Common Real Estate Terms

Closing– the execution of legal documents of conveyance and loan paperwork to transfer and/or mortgage a property. The parties meet at the closing attorney’s or title company’s office. The closing attorney or settlement agent executes the closing documents, collects funds, and disburses proceeds.

Commission– the fees paid to the real estate agents who represent the buyer and seller. Typically, the amount of commission and the party responsible for paying the commission are outlined in the Listing Agreement, in the sales contract, and/or in a separate commission agreement. Commissions are generally calculated based on a percentage of the sales price. Commissions are reflected on the HUD-1 Settlement Statement.

Contract– the instrument memorializing the agreement between a buyer and seller to purchase and sell real property. The contract contains all material terms relevant to the transaction: sales price; property description; amount of earnest money; who is paying closing costs and how much; closing date; and items to be completed at or before closing, e.g. repairs, etc.

Deed of Trust– In some states, the mortgage is called a Deed of Trust. The Deed of Trust is the instrument which is recorded at the county courthouse to secure the property as collateral for the loan .

Earnest Money– Upon making an offer to purchase real estate, a buyer will generally deposit a sum of money to the seller as a demonstration of the buyer’s good faith intention to purchase the property; this deposit is generally refunded to the buyer at closing on the settlement statement. The contract generally spells out specific guidelines for who shall hold the earnest money and how it should be handled in the event of default on the contract.

Escrows– an account maintained by the lender on behalf of the borrower for the payment of annual taxes and insurance. Borrowers pay 1/12 of the amount due for taxes and insurance into the account with each monthly payment, and the lender disburses the full annual payments to the taxing authority and insurance company when each becomes due.

Hazard Insurance– also known as “homeowner’s insurance,” hazard insurance insures a home against liability and loss due to fire, wind, vandalism and other damage. Hazard insurance is generally required by lenders as a condition of the loan.

Homeowners Association Dues– assessments charged by a Homeowners’ Association to the individual homeowner which are generally used to maintain common areas of the subdivision.

Promissory Note– the instrument signed by a borrower wherein the borrower promises to repay, on demand or at some time fixed in the future, a sum of money to a lender or holder of the promissory note. This document outlines the terms of the loan including the principal amount, interest rate, term, late payment penalty, and prepayment penalty, if any.

Property Taxes– taxes paid to the city and/or county based upon the assessed value of the property. Inquire with the specific city and county for the computation rates.

Security Deed– In Georgia, a mortgage is called a Security Deed. The Security Deed is the instrument which is recorded at the county courthouse to secure the property as collateral for the loan.

Settlement Statement– document developed by the United States Department of Housing and Urban Development which itemizes all fees and services associated with closing the loan.

Survey– A survey is a drawing prepared by a registered land surveyor, after a physical inspection, that depicts the property boundary lines, size and improvements, as well as setback lines, easements and encroachments. Specialty surveys also exist which show topography and water flow, the elevation of any structures on the property in relation to the maximum 100 year flood zone, and the location of any septic and drain lines. For more information on surveys, click here .

Tax Stamps– the taxes paid to the State on the transfers memorialized by the deed of conveyance and the mortgage deed. Generally, state tax stamps are calculated on the deed of conveyance based on the sales price, and tax stamps are calculated on the mortgage deed based on the loan amount. Formulas vary from state to state.

Termite Letter– A termite letter is an inspection report which shows the existence of active or previous infestation of subterranean termites and other wood destroying organisms. The inspection report is a standard state form which reveals whether there is any earth-to-wood contact on the property, if there were any areas of the structure that were not inspected, and if it appears that any previous termite treatment has been performed. The inspection letter often contains exclusions of liability printed on the back.

Title Exam– an examination of the public records in the county where the property is located. The title examiner reviews the history of the title, or the “back chain” to ensure the seller owns the property, and to determine if there are any mortgages, taxes or liens on the property that will require payment at closing. Each previous owner of the property is a link in the chain of title.

Title Insurance– Title insurance protects the insured from claims regarding ownership of the property, liens against the property and marketability of title to the property. Title insurance company offer two types of policies; the mortgagee policy protects the lender, and the owner’s policy protects the buyer.

Warranty Deed– the instrument which transfers ownership interest in the property from the seller to the buyer and which contains assurances as to the marketability of the title to the property.

Title Insurance

Title insurance protects the insured from claims regarding ownership of the property, liens against the property, and marketability of title to the property. Title insurance companies offer two types of policies; the mortgagee policy protects the lender, and the owner’s policy protects the buyer.

According to the mortgagee policy, when a claim results in a total loss of title, the title insurance company buys the existing mortgage loan from the lender. This lender is, therefore, compensated for its loss, and the title insurance company, in turn, becomes the new holder of the loan. The mortgagee policy protects only the lender and does not afford any protection to the buyer. An uninsured buyer would still be responsible for repaying the mortgage to the title insurance company, despite the fact that he no longer actually owns the property. The uninsured buyer would also lose any equity he may have in the house.

A buyer must obtain an owner’s policy of title insurance in order to be protected in the event of a title claim. The owner’s policy insures the buyer against loss resulting from a title claim and typically includes reimbursement to the buyer for court costs and attorney fees associated with the claim. Title insurance is a one-time premium, and the policy is written by the closing attorney or settlement agent. Title insurance is typically a line-item charge on the settlement statement. Southern Capital Title strongly recommends that every buyer purchases an owner’s policy of title insurance.

Escrow Accounts

An escrow account contains funds held by a lender for future payment of property taxes and applicable insurance, such as homeowner/hazard insurance, flood insurance, and/or mortgage insurance Private Mortgage Insurance. Lenders utilize escrow accounts to ensure that the loan collateral is protected from losses resulting from tax sales for unpaid taxes or lack of insurance coverage due to unpaid premiums.

At closing, taxes for the current year are pro-rated, and the buyer pays up-front for a homeowners insurance policy for one year. The closing attorney or settlement agent establishes the escrow account on behalf of the lender to pay future tax bills and insurance renewals.

The lender does not pay interest on the funds held in escrow, and the lender does not charge a fee to manage the account. Lenders analyze the escrow account annually to prevent holding too much money, and the amount a borrower pays into the account each month can change to avoid accumulating overages or shortages.

The lender will generally calculate the tax escrow based on the tax bill used for prorations at closing. Sometimes, however, the tax assessment used for proration purposes is obviously much lower than future tax assessments will be – for example, cases where prorated taxes were based on unimproved property, or prorated taxes were calculated with exemptions no longer applicable for the new buyer. In such cases, the closing agent will calculate an estimated future tax bill based on formulas set forth by the taxing authority. The estimated future tax amount is then used to establish the escrow account.

Insurance escrows are based upon the known guaranteed renewal premium. If a renewal premium is not known or guaranteed, the escrows will be based on the annual premiums for the current year.

At closing, the settlement agent makes an initial deposit into the escrow account to set it up. The borrower then continues to make ongoing monthly deposits into the account with each monthly mortgage payment. When taxes or insurance renewal premiums become due, the account will pay out these items, and a cushion remains in the account going forward.

Homeowners Associations

Many properties are located in areas that are subject to protective covenants. Protective covenants outline rules and restrictions for the neighborhood or development. The goal of the covenants is to protect the integrity of the neighborhood and to preserve property values.

Covenants are generally recorded at the county courthouse, and everyone who buys property in the neighborhood after the covenants are recorded is subject to the covenants. Developers or neighbors often form homeowners associations to further the goals set out in the covenants, to collect dues from the property owners, to maintain common areas, and to enforce rules and regulations.

At closing, unpaid association dues from previous years are the responsibility of the seller. Association dues for the current year are prorated between the buyer and seller. Future dues are the responsibility of the buyer, and future dues are not typically held by the lender in an escrow account.

Mortgage Insurance

Private Mortgage Insurance (PMI) is an insurance policy that protects the lender in the event that the borrower defaults on the loan. Lenders generally require PMI on loans where the loan to value ratio exceeds 80%, or, in other words, the buyer’s down payment on the loan is less that 20%.

In the event of foreclosure, the PMI company compensates the lender for certain losses incurred. PMI insurance offers no protection to the buyer. The PMI premium is generally tacked onto the borrowers monthly mortgage payment.

In obtaining an FHA loan, borrowers pay for an upfront mortgage insurance premium (MIP) which is itemized on the settlement statement at closing. Borrowers obtaining VA loans will not pay PMI or MIP; however, the Department of Veterans Affairs charges a similar VA Funding Fee which is also itemized on the settlement statement.

Property Taxes

Property owners are obligated to pay city, county, and/or state ad valorem taxes. Nonpayment of such taxes will result in a lien on the property. The county tax assessor periodically determines the value of the property, and taxes are assessed on the appraised value of the property. Depending on the city, county and/or state in which the property is situated, there may be exemptions for which the property owner can apply which reduce the tax bill.

At closing, the seller is responsible for paying delinquent property taxes for previous years. Taxes for the current year are prorated between the buyer and seller on the settlement statement. Generally, the lender requires the closing attorney or settlement agent to establish an escrow account to pay taxes for future years.

In calculating taxes for closing, the attorney or settlement agent will base prorations upon the current year’s tax bill. If the tax bill for the current year has not been issued, the proration of taxes will typically be based upon the previous year’s tax bill. The amount of the charge to one party and the credit to the other is determined by dividing the annual tax bill by 365 (for the daily amount) and then multiplying that amount by the number of days before closing (for the seller) and after closing (for the buyer).

In closings involving new construction, the current tax bill may be dramatically less than future tax bills are expected to be. This happens because the most recent tax assessment was likely based on unimproved property. The tax assessor will eventually reassess the property and base taxes on the improvements. In such cases, the closing attorney or settlement agent will use the current lower tax bill for prorations between the buyer and seller, and the attorney will use an estimated future tax amount to establish the escrow account.