Some common financing terms

Key Mortgage Inc., a subsidiary of Baird & Warner, offers a guide to some of the most common financing terms.

Abstract of title. A summary of all public records relating to the ti­tle of a particular piece of land from the original source of the title to the present -- a sort of "This Is Your Life" for your new property. An attorney or title insurance company will review the abstract to identify any potential glitches in its background.

Adjustable Rate Mortgage (ARM). A type of mortgage some­times called an Adjustable Mort­gage Loan (AML). What makes it adjustable is that the interest rates paid by you vary, depending upon a financial market index. The initial rate is usually lower than conven­tional "fixed" financing and there is usually a ceiling as to how high the rates can go above your origi­nal rate. Increases are usually at the discretion of the lender, but de­creases (if interest rate indexes fall) are mandatory.

Advance commitment. A com­mitment by a lender to make or purchase a loan on a specific prop­erty for a stated amount within a certain amount of time, to a home buyer whose credit is approved by the lender.

Agreement of sale. Commonly referred to as "going to contract," this is a written agreement be­tween the seller and buyer for the purchase of a home based on spe­cific terms and conditions. It's also known variously as a contract of purchase, purchase agreement, sales agreement or binder.

Amortization. Gradual repay­ment of a debt through regular, periodic installments, such as monthly mortgage payments. When a loan is amortized, it is bro­ken down into a series of pay­ments.

Chain of Title. A history of the ownership of a particular piece of property, telling who bought it and sold it, and when. The information may be derived from public re­cords -- usually a County Clerk's or Recorder's office -- or obtained from title companies that offer such services (most do).

Certificate of Title. A document signed by an attorney or title exam­iner that states that the seller does indeed have a marketable and in­surable title to the property being offered for sale. Unlike a title in­surance policy, the certificate of ti­tle does not provide protection against hidden defects in the title that an examination of the records could not reveal.

Cloud on Title. Anything that might "cast a shadow" over the marketability of a title. Possibilities include an adverse deed, deed of trust, outstanding mortgage, tax assessment, judgment or decree.

Condominium. Though popularly considered to be a type of housing, it is actually a form of ownership in which you own a dwelling unit (individual ownership) and an undivided interest in the common areas. In single-family homes, this usually includes lawns, entry monuments and any open space. In multi-family developments, it usually includes the lobby, corridors and amenities, such as a pool or tennis court.

Deed. A formal, written instru­ment by which title to real property is transferred from one owner to another -- the receipt for your land purchase. Besides describing the property accurately, it should be signed, notarized and delivered to the buyer at the closing for subse­quent recording.

Earnest money. This is the de­posit given to the seller by the po­tential buyer upon going to con­tract, to demonstrate that the buyer is indeed serious about buy­ing the property. If the deal goes through, the earnest money is ap­plied to the down payment; if not, and the buyer is at fault, the money is forfeited unless the offer to pur­chase expressly provides that it will be refunded.

Equity. The interest or value that an owner has in real estate over and above any liens (claims) against it, such as a mortgage bal­ance, deed of trust, or the value of an interest in a contract of sale.

Escrow. Funds, property or im­portant papers (like deeds or se­curities) left in trust with a third party, to be delivered to a desig­nated person upon the fulfillment of certain acts or conditions or by agreement of the parties. For ex­ample, the earnest money is often put in escrow until the closing; a bank holds onto it until both sides sign the final papers allowing them to disburse the funds to the proper people. The terms of depositing it to a third party is an escrow agreement and the third person is the escrow agent.

Federal Housing Administration (FHA). A division of the Department of Housing and Urban Development (HUD) whose principal role is to insure residential mortgage loans made by private lenders. While the FHA does not lend money, plan or build housing, it does set standards for construction and underwriting.

Fee simple. Absolute ownership of real property, with unconditional power to dispose of property while alive, or to transfer it, even without a will. There is no "common" prop­erty as there is in a condominium agreement -- you own it all.

Hazard insurance. Insurance that compensates the property owner for property damage caused by fire, windstorms or other speci­fied hazards known as "acts of God."

Joint tenancy. Ownership of real property by two or more persons, each of whom has an undivided interest and the right of survivorship or the right to take the interest upon the death of any of the others.

Lien. A legal claim by one person (or business, such as a bank or loan company) on the property of another until a debt is erased. Such claims may include mortgages (the most common), obligations se­cured by a property, judgments, unpaid taxes, or materials or labor incorporated into the property.

Listing contract. An agreement between the owner and a licensed broker in which the broker is em­ployed to sell the real estate within a given time for a commission to be paid by the owner. This is not a usual procedure among new-home sales.

Loan-to-value ratio. The rela­tionship between the amount of the mortgage loan and the appraised value of the property, expressed as a percentage of the appraised value. Example: if a home is worth $100,000 and the mortgage loan is for $50,000, the ratio is 50 percent.

Market value/market price. Market value is described as the highest price a buyer would be willing to pay and the lowest price the seller would be willing to ac­cept. It is the basis for the listing price or asking price. Market price is the actual amount for which a property is sold. It is also called the sales price or purchase price. The difference is between what you ask for your home, and what you get for it.

Mechanics lien. A claim against real estate property by a contractor or worker who claims not to have been paid for work performed or materials furnished to build or repair a building. If there is a judgment in favor of the contractor, or if the worker's claim is upheld, the resulting mechanics lien against the property may come ahead of the buyer's or lender's rights. Mechanics liens usually must be settled before property changes hands.

P.I.T.I. Lender's shorthand for "principal, interest, tax and insur­ance" and is another way of saying "bottom-line figure." Most resi­dential mortgages include these items, which are also sometimes called carrying charges.

Points. A point is 1 percent in­terest of the amount of the mort­gage loan or note. Generally, more points are charged when money is tight, interest rates are high and when there is a legal limit on the amount of interest that can be charged on a mortgage.

Real property. The actual land and whatever is usually erected upon it, such as structures; or af­fixed to it, like trees and minerals. The interest, benefits and inherent rights of the land and all things ap­pertaining to it are also considered real property.

Tenancy in common. An owner­ship of real property by two or more persons, each of whom has an indivisible share of the asset, but without the "right of survivor­ship" provided for in joint tenancy. The surviving tenant in common does not automatically receive the deceased's share of the property. This can be accomplished by a valid will, however.

Title insurance. This insures the existence (or nonexistence) of rights to real estate. It pays for any losses to the insured if it is later discovered that the property was subject to the claims of other par­ties previously unknown. A policy is issued following a search of pub­lic records to discover "clouds" that might affect the title, such as unpaid taxes and assessments, judgments, federal tax liens, me­chanic's liens and similar claims. The policy also protects against "hidden" risks that cannot be dis­covered by examining public re­cords, such as forgeries or future claims made by missing heirs or undisclosed spouses. The title in­surer pays the legal expenses of defending the title against adverse claims, even if a claim proves to be groundless and eventually is de­feated in court.

Title search or examination. A title search is made to determine that the person who is selling the property really has the right to sell it, and that the buyer is getting all the rights to the property (title) that he or she is paying for. The process involves discovering from public records just what these rights are and who owns them.

Torrens Certificate. A certificate issued by a public authority, known as the registrar of title, establishing title to an indicated owner. This is used in states where title to the property is registered under the Torrens system, in which ownership and encumbrances can be determined by examining the registrar of titles without the need to search other public records.

Veterans Administration. An in­dependent agency of the federal government created to assist vet­erans to adjust to civilian life. While not a lending agency, the VA's home loan guaranty program (like that of the FHA) is designed to encourage lenders to offer long-term, no down payment or low down payment mortgages to eligi­ble veterans by guaranteeing the lender against loss.

Warranty deed. A deed in which the seller or grantor warrants (guarantees) that good title is be­ing conveyed.