact the lender on your behalf. It may be possible to work out a different monthly payment, an interest rate lowered to current levels, a long extension, etc.

Another alternative is to rent the property.

If the property is rented, it may then be possible to write off any losses. In contrast, with a primary principle place of residence property, it is not possible to write off losses at this time.

If you must move, a short sale is usually the best alternative for all parties involved. BE VERY CAREFUL OF THE AGENT YOU SELECT! The choice of listing agent will be the SINGLE MOST IMPORTANT decision if a short sale is completed, or you end up with a foreclosure on your record for the next SEVEN YEARS!

Every agent is an independent contractor, no matter the “company” or franchise of affiliation. How the listing agent handles the short sale listing, will mean the difference between a closed short sale transaction, and a foreclosure for the seller!

I have met many agents in my Real Estate career, most hate short sales, most do not really know what to do, and not a one has the ratio of closed short sales that I personally have closed. I have closed short sales with FIVE, and up to EIGHT liens of record! All lien holders of record MUST release their interest, or the sale will not close. My personal closing ratio of short sale listing is over 90%.

Real Estate is a practice, like law and medicine. Market conditions, availability of funds, qualifying criteria of borrowers, FHA, FANNIE MAE loan limits change, everything changes. What may have worked in the past, may not work today. Be sure the Real Estate Agent you hire is looking out for YOUR best interest, not THEIR income! If the agent only list properties, or has a “staff” of people that work under him/her, chances are very good YOU are not their priority, only their income is a priority!

There is no guarantee a short sale transaction will close. Every short sale is evaluated on a case-by-case basis. With the seasoned agent, that knows the route to a successful approval from each lender of record, you can have a successful sale and closed sale too.

Remember this; The value of an agent, is in their ability to negotiate.

Here’s What You Should Expect From Any Agent You Work With:

You should expect to be treated with respect, not like a number. You should feel like the agent’s only client, not like transaction #34. You should expect to have your best interests represented. The whole moving process should be as painless as possible. Your agent’s eye shouldn’t be on your wallet, but on serving you selflessly. Your agent should not think of you as a transaction that will be gone in a few months, but more like a friend and a client for life.

You should expect your agent to work as hard for you as he would if he were buying or selling his own house. You should expect the highest skills available. Your calls should be returned promptly, you should be kept up to date, and not feel like you were forgotten by your agent.

If any problems do arise, your agent should go overboard to fix them and document everything diligently so that you are protected. After the transaction, you should expect your agent to be a trusted advisor that you can consult anytime. You should feel like you were represented professionally, and that you came out the better for it.

Why We Have a Lot to Lose!

Our business is built on referrals. What this means to you is that we don’t spend a lot of time on prospecting activities to find new clients as other agents do. So you get all of our attention and energy. We feel that by providing you with the best real estate experience you ever had, you will naturally want your friends and associates to have the same benefit. When this happens, we can devote even more time to making our service the best available.

Since we don’t knock on doors or make cold telephone calls, we depend on referrals to grow our business. We HAVE TO give you excellent service. You MUST be happy, or there will be no referrals from you, and our business will suffer. So we don’t see you as just a transaction, here today and gone tomorrow. We’re not superstars, pushing people through some kind of assembly line, but we see ourselves as super servants. We treat your business with great respect, and want to be your REALTORs for life.

Appraisals & Sales Price

If the appraised value is higher than the sales price, there is no impact to you.

When the property appraises for a lower value than the sales price, the lower appraised value is used to determine your loan amount. To complete the sale, you may have to increase the down payment to make up the difference between the appraised value and the purchase price.

The Appraisal Process

An appraisal is a written estimate of a property’s market value completed by an appraiser. The value is based upon a market analysis of the prices of recent sales of similar properties in the area and the property’s physical condition. Usually, this requires an interior and exterior property inspection.

Why is an Appraisal Necessary?

Lenders use your appraisal to determine your loan amount. Your appraisal will be completed shortly after you request your mortgage.

The 4 rules of Real Estate: (It is safe to say these 4 rules apply to life in general also )

1. Show Up
   What happens if you do not show up for your job? Your relationships? Your children’s lives? In the construction industry, showing up on time gets you ahead of 80% of the entire industry!
2. Pay Attention
   You must pay attention. What happens if you fail to pay attention while driving? When a client needs a 3 bedroom, do not show 2 bedrooms.
3. Always Tell The Truth
   What I have seen, the trouble for some with rule 3 is that most people are not truthful with themselves. That is where you start. When in doubt, disclose! An agent must disclose everything to a potential buyer he or she may know or discover before or during an escrow period. You must decide what you want, and then take all necessary and relevant steps to obtain your goals. If you are qualified for a $500,000.00 home, why look at homes listed at $750,000.00? Be realistic with your expectations, and what you have to offer.
4. Don’t get Attached to the Outcome
   I have worked on transactions, and the deal falls through. It will happen. Anything can happen. In 1991, a buyer made an offer on a custom, Ocean view home in San Clemente, California. The buyer was a pilot and during the escrow period, the buyer had a tragic accident in which his plane crashed and he passed away. Needless to say, the escrow fell through. The sellers tried to sell again, but the market conditions at that time were more favorable to a buyer. Three years later their house sold to a new buyer, although the sales price was over $300,000.00 less then that first buyer. You can have the best intentions, and a great plan of action, in the end the plan may not work out exactly as you had hoped.

To the 4 rules, I have added the following that needs to come AHEAD of the 4 rules of real estate.

Always do your BEST.
Always do what is right.

If a person follows the 4 rules AND the aforementioned two, most of the time, things will go very well for you.

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Real Estate Glossary & Definitions

Property Definitions | Real Estate Terminology

Property Definitions

Single Family Residence
A structure that provides housing accommodations for one single family. ^

Condominiums
A condominium is a home in a shared building or development. The buyer gets title the space inside the unit, shares the common areas with other unit owners and pays a maintenance fee to the condominium association to pay for needed maintenance, repairs and improvements to the property. ^

Duplex
A structure that provides housing accommodations for two families by having separate entrances, kitchens, bedrooms, lanais, living rooms and bathrooms. A two-family dwelling. ^

Triplex
A structure that provides housing and accommodations for three families by having separate entrances, kitchens, bedrooms, lanais, living rooms and bathrooms. A three-family dwelling. ^

Fourplex
A structure that provides housing and accommodations for four families by having separate entrances, kitchens, bedrooms, lanais, living rooms and bathrooms. A four-family dwelling. ^

Multiple Family Dwellings
A Duplex, Triplex , Fourplex or more. Can also refer to an apartment or condominium complex. ^

Commercial Property
A classification of real estate which includes income producing property such as office buildings, gasoline stations, restaurants, shopping centers, hotels and motels, parking lots and stores, and other similar uses. ^

Industrial
An area zoned industrial and containing sites for many separate industries and developed and managed as a unit, usually with provisions for common services for the users. ^

Raw or Vacant Land
Unimproved land; land in its unused natural state prior to the construction of improvements such as streets, lighting, sewers, and the like. ^

Escrow
Money or other valuables given to a neutral third party with directions to deliver them to another party upon the fulfillment of a specific act or condition. ^

Title Insurance
Protection for lenders and homeowners against financial loss resulting from legal defects in or other claims against the property’s title. The cost of the policy is usually a function of the value of the property and is often borne by the purchaser and or seller. ^

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Real Estate Terminology

Abstract (Of Title)
A summary of the public records relating to the title to a particular piece of land. An attorney or title insurance company reviews an abstract of title to determine whether there are any title defects which must be cleared before a buyer can purchase clear, marketable, and insurable title. ^

Acceleration
The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the Due-on-Sale-Clause. ^

Acknowledgment
A formal declaration before an authorized official (usually a notary public) by a person who has executed a document, that he did in fact execute (sign) the document. ^

Addendum
Something added. A list or other items added to a document, letter, contract, escrow instructions, etc. ^

Agent
A person who acts or has the power to act for another. A real estate agent acts on behalf of the principal (the buyer or seller) and has a fiduciary responsibility towards the principal. Buyer’s Agent: a agent who represents the buyer and owes fiduciary duties to the buyer. Seller’s Agent: an agent who represents the seller and owes fiduciary duties to the seller. They are usually referred to as the listing agent who is authorized by a property owner to find a buyer or a tenant for the property. ^

Agreement of Sale
A written agreement of contract in which the seller agrees to sell and the buyer agrees to buy under specific terms and conditions. ^

Alienation Clause
A clause within a loan instrument calling for a debt in its entirety upon the transfer of ownership of the secured property. Also called a “due on sale” clause. ^

Amenities
Features that enhance and add to the value or desirability of real estate. Common amenities include swimming pools, professional landscaping, gourmet kitchen and so on. ^

Amortization
The reduction of a debt over time by making periodic payments, usually monthly, a portion of which is interest and a portion of which reduces the outstanding amount of the debt. The monthly mortgage payments remain the same over the life of the loan, even though the proportion of principal to interest changes over time. In the early part of the loan period the principal repayment is very small and interest repayment is very high. At the end of the loan that relationship is reversed. ^

Appraisal
An estimate of the value of property, made by a qualified professional called an “appraiser”. ^

Appraiser
Someone who practices appraisal. Appraisers’ work involves appraising, review (the process of critically studying a report prepared by another), or consulting (the process of providing information, analysis of real estate data, and recommendations on diversified problems in real estate, other than estimating value). ^

APR – Annual Percentage Rate
The actual interest rate taking into account the points and other prepaid fees expressed in annual percentage terms. Not to be confused with initial interest rate, a teaser rate lenders use to get you into a loan. ^

ARM – Adjustable Rate Mortgage
A loan that allows the interest rate to change periodically up or down. The interest rate on an ARM is determined by adding a margin or spread to a specified financial index. Financial indexes include; Treasury, Certificate of Deposit, Cost of Funds. The margin is the difference between the index rate and the ARM rate. Adjustment interval is how often the interest rate is adjusted. A loan that adjusts its interest rate after six months is called a six-month ARM. Rate caps limit how much your interest rate can move up or down. Periodic caps limit the change per adjustment period, and a lifetime cap governs the maximum amount the interest rate can increase or decrease over the life of the loan. ^

Assessment
A local tax levied against a property for a specific purpose, such as a sewer or street lights. ^

Assessor
One appointed to assess property for taxation. ^

Assignment
A transfer or making over to another the whole of any property, real or personal, or of any estate or right therein. To assign is to transfer. ^

Assumption
The agreement between the buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing costs and new, probably higher, interest rates will apply. ^

Balloon Mortgage
A mortgage for a fixed term shorter than necessary to fully repay the debt. As a result, the remaining amount of principal is due at the maturity of the loan. ^

Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage. ^

Bond
An insurance agreement by which one party is insured against loss or default by a third party. In the construction business a performance bond ensures the interested party that the contractor will complete the project. ^

Breach
Violation of an obligation in a contract. ^

Bridge Loan
A loan, usually short term, that finances the portion of the purchase price not provided by the mortgage loan and the down payment. A bridge loan is commonly used when a purchaser has not sold his existing home before he closes on his purchase of a new home. The bridge loan is paid off when the old home is sold, out of the proceeds of that sale. ^

Broker
A real estate professional who has acquired a higher level of training and experience than a sales agent. A minimum number of classes must be taken along with passing a state exam to acquire a brokers license. Generally they are a legal representative or a proprietor of the office. Brokers usually charge a fee or receive a commission for their services. ^

Building Code
A set of stringent laws that control the construction of buildings, design, materials and other similar factors. ^

Building Line or Setback
Distances from the ends and/or sides of the lot beyond which construction may not extend. The building line may be established by a filed plat of subdivision, by restrictive covenants in deeds or leases, by building codes, or by zoning ordinances. ^

Buy-down
When the lender and or the home builder subsidized the mortgage by lowering the interest rate during the first years of the loan. While the payments are initially low, they will increase when the subsidy expires. ^

Buyers Market
A market condition which occurs in real estate where more homes are for sale than there are interested buyers. ^

Cash Flow
The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, insurance, maintenance, utilities, etc.) ^

Capital Gain
Income that results from sale of a capital (tangible) asset. ^

Capitalization
An appraising term used in determining value by considering net operating income and a percentage of reasonable return on investment. ^

Certificate of Eligibility
The document given to qualified veterans which entitles them to VA guaranteed loans for homes, business, and mobile homes. Certificates of eligibility may be obtained by sending DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility). ^

Chain Of Title
A history of conveyances and encumbrances affecting the title as far back as records are available. ^

Closing
The end of the transaction when the seller hands over the title to the buyer in exchange for payment. Also called settlement. ^

Closing Costs
Costs the buyer must pay at the time of the closing in addition to the down payment which may include points, title charges, credit report fee, document preparation fee, mortgage insurance premium, inspections, appraisals, prepayments for property taxes, deed recording fee, and homeowners insurance. Closing costs can vary considerably from one financial institution to another. ^

Cloud (On Title)
An outstanding claim or encumbrance which adversely affects the marketability of title. ^

Commission
Money paid to a real estate agent or broker by the seller as compensation for finding a buyer and completing the sale. Usually it is a percentage of the sale price: 4 to 7 percent on houses, 10 percent on land. ^

Condemnation
A declaration by governing powers that a structure is unfit for use. ^

Conditional Sales Contract
A contract for the sale of property where the buyer has possession and use, but the seller retains title until the conditions of the contract have been fulfilled. Also known as a land contract. ^

Condominium or Condo
A condominium is a home in a shared building or development. The buyer gets title the space inside the unit, shares the common areas with other unit owners and pays a maintenance fee to the condominium association to pay for needed maintenance, repairs and improvements to the property. ^

Construction Loan
A short term interim loan to pay for the construction of building or homes. These are usually designed to provide periodic disbursements to the builder as he progresses. ^

Contingency
A condition that must be met before a contract is binding. Contingencies include: the property must appraise for sales price or buyers approving of various inspections. ^

Contract Sale or Deed
A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale. ^

Conventional Loan
A fixed rate and fixed term loan that is made without government insurance. ^

Convertible Loan
Some ARM loans include a provision that allows it to convert to a fixed rate mortgage at specific times, usually from the end of the first through the fifth years. There is usually an additional fee, $300-$500, to convert it. ^

Conveyance
The transfer of the title to land from one to another. ^

Co-operative or Co-op
In a residential co-operative, the buyer purchases shares in the co-op corporation which is made up of the residents in the co-op property. The buyer owns the shares rather than owning real property. In exchange he has the right to lease and occupy a co-op unit. ^

Covenants
Agreements written into deeds and other instruments stating performance or non-performance of certain acts or noting certain uses or non-uses of property. ^

Credit Report / History
Lenders will investigate your credit record which is a history of your debts. They get a report from a credit reporting agency (TRW, Equifax, TransUnion) which shows if you pay you debts on time and with who you have current debts with. ^

Debt-to-income Ratio
The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her gross monthly income. ^

Deed
A legal document by which property title is transferred from one owner to another. ^

Default
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage. ^

Depreciation
Decline in value of a house due to wear and tear, adverse changes in the neighborhood, or any other reason. ^

Devisee
A person who receives real estate from another by will. ^

Down Payment
The down payment is the percentage of the purchase price that the buyer must pay in cash and may not borrow from the lender. The down payment amount in addition to the mortgage equals the purchase price of a property. They can vary from 0% to over 50%. The less your down payment the better your credit has to be. Lower down payments generally result in higher interest rates. ^

Dual Agency
Representing both parties in a transaction. In virtually all states it is unethical and illegal for a broker to represent buyer and seller in a real estate transaction without written consent of both. ^

Due-on-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home. ^

Earnest Money
The deposit money given to the seller by the potential buyer as evidence of good faith in purchasing real estate. The broker places the money in an escrow or trust account until closing, when it becomes part of the down payment. ^

Easement Rights
A right- of- way granted to a person or company authorizing access to or over the owner’s land. An electric company obtaining a right- of- way across private property is a common example. ^

Economic Obsolescence
Loss of useful life and desirability of a property through economic forces, such as change in zoning, changes in traffic flow, etc., rather than deterioration. ^

Encroachment
An obstruction, building, or part of a building that intrudes beyond a legal boundary onto neighboring private or public land, or a building extending beyond the building line. ^

Encumbrance
A legal right or interest in land that affects a good or clear title, and diminishes the land’s value. ^

Equal Credit Opportunity Act (ECOA)
Is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs. ^

Equity
The value of the property less the amount of unpaid mortgages and any outstanding liens. ^

Escalation Clause
A clause in a lease providing for an increased rent at a future time due to increased costs to lessor, as in cost of living index, tax increases, etc. ^

Escheat
The reverting of property to the state in the absence of heirs. ^

Escrow
Money or other valuables given to a neutral third party with directions to deliver them to another party upon the fulfillment of a specific act or condition. ^

Escrow Instructions
This discloses when the escrow should be closing and when possession should take place, proration of property taxes, transfer taxes, release of funds and the basics of satisfying the escrow demands. ^

Estate
The ownership interest of a person in real property. Is also used to refer to a deceased person’s property. ^

Exclusive Agency Listing
A written agreement giving the broker the right to market an owner’s property for a certain period of time, but also allowing the owner to sell the property during that period without paying a commission. ^

Exclusive Right-to-Sell
A written agreement between the agent and the owner whereby the owner promises to pay a fee or commission to the broker if his property is sold during the listing period, regardless of whether the broker is responsible for the sale. ^

Fair Market Value
That price a property will bring given that both buyer and seller are fully aware of market conditions and comparable properties. ^

Fannie Mae – FNMA
Nickname for the Federal National Mortgage Association. FNMA is a public corporation originally established by the federal government. Fannie Mae purchases mortgage loans from lenders and results in a major source of funds for mortgage companies. ^

Fee Simple
Ownership of title to property without any limitation, which can be sold, left at will, or inherited. ^

FHA – Federal Housing Administration
Part of the US Department of Housing and Urban Development (HUD). It was established in 1934 to encourage improvement in housing standards and communities. The FHA insures mortgage loans. ^

FHA Mortgage
A mortgage loan insured by the Federal Housing Administration. ^

FHA Mortgage Insurance
Requires a fee (up to 2.25% of the loan amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5% of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid. ^

Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property. ^

Freddie Mac – FHLMC
Nickname for Federal Home Loan Mortgage Corporation. It is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD- approved mortgage bankers. ^

Functional Obsolescence
Loss in value due to out-of-date or poorly designed equipment while newer equipment and structures have been invented since it’s construction. ^

Ginnie Mae – GNMA
Government National Mortgage Association ^

Graduated Payment Mortgage – GPM
A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it. ^

Grantee
That party in the deed who is the buyer or recipient. ^

Grantor
That party in the deed who is the seller or giver. ^

Home or Property Inspection
A detailed inspection of the physical structure, the plumbing, electrical and heating systems and the overall condition of the home. Typically the cost is $150-$300 and the results are detailed in a multiple page report. ^

Homeowners Insurance
Insurance that protects the homeowners from Casualty losses or damage to the home or personal property and from liability damages to other people or property. Homeowners insurance is required by the lender and may be included in the monthly mortgage payment. ^

Home Owners Association
An association of homeowners within a community formed to improve and maintain the quality of the community. An association formed by the developer of condominiums or planned developments. ^

Housing Expense-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower’s housing expenses are divided by his or her gross monthly income. ^

HUD – The US Department of Housing and Urban Development
Department of Housing and Urban Development, a government agency created to make the American Dream of home ownership a real possibility for everyone. HUD has many programs involving homeownership assistance for low and moderate income families, community planning and development, fair housing and equal opportunity, and home improvement loans. The Housing and Urban Development home page is a rich resource of information. ^

HUD Home
When a purchaser fails to meet her/his obligation of a HUD insured loan and, the lender completes a foreclosure, ownership is then turned over to HUD. Only HUD approved brokers may sell HUD homes. ^

Impound
That portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves. ^

Index
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one-three and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down. ^

Initial Interest Rate
The initial rate quoted usually is a lower introductory rate, sometimes called a teaser or discount rate. This lower rate lasts only until the first adjustment, after which you will be charged the fully indexed rate. ^

Interest
A charge paid for borrowing money. ^

Joint Tenancy
Joint ownership by two or more persons with right of survivorship. Upon the death of a joint tenant, his interest does not go to his heirs, but to the remaining joint tenants. ^

Jumbo Loan
A loan which is larger than the limits set by the FNMA and FHLMC (more than $207,000 as of 1/1/96). Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate. ^

Lease
A contract between the owner of real property, called the lessor, and another person referred to as the lessee, covering all conditions by which the lessee may occupy and use the property. ^

Lease With Option To Purchase
A lease where the lessee has the option to purchase the leased property. The terms of the purchase option must be set forth in the lease. ^

Legal Description
The geographical identification of a parcel of land. ^

Lien
A hold or claim on the property of another to satisfy an unpaid debt or obligation. ^

Life Time Cap
Life time cap governs the maximum amount the interest rate increase or decrease over the life of the loan. ^

Listing Contract
An agreement between a homeowner and a licensed real estate broker that authorizes the broker to market the property for sale during a given time period. ^

Loan Origination Fee
A fee charged by the lender for evaluating, preparing and submitting a proposed mortgage loan. ^

Loan-to-Value Ratio
The ratio of a mortgage loan principal to the property’s appraised value or its sales price, whichever is lower. Loan-to-value ratios vary depending upon the individual lender’s policy. ^

Lock-in Rate
A commitment made by a lender to make a mortgage loan at a specified rate, pending loan approval, on or prior to a specified date. ^

Market Value
The highest price a buyer will pay for a property and the lowest price the seller will accept in a typical market. ^

Margin
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate. ^

Mechanic’s Lien
A lien created by statute on a specific property for labor or materials contributed to an improvement on that property. ^

Mortgage
A lien on real estate given by the buyer to secure money borrowed to purchase the real estate. ^

Mortgage Broker
An individual or company that obtains mortgages for others by finding lending institutions, insurance companies or private sources to lend the money. The mortgage broker may also handle collections and disbursements. ^

Mortgage Insurance
A policy that provides protection for the lender in case of default and or which guarantees repayment of the loan if the borrower becomes disabled or dies. ^

Mortgage Insurance Premium – MIP
Insurance from FHA to the lender against incurring a loss on account of the borrower’s default. ^

Multiple Listing
A listing taken by a member of an organization of brokers, whereby all members have an opportunity to find a buyer. ^

NAR – National Association of Realtors
The largest trade association in the country serving over 700,000 Realtors. The purpose of the association is to enhance the ability and opportunity of its members to conduct business successfully and ethically and to promote the preservation of the right to own, transfer and use real property. ^

Negative Amortization
Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan. ^

New Home
Accommodations having not yet been occupied. Usually purchased directly from the builder or developer. ^

Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. ^

Notary Public
One who is authorized by federal or local government to attest authentic signatures and administer oaths. ^

Note
A written instrument acknowledging a debt and promising payment. ^

Offer
A proposal to purchase real estate at a particular price, subject to other specified terms and conditions. Acceptance of the offer by the seller creates a purchase contract. A counteroffer is a different offer made in response to the initial offer. ^

Origination Fee
Application fee(s) for processing a proposed mortgage. ^

Option
A right given, for consideration, to purchase or lease property upon stipulated terms within a specific period of time. ^

Periodic Caps
Periodic caps limit the change per adjustment period of a loan. ^

PITI Payment
A loan payment that combines Principal, Interest, Taxes and Insurance. ^

Plat
A map or chart of a lot, subdivision or community drawn by a surveyor showing boundary lines, buildings, improvements on the land, and easements. ^

PMI – Private Mortgage Insurance
Insurance issued to a lender to protect it against loss on a defaulted mortgage loan. Its use is usually limited to loans with high loan-to-value ratios, generally in excess of 80%. The borrower pays the premiums. ^

Point
An amount equal to one percent of the loan amount paid to a lender for making the loan. A lender may charge the borrower several points in order to provide the loan. ^

Power of Attorney
A legal document authorizing one person to act on behalf of another. ^

Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date. ^

Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form, but are not necessarily imposed in many states. ^

Primary Mortgage Market
Lenders making mortgage loans directly to borrowers such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary market such as FNMA or GNMA. ^

Pre-qualification
Getting pre-qualified for a loan is a free process and normally takes between 15 minutes to an hour on the phone. The lender will ask you some basic questions about your household income, time on the job, credit history, down payment and personal savings. You should get pre-qualified before looking for properties so you and your real estate agent know in what price range to start looking. ^

Principal
One of the parties to a transaction. For example, the buyer and seller are principals in the purchase of real property. Also the amount of debt, not counting interest, left on a loan. ^

Purchase Agreement
An agreement between buyer and seller denoting price and terms of the sale. ^

Rate Caps
Rate caps limit how much the interest rate can move up or down. ^

Real Estate Agent
A licensed person who works under the direction of a broker selling and renting real estate. ^

Real Estate Broker
A middle man or agent who buys and sells real estate for a company, firm, or individual on a commission basis. The broker does not have title to the property, but generally represents the owner. ^

Realtor
A Realtor is a real estate professional who is a member of the National Association of Realtors and subscribes to its strict Code of Ethics. This professional is committed to protecting and promoting private ownership of real property, establishing and maintaining high professional standards of practice, and creating unity in the National Association of Realtors organization and respect for the real estate profession. ^

Recision
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security. ^

Refinance
Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property. ^

R.E.O.
Real estate owned by a bank. A lending institution will acquire ownership of a specific property usually through a foreclosure process. ^

Repossessed
Same as R.E.O. ^

RESPA
Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only. ^

Restrictive Covenants
Private restrictions limiting the use of real property. Restrictive covenants are created by deed and may “run with the land,” binding all subsequent purchasers of the land, or may be “personal” and binding only between the original seller and buyer. ^

Reverse Annuity Mortgage – RAM
A form of mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as Satisfaction of Mortgage: the document issued by the mortgagee when the mortgage loan is paid in full. ^

Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one. ^

Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders. ^

Seller’s Market
More buyers than sellers. ^

Shared Appreciation Mortgage – SAM
A mortgage in which a borrower receives a below-market interest rate in return for which the lender or investor, receives a portion of the future appreciation in the value of the property. May also apply to mortgage where the borrowers share the monthly principal and interest payments with another party in exchange for part of the appreciation. ^

Special Assessments
A special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, street lights, etc. ^

Survey
A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. ^

Title
Ownership of real property. Title is transferred from one party to another through a document called a deed. ^

Title Insurance
Protection for lenders and homeowners against financial loss resulting from legal defects in or other claims against the property’s title. The cost of the policy is usually a function of the value of the property and is often borne by the purchaser and or seller. ^

Title Search
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company. ^

Townhouse or Townhome
Used to describe an architectural style. A condominium with no one living above or below. ^

Trust
A property interest held by one person for the benefit of another. ^

Trustee
A party who is given legal responsibility to hold property in the best interest of or “for the benefit of” another. ^

Truth-In-Lending
A federal law requiring disclosure of the APR-Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z. ^

Underwriting
The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount. ^

VA or US Department of Veterans Affairs
A federal agency designed and operated to help veterans enter the housing market. The VA assists veterans in terms of low or no down payment, mortgage qualifications assistance and low interest rates. ^

VA Home
When a purchaser fails to meet her/his obligation of a VA insured loan and, the lender completes a foreclosure, ownership is then turned over to VA. ^

VA Loan
A mortgage loan guaranteed by the US Department of Veterans Affairs against loss to the lender and made through a private lender. ^

Variable Interest Rate
A fluctuating interest rate which can go up or down depending on the going market rate. ^

Waive
To relinquish, or abandon. To forego a right to enforce or require anything. ^

Wraparound Mortgage
Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top. ^

Zoning Ordinances
The acts of an authorized local government establishing building codes, and setting forth regulations for property land usage. ^