Definitions to Common Terms Used in Real Estate
We will try to organize these definitions by category and include links to the location of the page where those definitions are, but it may be easier to use the search functionality of your web browser (typically accessed by pressing “Ctrl” and “F” together).
Common Real Estate Finance & Loan Terms
Mortgage: Very similar to a deed of trust (DoT), but they do differ in the number of parties and how a foreclosure is handled. Which is used typically depends on the state. While many (including myself) call their home payment a “mortgage payment”, that’s not really accurate. Like a DoT, a mortgage is a security instrument. It’s the legal document that’s often filed with the county as a lien and collateralizes the property for the loan (the promissory note). A mortgage has two parties, a mortgagor (the borrower) and the mortgagee (the lender). When a mortgage is used, the foreclosure process must go through the courts, known as a judicial foreclosure (link).
Deed of Trust: Missouri uses a deed of trust, not a mortgage, but it’s still common to hear “mortgage payment” just as it is anywhere in the country. Like a mortgage, a deed of trust is not the loan itself, but the security instrument used to place a lien on title and collateralize the house for the loan. Whereas a mortgage has two parties, a deed of trust has three: 1. The borrower (also called a “trustor”) 2. The lender (also called a “beneficiary”) and 3. The trustee – A third party (typically an escrow company, loan servicing company, or attorney) that holds legal title (link) to the property. The trustee also either handles the foreclosure process directly, or appoints a successor trustee (link) (often an attorney) to handle the foreclosure. Unlike a mortgage, a deed of trust typically results in a non-judicial foreclosure, which does NOT require going through the courts. The majority of foreclosures in Missouri are non-judicial.
Promissory Note: Sometimes called “paper”. The promissory note is what’s agreed upon and signed with the lender to borrow money. It includes the terms of the loan, including interest rate, amortization, etc. The note is the “promise” to repay the borrowed money. It’s basically a detailed IOU.
Principal or Principal Loan Balance: The principal is the amount of money borrowed (the loan amount). Sometimes it will include things that were added into the loan, such as closing costs (link), but it does NOT include interest. The principal loan balance is the remaining amount of what was borrowed. It’s important to note that typically when you make a mortgage payment, only a portion of that (if any) reduces the principal loan balance.
Interest or Interest Rate: The interest rate, not to be confused with APR, is the yearly cost of borrowing money and does NOT include other factors that the APR accounts for.
Annual Percentage Rate: Commonly known as APR. While people often use this interchangeably with interest rate, they are not the same. APR is the interest charged over a year, including other costs, such as points (link), origination fees (link), and other charges. A break down of the interest rate and APR can typically be seen on a loan estimate sheet (link).
Loan Reinstatement or Foreclosure Re-instatement Amount: Not to be confused with a payoff amount, the reinstatement amount is what’s needed to bring the delinquent mortgage/loan payments current (pay the arrears) and stop the foreclosure. This includes the defaulted/late payments as well as fees and expenses.
Loan Payoff Amount: Paying the total amount left on a loan. This pays the loan off in full. Typically when you get a payoff quote, it’s only good for a few days, depending on how often interest compounds and where you are in the billing cycle.
Payment Arrears or Arrearage: Delinquent (or late) loan payments. Money that is owed from previously missed payments. This not only applies to mortgage loans, but any kind of payment arrangements that aren’t met. Child support is another payment type that commonly sees arrears, which can lead to judgments.
Amortization or Amortization Schedule: Paying off a loan with regular payments, so the principal loan balance is reduced with each payment. The schedule defining when mortgage payments are made. The most common for retail sales is the same monthly payment (not including escrow adjustments for taxes and insurance) for 30 years (360 payments), which is known as fully amortized. Alternatively you can have an adjustable rate mortgage where the amortization schedule will change. Another example includes balloon payments where you might have a 20 year amortization (monthly payments are calculated based on 20 year repayment), but you have a balloon payment (must pay remaining balance in full) in 5 years. These are common with commercial property loans.
Negative Amortization: This is a means to reduce the mortgage payment at the beginning of the loan (typically not even paying enough to reduce the loan amount). While it has been used on fixed-rate mortgages, it’s more common on adjustable rate mortgages (ARMs) and is seen as a tool to avoid payment shock. Negative amortization (particularly with ARMs) is part of what caused the 2008 housing crash.
Fully Amortizing or Self Amortizing loan: The amortization schedule and loan term are the same (no balloon payment). If the borrower (or mortgagor) pays according to the amortization schedule, the loan, principal and interest, are payed in full. If This is in contrast to a balloon loan and can be seen as the opposite of interest only payments.
Balloon Mortgage: In contrast to a fully amortizing loan, a balloon loan is payed off with a lump sum, rather than installments. They are commonly used in conjunction with commercial property, construction projects, or interest only loans, such as a HELOC. Balloons will typically (though not always) have a term (when the loan must be paid of in full) that is shorter than the amortization period. A common example of this is a commercial loan on an investment property with a 20 year amortization (monthly payments are calculated based on a 20 year repayment), but you have a balloon payment (must pay remaining balance in full) after only 5 years.
Fixed Rate Mortgage: A very common type of loan, especially for residential houses for owner occupants (link). In contrast to an adjustable rate, a fixed rate mortgage has an interest rate that does NOT change. Note that this does not necessarily mean your payment will always be the same, especially if taxes and insurance are in escrow with the mortgage payment, but it does tend to be more stable and predictable.
Adjustable Rate Mortgage: Commonly called an “ARM”, this type of loan has an interest rate that changes on certain schedule. The rate typically changes in respect to some kind of index, such as the treasury index, prime rate, or LIBOR rate (links).
HELOC: Home Equity Line of Credit. A loan (typically interest only with an adjustable rate) that uses a house (typically a primary residence) as collateral. If there is already a loan or mortgage on the house, then the HELOC will be a junior lien.
Refinance: Often in the form of a cash out refinance (where the borrower gets money back due to borrowing more than they owe), but also sometimes to simply lower a mortgage payment. When refinanced, one or more debts are replaced by a new loan with new terms. Typically a refinance is done to get more favorable loan terms, but sometimes it’s simply needed due to an unexpected hardship.
Loan Modification: A loan modification is when changes are made to the terms of the original loan. Common changes include changing the interest rate (often to a lower rate), extending the maturity date (link), or putting the arrears on the back of the loan.
Payment Shock: A large increase in the mortgage payment, often associated with an increase in the interest rate of an adjustable rate mortgage. Payment shock can also be an issue if refinancing or if transitioning from very favorable purchase terms or mortgage payment to a more expensive one.
Compound Interest: Great for savings and investments, but far from great when applied to debts. Interest compounds on top of the current balance. As an example, if you deposit $100 into a savings account that earns 2% interest annually, then after 1 year you would have a total balance of $1,02. This is simple interest. The second (and following years) is where compound interest comes into play. Not only will you earn 2% interest on the original $100, but you’ll also earn (yield) 2% on the $2 you earned in interest on the previous year. So the second year you would earn $2.04 ($102 * 0.02). The third year you would earn $2.08 ($104.4 * 0.02). This may seem insignificant, but when you work with larger numbers the effect of compounding interest is even greater.
PITI: Principal, Interest, Taxes, and Insurance. Common to have all four of these make up a monthly mortgage payment.
Billing Period or Billing Cycle: The length of time from the end of one billing statement and the next billing statement (typically a month).
Conventional Sale or Retail Sale: This is a bit of a loose term, but it typically means a property was sold to a consumer (the end buyer) and they intend to keep it. It also often assumes it was sold on the open market (whether listed with an agent or for sale by owner). This excludes house sales that involve short sales, foreclosures, inter-family transfers, and other non-standard, traditional housing sales.
Junior Lien: A lien that is placed on a property that already has a previous lien. This is typically in the form of a second mortgage or HELOC.
Judgment: When a borrower is ordered by a court to pay a sum of money and they place a judgment against that person, that judgment can be filed against the borrowers assets, such as their home, so if it can’t be sold or if it is the proceeds go to the creditor. Judgments can sometimes be negotiated or removed from a property.
Lien or Lien Holder: There are many forms of liens, including mechanics and child support, but often due to an unpaid debt, such as a mortgage. It’s a legal document that is recorded on the chain of title (link), so that the lien holder (the person that placed the lien or bought rights to the lien) gets paid what they are owed if the house is ever sold. When a lien is cleared, it is either expired or a lien release is filed.
Title and Chain of Title: Not to be confused with a deed. Real estate is a bit different than vehicles. With vehicles you simply have a title, whereas with real estate (houses and land included), there’s a chain of title and a deed. The chain of title includes all past and present owners, lien holders, and recordings of other documents such as affidavit of heirship (link), memorandum of agreement, loan modification, inter-family transfer (link), deed of trust, quit claim deed (link), etc.
Deed: Not to be confused with title, a deed is the legal document used to transfer (or convey) ownership from the previous owner (the grantor, typically the seller) to the new owner (the grantee, typically the buyer).
Grantor: The person (typically the seller) conveying ownership, through use of a deed, to another person. There can be multiple grantors in real estate transaction.
Grantee: The person (typically the buyer) receiving ownership, through use of a deed. There can be multiple grantees in a real estate sale.
Clear title or Clean Title: No liens, claims, or other encumbrances (link) against the property
Encumbrance: In real estate, an encumbrance is any claim that prevents clear title and prevents transferring or selling the property. The most common type are voluntary loans (such as a mortgage or HELOC). Involuntary encumbrances are also common and can range from an HOA lien, easement (link), judgment, mechanic’s lien, etc.
Easement: Often used for public right of way (link), such as with a sidewalk or property bordering a park. An easement allows a person or entity (link) to enter and use a property in a specific manner, such as working on a utility line, such as water or fishing the banks of a public lake that’s surrounded by private property.
Right of Way: Whereas an easement allows someone to stay for a more extended time and possibly even alter the property (such as with utility work), a right of way allows someone to travel through a property (not stay for an extended period) to get somewhere else, such as walking through a piece of property to fish a public lake.
Appreciation: How much a property’s value has increased. Some houses/areas depreciate (go down in value). Appreciation typically occurs in a seller’s market while depreciation occurs during a market downturn or buyer’s market. In general, most properties appreciate (increase in value) in the long run.
Depreciate and Depreciation: Typically these two words are used in different context. Depreciate literally means to decrease in value over time. While most property and areas appreciate in value in the long run, there are some areas that go down in value, though this is more common in a shorter period, such as a few years of a market downturn. Depreciation in accounting is a method to record the cost of a fixed asset over time. So if you have a $100,000 fixed asset that is defined to have a 5 year depreciation schedule or useful life, you might allocate $20,000 of the $100,000 expense for each one of those years.
Real Estate & Real Property: While these terms are often used interchangeably, there are differences between the two. Real estate is generally used in less formal settings, whereas real property may be more prevalent in law. Real estate not only includes the land and structures (such as houses, outbuildings, etc.), but it also includes the resources (such as minerals, water, and oil) attached to it. Many people don’t realize how important mineral rights (and other natural resources) are in real estate. Real property encompasses real estate, but also includes usage rights and ownership, which is important when discussing things like owners, renters, optionees, etc.
Real Estate Agent: An agent is licensed to represent buyers and sellers of real estate. They’re able to legally negotiate and facilitate the buying and selling of real estate between two parties. They typically need to be part of a real estate brokerage that has additional experience, training, and certification. An agent is NOT necessarily a Realtor®
Realtor®: A real estate professional (typically an agent) who is a member of the National Association Of Realtors®.
National Association of Realtors®: Commonly known as “NAR”. They have their own code of ethics, which I see constant violations of (an ethics code is only useful to a person that practices it). It’s basically a subscription to get a fancy trademark to tout. In my personal opinion, I view them similar to the BBB: a pay to play organization that professionals feel compelled to pay for a designation to show potential clients.
Common Real Estate Contract Terms
Purchase and Sale Agreement: Sometimes abbreviated as P&SA, this is the legally binding contract outlining the terms and conditions of a sale. It’s important to ensure everything is in the P&SA. Never rely on a verbal agreement. If it’s important, it should be in writing.
Assignment or Assign: This is a general concept with contracts and not specific to real estate, though it is used with the sale of houses. Some contracts can NOT be assigned, whereas other contracts (such as a purchase and sale agreement for real estate) can often be assigned even if not explicitly stated in the contract, which means the original buyer (the assignor) signs over all rights and obligations of that contract to another party (the assignee), who would then become the new buyer before closing (link). It’s important to note that when a contract is assigned, the assignor (or original buyer) is still generally held to the terms of the original agreement if the assignee fails. Essentially, the original buyer is responsible for and has a duty to ensure the agreement is still satisfied in full.
Contract Addendum: Not to be confused with an amendment. An addendum is an additional document that outlines terms that aren’t covered in the main contract. One of the most common addendum’s is to detail inspections. The main contract will reference the addendum that contains the agreement pertaining to the inspection. An addendum we sometimes use is a subject-to addendum.
Contract Amendment: Much like how a constitutional amendment alters the U.S. constitution, a contract amendment alters the terms of the original contract by adding, removing, or changing one or more of the previously agreed terms. After a contract has been signed, an amendment is often best practice to change part of the contractual obligations, rather than creating and signing an entirely new contract. Common examples include changing a closing date or agreeing to fix items on an inspection, something that is never needed when selling a house to us, because we buy houses as-is (link).
Escalation Clause: Commonly used in a seller’s market when multiple offers are expected on a house. Personally, I’m not a fan of them, but I understand why buyers sometimes use them. In a sense it somewhat relates to a right of first refusal. An escalation clause, which may be outlined in an addendum, might say something along the lines of: Buyer is offering $120,000 for this home, but if the seller receives an offer that’s higher than this, my offer will increase in $1,000 increments up to a maximum of $130,000. So if you get two contracts that both have an escalation clause, they essentially automatically bid against each other (in the increment specified in each escalation clause) until the contract with the highest limit wins.
Mortgagee: The lender (typically a bank) for a mortgage.
Mortgagor: The borrower (typically a soon to be home owner) for a mortgage.
Borrower: The person or entity borrowing the money or taking out a loan. While a mortgagor is the borrower specific to a mortgage and a trustor is the borrower specific to a deed of trust, “borrower” is a more generic term that can apply to any loan or security instrument.
Right of First Refusal (ROFR): When a person has a right of first refusal, it means if the owner wants to sell the property to another person, they must first give the person with the right of first refusal the same opportunity to buy under the same terms. The most common forms of this are within a lease agreement or with an option agreement.
Lease Agreement: Also known as a rental agreement, this is the the contract outlining the terms of someone (the tenant or lessee) renting a property from the owner (the landlord or lessor). Some common agreements in a lease include length of time, whether pets are allowed, smoking, how many and who is allowed, etc. It’s important to note that each state has tenant/landlord laws that govern what can and cannot be enforced. One example might be the inability of a landlord to make a tenant responsible for repairing a furnace if it breaks.
Lessee: A party (the tenants) in a lease agreement to rent a house.
Lessor: A party (the owner or landlord) in a lease agreement to rent real property.
Option Agreement: Also known as an option to buy. An option agreement (often paired with a lease agreement) allows a person (the optionee) to buy a property for a predetermined price (can be fixed or change depending on time span or appraised value) within a certain period of time. These often act as a right of first refusal.
Lease Option: This is a common form of rent-to-own and is an alternative owner financing. This is the combination of a lease agreement and an option agreement. While they may be a part of the same document, some people consider it best practice to have them be completely separate documents for legal reasons, especially since the Dodd-Frank Act. Visit our other website to see or be notified our rent-to-own and owner finance housing opportunities.
Optionee: The person with the right to exercise (or execute) their option agreement. Once exercised, the optionee becomes the buyer. Often a lessee/tenant.
Optionor: The party (typically the owner/seller) that is providing the option to buy the property.
Common Real Estate Legal Terms
Foreclosure: The legal process that lenders use to take back a property that is the collateral of a loan. There are many foreclosure laws at both, the federal level (such as with the Dodd-Frank Act) and at the state level, but in general there are two types of foreclosure: Judicial and non-judicial. Once the foreclosure process has been successfully completed, the property is considered foreclosed and becomes Real Estate Owned (REO).
Non-judicial Foreclosure: This is when a foreclosure does NOT go through the court system. A non-judicial foreclosure typically happens in states that utilize a deed of trust, like Missouri, rather than a mortgage.
Deed in lie of foreclosure: This is where the homeowner transfers ownership to the bank or lender to forego the foreclosure process. This can sometimes reduce some of the impact there would be from a foreclosure. It can also sometimes prevent the bank from going after the borrower for more money.
Short Sale: A way for the owner to sell the house for less than what is owed on any loans against the property. I’ve only heard of a short sale being used once one or more payments have been missed on a property, though technically the bank (and other stakeholders) could choose to allow it on a loan that’s current. Short sales are mostly only seen once foreclosure has already been initiated.