Clients are often faced with unfamiliar legal terms when executing a real estate transaction. Here are a few to acquaint yourself with:
Abstract Of Title : A summary of the public records relating to the title to a particular piece of property. It is important to review the 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 Clause : A condition in a mortgage that may require the balance of the loan to become due immediately, if regular mortgage payments are not timely made or for breach of other conditions of the mortgage.
Agreement of Sale : This is the contract of purchase or purchase and sales agreement in which a seller agrees to sell and a buyer agrees to buy real estate, under certain specific terms and conditions spelled out in writing and signed by both parties.
Amortization : A payment plan that enables the borrower to reduce his debt gradually through monthly payments of the principal amount of the loan.
Appraisal : The estimate of value of real property made by an impartial expert, typically including references to sales of comparable properties to estimate the value of the real estate in question. In a legal dispute, a forensic appraiser is used to establish the value of property since this individual has experience in such cases. A lender will require an appraisal before giving a loan, but that process is not a substitute for a property inspection.
Assessments : These are costs charged for public improvements that benefit a particular piece of property. Pending assessments must be addressed and disclosed in the purchase agreement and at the close of escrow.
Assumption of Mortgage : An obligation undertaken by the purchaser of property to be personally liable for the payment of an existing mortgage. In an assumption, the purchaser is substituted for the original mortgagor (seller) in the mortgage instrument and the original mortgagor is to be released from further liability in the assumption, the mortgagee’s consent is usually required. The original mortgagor (seller) should always obtain a written release from further liability if (s)he desires to be fully released under the assumption. If it is noteworthy, the failure to obtain such a release renders the original mortgagor liable if the person assuming the mortgage fails to make the monthly payments.
An “Assumption of Mortgage” is often confused with “purchasing subject to a mortgage.” When one purchases “subject to” a mortgage, the purchaser agrees to make the monthly mortgage payments on an existing mortgage, but the original mortgagor remains personally liable if the purchaser fails to make the monthly payments. Since the original mortgagor remains liable in the event of a default, the mortgagee’s consent is not required to a sale subject to a mortgage. Both “Assumption of Mortgage” and “Purchasing Subject to a Mortgage” are used to finance the sale of property. They may also be used when a mortgagor is in financial difficulty and desires to sell the property to avoid foreclosure.
Building Line or Setback : These are the distances from the ends and/or sides of the lot beyond which construction may not extend. The building line may be established by the developer when a survey is first made, by restrictive covenants in deeds or leases, by building codes, or by zoning ordinances.
Certificate of Title : A certificate issued by a title company that the seller has good, marketable and insurable title to the property which is being offered for sale. A certificate of title offers no protection against any hidden (latent) defects in the title that an examination of the records could not reveal. The protection offered a homeowner under a certificate of title is not as great as that offered in a title insurance policy.
Close of Escrow : The close of escrow is also known as the settlement, at which time the transfer of the sold property is finalized. At closing, the buyer signs the mortgage documents and pays all of the closing costs, and the seller signs the deed. Both parties sign the closing statement, which is an accounting of funds credited to the buyer and seller.
Closing Costs : The numerous expenses that buyers and sellers normally incur to complete a transaction in the transfer of ownership of property.
These costs are in addition to the price of the real estate and are items prepaid at the closing day. This is a typical list of buyer’s and seller’s expenses: Documentary Stamps on Notes Cost of Abstract; Recording Deed and Mortgage; Documentary Stamps on Deed; Escrow Fees; Real Estate Commission; Attorney’s Fee; Title Insurance; Survey Charge; and Appraisal and Inspection Fees. The agreement of sale negotiated previously between the buyer and the seller may state in writing who will pay each of the above costs.
Closing Day : The day on which the formalities of a real estate sale are concluded. The title is assured by a policy of title insurance, and there is a deed filed with the County Recorder. The buyer signs the mortgage, and closing costs are paid. The final closing confirms the original agreement reached in the agreement of sale.
Cloud On Title : An outstanding claim or encumbrance that adversely affects the marketability of title.
Commission : This is the money or consideration 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, between 5% to 6% on residential property.
Condemnation : The taking of private property for public use by a government unit, under the government’s power of eminent domain. It is usually against the will of the owner. The law requires the payment of just compensation. Condemnation may also be a determination by a governmental agency that a particular building is unsafe or unfit for use.
Condominium : The owner of a condominium unit owns the unit and has the right, along with other unit owners, to use the common areas, which are owned by the homeowner’s association. The condominium association is in charge of maintaining the common areas, the buildings, clubhouse, and common property, paying taxes and insurance, and maintains the reserves for improvements.
Deed : A formal written instrument by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed, and should be delivered to the purchaser at the close of escrow. There are two parties to a deed: the grantor and the grantee (see also deed of trust, grant deed and quitclaim deed).
Deed of Trust : Like a mortgage, a security instrument whereby real property is given as security for a debt.
In a “deed of trust” there are three parties to the instrument: the borrower, the trustee, and the lender, (or beneficiary). In such a transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the debt to the lender or beneficiary. If the borrower pays defaults in the payment of the debt, the trustee may sell the property at a public sale, under the terms of the deed of trust. In California, the borrower is subject to having his property sold without benefit of legal proceedings, which is called a non-judicial foreclosure.
Default : Failure to make mortgage payments as agreed on the terms and at the designated time set forth in the mortgage or deed of trust will result in a default. It is the mortgagor’s (homeowner’s) responsibility to remember the due date and send the payment prior to the due date, not after. Generally, thirty (30) days after the due date if payment is not received, the mortgage is in default. In the event of default, the mortgage may give the lender the right to accelerate payments, take possession and receive rents, and start foreclosure (they will issue a “Notice of Default”). Defaults may also come about by the failure to observe other conditions in the mortgage or deed of trust.
Easement Rights : A right-of-way granted to a person or company authorizing access to or over the owner’s land. An example is an electric company obtaining a right-of-way across private property. Another example is a driveway used by an adjacent homeowner that otherwise would not have access to his/her property.
Encroachment : An obstruction (such as a fence), 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. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes, or restrictive covenants. An encumbrance does not legally prevent transfer of the property to another. A title search will usually reveal the existence of such encumbrances, and it is up to the buyer to determine whether (s)he wants to purchase with the encumbrance, or what can be done to remove it.
Equity : The value of a homeowner’s interest in real estate over and above the amount that is owed to a lender or any encumbrances (such as a lien). In short, equity is computed by subtracting from the property’s fair market value the total of the unpaid mortgage balance and any outstanding liens or other debts against the property. A homeowner’s equity increases as (s)he pays off the mortgage or as the property appreciates in value. When the mortgage and all other debts against the property are paid in full the homeowner has 100% equity in his property.
Escrow : Funds paid by one party (the buyer or buyer’s lender) to another (the escrow agent) to hold until the occurrence of a specified event (filing of papers with the County Recorder), after which the funds are released to a designated individual (usually the seller).
Foreclosure : A legal term applied to any of the various methods of enforcing payment of the debt secured by a mortgage, or deed of trust, by taking and selling the mortgaged property, and depriving the mortgagor of possession. Foreclosure proceedings in California typically do not include a court proceeding and are designated non-judicial proceedings.
Grant Deed : A deed which conveys a “fee simple” interest in the real estate, which is not only all the grantor’s interests in and title to the property to the grantee, but also warrants that if the title is defective or has a “cloud” on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic’s liens against it) the grantee may hold the grantor liable. Typically, title insurance is purchased to protect against such consequences.
Grantee : The person in the deed who is the buyer or recipient.
Grantor : The person in the deed who is the seller or giver.
Lien : A claim by a person or entity on the property of another as security for money owed. Such claims may include obligations not met or satisfied, judgments, unpaid taxes, materials, and/or labor.
Mortgage : A lien or claim against real property given by the buyer to the lender as security for money borrowed. Under government-insured or loan-guarantee provisions, the payments may include escrow amounts covering taxes, hazard insurance and special assessments. Mortgages generally run from 5 to 40 years, during which the loan is to be paid off.
Mortgage Insurance Premium : The payment made by a borrower to the lender to provide a reserve fund to protect lenders against a loss with an insured mortgage transaction. In FHA insured mortgages this represents an annual rate of one-half of one percent paid by the mortgagor on a monthly basis.
Mortgage Loan : A mortgage loan is a loan that is secured with a lien on real property. Forms of mortgages include fixed rate, adjustable-rate, and balloon mortgages.
Mortgagee : The lender in a mortgage agreement.
Mortgagor : The borrower in a mortgage agreement.
Points : A point is one percent of the amount of the mortgage loan. For example, if a loan is for $250,000, one point is $2500. Points are charged by a lender to raise the profit on the transaction and, therefore, yield on his loan. Buyers are prohibited from paying points on HUD or Veterans’ Administration guaranteed loans (however, a seller can pay this fee). On a conventional mortgage, points may be paid by either buyer or seller or split between them.
Prepayment : Payment of mortgage loan, or part of it, before due date. Mortgage agreements often restrict the right of prepayment either by limiting the amount that can be prepaid in any one month, one year or charging a penalty for prepayment. The Federal Housing Administration does not permit such restrictions in FHA insured mortgages.
Principal : The basic amount of the loan as distinguished from interest and mortgage insurance premium. In other words, principal is the amount upon which interest is paid.
Quitclaim Deed : A deed which transfers whatever interest the maker of the deed may have in the particular property. A quitclaim deed is often given when the grantor’s interest in a property is questionable. By accepting such a deed the buyer assumes all of the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has. Many attorneys disfavor using a quitclaim deed, and a grant deed is preferred (see Grant Deed above).
Real Estate Agent : A licensed individual or entity that represents either the buyer or seller in the purchase or sale of real estate, usually on a commission basis. Attorneys disfavor a “dual” agent or broker who represents both parties in the same transaction because of the inherent conflict of interest. The terms of these agreements are negotiable as to the percentage of commission and the period of time of the listing agreement.
Restrictive Covenants : These are private restrictions or conditions 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. The determination whether a covenant runs with the land or is personal is governed by the language of the covenant, the intent of the parties, and California law (or in the State where the land is situated). Restrictive covenants that run with the land are encumbrances and may affect the value and marketability of title. Restrictive covenants are often entitled CC&R’s and may limit the density of buildings, regulate size, style, exterior color of buildings, landscaping, improvements to be erected, window coverings, pets, parking, use of garages, etc.
Title Insurance : This is a policy of insurance that protects lenders and homeowners against loss of their interest in property due to legal defects in title. Insurance benefits will be paid only to the “named insured” in the title policy, so it is important that an owner purchase an “owner’s title policy”, if (s)he desires the protection of title insurance.
Title Search or Examination : A check of the title records, generally at the County Recorder’s Office, to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of the property or title thereof.
Trustee : A party who is given legal responsibility to hold property in the best interest of or “for the benefit of” another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law (see deed of trust).
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The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.