The ABC's of Escrow Terms And Definitions
One of the best ways to stay ahead of the game during a real estate transaction is to know what people are talking about when discussing real estate sales and purchases, loans and mortgages, titles and escrows, and costs associated with the transaction.
During most real estate transactions, you will employ an escrow company, or an attorney who handles escrows, to do the paperwork and to make sure your sale or purchase closes smoothly.
Although you hire escrows to handle the minute details of a transaction, it is always a good idea to be as informed as possible because things can happen that may slip past even the best escrow officer.
This is not to say that you should know everything there is to know about real estate and it is not meant to imply that the professionals you hire won't do their best to look out for your best interests. What it does suggest, though, is that you are your own best protection when it comes to your property, your money, and your security.
What you know and how you use what you know is crucial to any transaction you may be involved in. By learning certain terms and definitions, you can make informed choices and feel comfortable making them.
If you are considering buying or selling real estate, take the time to familiarize yourself with basic escrow terms and remember where you can go to find them if you need them.
Below are some terms and definitions that you are likely to hear during an escrow:
Absentee Owner: The owner of a property who does not occupy or live in it.
Acceleration Clause: In a note and deed of trust, this clause permits the payee or the beneficiary to declare that the unpaid balance of a loan is due and payable immediately.
All Inclusive Trust Deed (AITD): A junior mortgage that has a face value that includes both the amount secures and the balance that is due under the first mortgage. It is sometimes called a wrap-around mortgage. Under this type of mortgage, the wrap-around collects a payment based on it's face value and is responsible for paying the first mortgagee.
Amortization: A provision for a debt to be paid in equal installments that include principal and interest payments over a specified period of time.
Appraisal: An opinion of value based on an analysis of factual details by a disinterested person who bases his or her opinion on standard formulas. In the appraisal of real estate, those formulas include the Cost Approach, the Market Value Approach, and the Income Approach. The appraised value also incorporates the location, improvements, and other factors that may have an affect on the property's value.
Arbitration Clause: A clause that calls for the decision of a (neutral) third party to settle disputes between parties in a real estate transaction.
Balloon Payment: The last payment of a balloon note which calls for periodic payments that are insufficient to pay off the full amount of the loan. The full balance is due in one payment at maturity.
Bankruptcy: The act of relieving a debtor of an accumulation of debt by using federal statutes. A bankruptcy can be voluntary, petitioned by the debtor, or involuntary, petitioned by the creditors.
Beneficiary: The person or entity that is designated to benefit from the security of a note and deed of trust.
Blanket Mortgage: A mortgage which covers more than one property of a borrower.
Borrower: The person or entity that obtains a loan and owes money to a lender.
Business Cycle: A cycle of economic prosperity, decline, and a return to prosperity. Business cycles usually occur every ten to fifteen years and include periods of inflation, stagnation, mild or severe recessions, and every so often, depression.
Buyer: One who purchases property or other tangible goods.
By-Laws: A set of rules and regulations that are intended to govern certain activities.
Cancellation Clause: A clause in a contract that sets forth the conditions under which each party may terminate the agreement.
Capital Assets: Assets that are used to produce income such as buildings, land, equipment, and machinery.
Capital Gains: The gains realized from the sale of capital assets. The gains are usually calculated as the difference between the costs and the selling price minus certain deductible expenses.
Cash Assets: Available money that can be used to meet the operating expenses of a business.
Certified Check: A check that is guaranteed to be good, usually issued by a bank or other lending institution.
Certified Copy: A true copy as attested by the officer who holds the original copy.
Closing Costs: Expenses that are require or incidental to the sale of real estate, such as escrow fees, loan fees, title fees, and other costs.
Closing Statement: The statement used to list the settlement figures between buyers and sellers and what each must pay.
Cloud On Title: An encumbrance on the title to a property that may prove to affect the rights of the owner. When there is a cloud on the title to a property, the cloud may present a problem for the owner if he or she decides to transfer the property to someone else. A cloud may be a mistake on the legal description, the misspelling of a person's name, or if there was an illegal transfer dating back many years.
Condominium: A multifamily structure in which units are individually owned and each owner share undivided rights in common areas.
Condominium Conversion: The changing of rental property that consists of two or more units to condominium ownership. The conversion should meet city and county building and safety codes.
Contingency: An action that is dependent upon conditions or events that are to happen at a later time. If there is a contingency, the contingency has to be removed in order to close the transaction.
Conveyance: A deed or other document that transfers the title of an asset from one person to another.
Deed: A written document which conveys ownership of property from one person to another.
Deed of Trust: In certain states, a Deed of Trust is an instrument used in place of a mortgage. It is given as security for the payment of a note or other obligation.
Deed In Lieu Of Foreclosure: A deed given by a debtor (borrower) to the lender to prevent foreclosure proceedings.
Default: Failure to pay an obligation such as a monthly mortgage payment.
Defective Title: Title given under conditions of fraud or which lacks certain elements that would make it transferable.
Demand: Statement from a lender giving the amount owed on a loan.
Department Of Real Estate: The department of the state government that governs the licensing and the regulation of persons engaged in the real estate business.
Deposit: Money given by a buyer as a show of good faith when an offer to purchase property is made.
Divorce: The dissolution of a marriage.
Double Escrow: Two concurrent escrows on the same property with the same party as buyer and seller of the property. Double escrows are illegal in some states unless full disclosures are made.
Down Payment: Money paid from a buyers own funds as opposed to that which is financed.
Employment Letter: A written letter from an employer stating how long an employee has worked for the company and how much the employee's salary is.
Equity: the market value of a property less liens and other encumbrances.
Equity Loan: A loan based on the equity in a property.
Escrow: A third party who acts as a neutral agent or employee in the sale of property. The escrow is entrusted with delivering any written instrument, money, evidence of title, and instructions as to the use of such instruments.
Escrow Instructions: Written instructions that grants permission to the escrow officer to carry out the wishes of both the buyer and the seller of a property or business.
Escrow Officer: The person who is entrusted to handle the details and of an escrow, such as drawing up escrow instructions and making sure that all aspects of the transfer is accomplished in a professional and timely manner.
Estate: The interest that a person has in property.
Executor: A person who is appointed to carry out the terms of a will.
Executrix: A Female executor of a will.
Face Value: The value of mortgages, notes, and other instruments as stated on the face of the instrument.
Federal Fair Housing Law: Title VIII of the Civil Rights Act. It forbids the discrimination in the sale or rental of residential property based on race, sex, color, religion or national origin.
Federal Tax Lien: A lien attached to a property for the nonpayment of federal tax.
F.H.A. (Federal Housing Administration): Federal agency which insures mortgages that enable lenders to loan a very high percentage of the price paid for a property.
Fire Insurance: Policy of insurance that protects against loss or damage by fire to a specific property.
Foreclosure: A legal proceeding used to force the sale of a property to satisfy a lien or debt.
Foreclosure Sale: The sale of property used as security for a debt to satisfy the debt.
Forgery: The use of a false signature on a document with the intent to defraud.
Fraud: A deceptive act or statement intended to wrongfully obtain money or property.
General Lien: A lien that attaches to the property of a debtor, such as a judgment or a lien put against a property for unpaid taxes. It gives rights to a creditor to hold the real or personal property of a debtor for the payment of a debt.
Gift: A transfer of money or property without valuable consideration.
Gift Letter: A letter stating that a gift of money has been made to a buyer towards the purchase of a property. The letter usually states that the money is not to be repaid, the amount of the gift and the relationship between the donor and the donee.
GNMA (Ginnie Mae): Government National Mortgage Association is a federal association that offers assistance in obtaining mortgages. It also purchases mortgages a secondary capacity.
Good Faith: An act of good intentions done without fraud or harm.
Graduated Payment Mortgage: A mortgage that calls for an increase of the dollar amount of payments starting with lower payments the beginning of the payback period and increasing amounts over the term of the loan.
Grant Deed: A written instrument used to transfer the title to real property. A grant deed contains certain warranties against prior encumbrances and conveyances.
Grantee: The person or entity in which the title to property is granted or conveyed, usually the buyer.
Grantor: The person or entity who does the granting or the conveying of title to property, usually the seller.
Guardian: An individual who is appointed by the courts to manage the affairs of a minor or someone who is deemed to be incompetent.
Hazard Insurance: Insurance that protects against losses caused by fire, vandalism, injury, and certain natural occurrences, depending on the terms of the policy.
Head of Household: The designated person who is in charge of managing and supporting a family. The head of household need not be a man or a parent.
Heir: One who receives the estate of a deceased person by the governing laws of that particular jurisdiction.
Holding Escrow: An open escrow set for the life of a land contract in which the escrow holder is empowered to collect payments under the contract and allowing the holder to pay underlying encumbrances and to file a a deed and purchase money mortgage in the event that the vendee defaults on the loan.
Home Owners' Association: An association of people who own homes in a given area for the purpose of maintaining or improving the quality of the area. Associations are formed by the builders of condominium complexes or planned developments in conjunction with state and local laws.
Homeowner's Insurance: A policy of insurance that includes the coverage of hazards such as fire but also covers theft, personal liability, theft away from home, and other such coverage.
Homestead: The dwelling of the head of household. Certain states grant statutory exemptions that protect the homesteaded property against the rights of creditors. A formal declaration of homestead may be required.
Husband: The status of a man who is legally married to a living woman.
Immovable: In reference to real estate, an immovable object is something that is affixed and cannot be moved or removed, such as a building or land.
Implied: Something that is apparent due to a particular circumstance and not from a communication or direct action.
Implied Contract: A contract that is not written or verbal, yet binding because it is created by the actions of the principal.
Impound Account: Monies held by a lender for the purpose of paying taxes, insurance, or other periodic debts on real estate from accumulated funds.
Improved Value: Land, buildings, and any permanent structures that are appraised together instead of the separate values of each.
Income Property: Property that produces income, usually from rent paid for the use of the property.
Incumbrance: A claim or lien that is attached to real property.
Inheritance: Real property that is obtained by law, usually from a dead person.
Interest Rate: The percentage applied to an amount of money for the use of the money for a specific time.
Involuntary Conveyance: The transfer of property without the consent of the owner such as in the case of divorce or by condemnation.
Joint Tenancy: An undivided interest in real property taken by two or more people with equal interest, under the same conveyance at the same time. Under joint tenancy, if one of the participants dies, his or her interest passes to the surviving joint tenants rather than to his or her heirs.
About the author
John M. Roberts is the owner of John Roberts Realty located in Rancho Belago, California. You may contact him at firstname.lastname@example.org.
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