Real Estate in Depth

Real Estate In Depth
The "Real Estate In-Depth" section reviews different elements and issues about real estate. This section
contains the following articles:
1. Introduction to Real Estate: Land; Real Estate; Real Property

2. All About Air Rights: Condominium; Railroads; Airplane over-flights
3. All About Deeds: Types of deeds; Requirements for a valid deed
4. All About Easements: Classification of easements; Creating & Ending Easements
5. All About Fixtures: Regular fixtures; Tenant fixtures
6. What You Should Know About Foreclosures: History of mortgage foreclosures; Types of
foreclosures; Foreclosure process; Relief against foreclosure
7. All About Leases: Leasehold estates; Types of leases; Elements of a lease
8. Lease Requirements and Elements: Basic lease elements; Tenant responsibilities; Landlord
responsibilities; Condition of property; Termination of lease
9. Ground Lease:
10. Commercial Lease:
11. Sale-Leaseback:
12. Closings and Transaction: The closing process; Pre-closing legal issues; Real estate closings;
Mortgage closings; Closing in escrow; Post-closing issues
13. Condominiums: Elements of the Condominium; Condominium Loan Requirement; Condominium
Conversion & Construction
14. Cooperatives:
15. PUDs and Townhouses:
16. Eminent Domain: Requirements; Procedure
17. Marketable Title: Seller's true ownership; Liens; Easements; Building and zoning restrictions; Leases
and tenants; Encroachments; Title insurance coverage
18. Mortgage Deed and Promissory Note: Dissecting the Mortgage Deed; Analyzing the Promissory Note
19. Environmental Issues:
20. Real Estate Contract: Contract basics; Elements of the real estate contract; Alternative types of real
estate contracts; Buyer Issues to Consider; Seller Issues to Consider; Remedies
21. Real Estate Fraud: Misrepresentation; Conduct; Non-disclosure
22. Real Estate Taxes and Special Assessments: Types; Process; Enforcement; Challenging
assessments
23. Real Estate Trusts: Living and testamentary trusts; Land trusts; Real estate investment trusts (REIT)
24. Real Estate Investment Trusts:
25. Recording: Why recording is necessary; The recording process; Chronological order
26. Selling Your Real Estate:
27. Spousal and Co-ownership Rights:
28. Subsurface Rights: Mineral Rights; Oil and gas
29. Surveys and Legal Description: Metes and bounds; Government survey system; Plat of survey
30. Title and Estates in Land: Freehold estates (fee simple and life estates); Leasehold estates (estate for
years, periodic estate, estate at will and estate at sufferance)
31. Title and Title Insurance: Abstracts and title examination; Title certification; Torrens system; Title
insurance
32. Title Transfers and Wills:
33. Transferring Title: Involuntary; Voluntary
34. Zoning and Building Codes:
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Introduction to Real Estate
Any understanding of the legal issues involved with real estate and mortgages must begin with the land and the
other key elements of real estate, as well as how real estate is owned.
Real estate in the United States follows the allodial system of property ownership. This system recognizes the
right of individuals to completely and fully own a parcel of property. This is no small thing, especially when this
system is compared to other systems:
● Feudal system. All the lands are owned by the sovereign ruler, who then gives certain ownership or
usage rights to his or her subjects, who then may allow peasants and other workers to lease land for
farming or other use. This was the predominant system in Europe for much of the Common Era.
● Communist system. Similar to the feudal system, all the lands are owned by the state-or the "people."
Use of land is dictated by the state, and no individual can ever fully own any property.
● Allodial system. The system used in the United States and much of the developed and developing
democratic world.
In American-English legal theory, it is important to understand the difference between these elements of land,
real property, real estate and associated rights, such as air, mineral and water rights. This chapter will discuss
these elements in three categories:
1. Land. The ground surface and the natural elements below and above it.
2. Real Estate. Land and any improvements on it.
3. Real Property. Real estate and the different "rights" involved with it.
Most people treat the terms land, real estate and real property as interchangeable. They are not. Anyone who
aspires to invest in real estate or work in the real estate industry must understand the key distinctions between
these terms. Fortunately, they are not difficult concepts to grasp.
Land
In the real estate industry, the legal concept of land encompasses more than just the ground that we see or that
comprises a parcel of property. Land includes everything natural beneath and above the surface. The operative
term here is "natural"; but the concept of land need not be completely tangible.
It may be helpful to view land as an inverted pyramid extending from the center of the earth and projecting
outwards into the atmosphere. Land includes, but is not necessarily limited to the following elements:
● Surface ground. This is what most people think of when they hear the term "land," but it's obviously
much more.
● Subsurface soil and water. Landowners have traditionally owned the water underneath their land
surface and can access it at will. However, many local governments and new regulations have begun to
exercise control over aquifers and other subsurface water sources.
● Minerals, oil and gas. This is an extension of subsurface land rights. These elements are prime
commodities and can give the property owner additional income-if that owner still controls the rights to
those subsurface elements. For more information, see the "Subsurface Rights" article.
● Airspace above the ground. Believe it or not, air space is part of real estate. For example, your
neighbor cannot build an overhanging bay window that extends into your property's air space. An
increasingly more common discussion of air space involve condominiums, in which the condo owner
often only owns the air space within their units—but not the walls, floors or ceilings. For more
information, see the "Air Rights" article.
● Permanently attached natural elements (trees, boulders and vegetation). The law does differentiate
between permanent vegetation and annual crops. Trees, grass and perennials are called "fructus
naturales" and are considered part of larger real estate. Planted annuals and crops are called "fructus
industrials" and are considered personal property. For more information, see the "All About Fixtures"
article.
The concept of personal property, as opposed to real property, will discussed later in this article. As you can see,
however, the land can contain both real property and personal property. Ownership of land can also be further
divided into different facets-which allow for separate uses and manners of possession.
Example: Ownership of Land
Sally owns a ranch. She learns that there may be precious minerals under
her land. She would like to take advantage of this fact, without jeopardizing
her ranch operations. So, Sally sells the rights to the mineral under her land
without surrendering her land. The mining company that purchases the
mineral rights is allowed to mine for it, within strict limits, while Sally is free to
continue with her ranch operations.
Real Estate
The concept of real estate begins with land, but typically includes more. Real estate also includes all the artificial
improvements to land, such as buildings, sewers, pavements, fences and wells.
When discussing real estate, we are talking about the entire property as a physical entity—soil, minerals, air
space and all improvements. The real estate industry sees all of these as commodities that can be quantified,
bought, sold and transferred.
In short, the term "real estate" starts with the land, but then includes all improvements made to that land.
Real Property
The term "real property" normally applies to the legal concept of property ownership. In our system of property
law, there are different elements to ownership, especially with ownership of real estate.
When using the term real property, you should try to avoid thinking of the tangible, physical elements of real
estate. Instead, you should view the term "real property" as a concept or idea. The key issue here is ownership,
and the rights involved with ownership.
In this sense, what you own is not as important as how you own it. These elements or facets of property
ownership are often grouped into a "bundle of rights" that include the following five:
● Possession. This facet of ownership pertains to the right to occupy the property. For example, a
landlord gives the renter the right to temporarily possess, enjoy and exclude the property, but the
landlord keeps the right to control its usage and the right to dispose the property to another person.
● Enjoyment. This facet pertains to the right to possess the property without interference.
● Control. This facet pertains to the owner's right to determine how the property may be used.
● Disposition. This facet pertains to the owner's right to give, sell or transfer the property (either in whole
or in separate "rights") to another individual. This right to dispose is one of the cornerstone of the real
estate market.
● Exclusion. This facet pertains to the owner's right to restrict other individuals from accessing or using
the owner's property. Trespassing laws arise from this right.
When many people talk about property rights, it takes on an almost majestic set of rights. This goes hand in hand
with American principles (or myths) about self-reliance, privacy rights and individualism. We may find an
historical basis for this view of property rights in monarchial Europe, where landowners were essentially royalty
and had near-absolute power over their dominions, no matter how small.
Even in America's allodial system, however, ownership is never infinite or unlimited. The government reserves
the right to "take" any or all of the ownership elements from any private individual. However, the government
must justify any such "taking" as being for the public good and the owner must be compensated the fair market
value of the property taken. As long as the government meets these two conditions and follows due process, the
property owner cannot prevent such a taking.
For example, when the state, county or city must build a new highway or street, they will need to buy the homes
and properties in the path of the proposed road through a taking.
Another, more limited example, would be if the local county wanted to build a river-walk and took an easement
through the property of the riverfront owners. The property technically still belongs to the property owner, but the
easement gives the government full usage and control of the river's shore.
For more information about the government's ability to limit or take real property from their private owners, see
the "Eminent Domain" article.
Real vs. Personal Property
Most physical items can normally be classified into either real or personal property. This is an important
distinction in the real estate industry and can translate into serious money.
The quick way to understand the difference between the two types of properties is to think of personal property,
as everything not permanently attached to the real estate.
As noted above, real estate is land (with its included rights) and anything permanently attached to that land.
Personal property is legally called "chattel," most probably because defining the concept of personal property
became a legal need when cattle became big business.
● Attachment. The permanency of an item's attachment to the real estate determines whether it is real or
personal property. For example, a pile of wooden posts would be considered personal property until
they are driven into the ground to create a fence, at which time, they become part of the real property.
● Transfer. Real property is transferred with a deed; personal property is transferred with a bill of sale.
With most home purchases, the deed transfers the land and house, while the bill of sale handles the
transfer of the washer and dryer.
Per the preceding example, personally property can be converted into real property through the process of
attachment. Fixtures are objects that were previously personal property but have been attached to real estate,
thus making them real property. [Note: try not to confuse regular fixtures with trade fixtures; trade fixtures,
sometimes called chattel fixtures, are considered personal property.]
By the same token, real property can be converted into personal property through the process of severance.
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Air Rights
As the scarcity of real estate grows, the value of air rights has grown conversely, especially in areas of higher
density. Air rights are normal elements of real property. As such air rights are a commodity, and the landowner
can sell air rights just as easily as he or she can sell the minerals underneath the land.
Air rights refer to real estate space, specifically all or a portion of the air space above a parcel of land. Although
that air space is not something that can be touched, it is still quantifiable, measurable and marketable. That air
space is still real estate.
If you are having problems understanding the concept of air rights, consider that a farmer can sell the mineral
rights to a parcel of land, while still retaining ownership of the land for farming. That same farmer may also sell
the water rights that came with the land. That same farmer may also lease the land to a tenant farmer: the land
remains in the original farmer's ownership, but the tenant farmer receives possession of the land. As you can
see, the different facets of land and property rights can be separated. Air rights is just another facet of land.
Air rights most often apply to condominiums and space above railroads. The sale and purchase of air rights most
often occurs in urban areas, where land is scarce and every inch of space is valuable.
Because air space entails more of a three-dimensional element, the sale or transfer of air rights will entail legal
descriptions that refer to a datum, or recognized height marker.
Condominiums
Air rights come into play with many condominiums. Often, the condominium owner only owns the air rights, while
the homeowner association owns all the walls, ceilings and floors. The condo owner only owns the air space
within his or her unit. Nevertheless, that air space has proven very valuable, as condominium development has
exploded throughout the country.
Within the unit's air space, the condominium owner enjoys the usual bundle of real property ownership rights,
such as possession, control, enjoyment, exclusion and disposition. The homeowner's association can and does
impose restrictions on these ownership rights, but the unit owners are normally given wide latitude.
For more information, see the "Condominiums" article.
Railroads
Before the widespread advent of condominiums, one of the most prevalent application of air rights involved
railroads. With the density of many metropolitan areas and the advent of stronger construction materials
(particularly steel and concrete), many railroad companies made extra income by selling or leasing their air
rights.
The most common, but overlooked, example of using air space above railroads is street overpasses above
railroad tracks. When the local, state or federal government builds an overpass above train tracks, they first had
to obtain the air rights over those tracks.
A more discreet application has become more widespread in 20th-century cities, where land is so valuable. The
Merchandise Mart and Central Post Office in Chicago, portions of the St. Louis downtown riverfront and the Park
Avenue developments in New York are all examples of developments over railroad tracks. In each case, the
railroads sold or leased the air rights above their tracks to allow developers to build above them.
Of course, some of ground and sub-surface portions were also transferred so that columns and caissons could
be built to support the developments above. Caissons are typically from the ground surface down to several feet
below the surface; the columns would then rest atop the caissons.
Airplane Over-flights
Technology constantly forces the law to adapt to new sets of circumstances, while trying to maintain basic truths
and principles. This is particularly true with real estate in the case of airplanes.
Technically, a property owner's air rights extend from the land's surface all the way to the edge of Earth's
atmosphere. But the advent of airplanes and the timelessness of common sense have forced some compromise
in this concept.
Aircraft over-flights are not considered trespassing or a violation of a property owner's rights if those over-flights
are at a sufficiently high altitude and cause no inconvenience to the property owner. It is the low over-
flights—especially when they damage the property owner's property or inconvenience his or her enjoyment,
possession, usage or control—that invade the property owner's rights.
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All About Deeds
Many people unfortunately confuse titles and deeds. They are related, but they are not the same thing. Title
refers to the ownership rights to a property, either real property or personal property. So you can have title to a
car (personal property) or a condominium (real property).
Note that title ownership is a concept; it is not a piece of paper, although documents can confirm the title. The
car's title registration or your property's title abstract is not the title. They are merely evidence of title.
Unlike the concept of title, the deed is tangible. It is usually a piece of paper or other recorded instrument. Deeds
are also only used for real property—not personal property. If you want to convey ownership of personal
property, such as appliances or tools, you will probably use a "bill of sale" or other similar instrument.
The written deed is used to convey title to real property. Through the deed, the grantor (current owner or seller)
gives ownership interest in the subject property to the grantee (buyer or receiver). This article will discuss the
following deed elements:
1. Types of deeds
2. Requirements for a valid deed
Types of Deeds
Property buyers and investors, as well as their agents and attorneys, must carefully examine the deed presented
at closing and being used to convey the property. Even before the closing, the buyer's attorney should negotiate
to have the best type of deed, at least from the buyer's point of view.
Different types of deeds offer varying levels of protection and assurances to the grantee. There are five common
types of deeds used in most real estate transactions:
1. General warranty deed. This deed offers the grantee or buyer the greatest amount of protection,
because the grantor must make several guarantees about the property.
2. Special warranty deed. Also called a limited warranty deed, this deed does not provide all of the
guarantees of a general warranty deed.
3. Quitclaim deed. This deed offers the grantee no guarantees about the title and property. All it does is
convey any interests that the grantor may have.
4. Bargain and sale deed. This type of deed has slightly more protection than the quitclaim. The bargain
and sale deed normally indicates that the grantor actually has the power to convey the title. Other
guarantees may be added, but not required.
5. Grant deed. Similar to the special warranty deed, the grant deed only covers the actions of the grantor
(current owner) and makes no promises about previous owners.
All of the preceding five common deeds will be discussed in greater detail later in this article. Meanwhile, in
addition to the above, many states use special purpose deeds to handle certain transactions:
● Administrator's deed. This type of deed is used by the court-appointed administrator—who is charged
with disposing the remaining assets of a person who has died without a will—to convey the title of the
deceased person's real property to a purchaser, heir or other party.
● Deed in lieu of foreclosure. When mortgage loan borrowers have defaulted on their loan and have no
practical hope of recovering, they can avoid the further cost and demands of foreclosure proceedings by
surrendering their property to the lender. The title to the real property is then conveyed through this
deed. For more information, see the "What You Should Know About Foreclosure" article.
● Deed in trust. When establishing a land trust, this deed is used to establish the land trust and convey
the property ownership to the trustee.
● Executor's deed. This type of deed is used by the executor—who is appointed by the will of the
deceased person, to administer the terms of the will—to convey the title of the deceased person's real
property to a purchaser, heir or devisee.
● Gift deed. When giving or donating property without expectation of any repayment or consideration, the
gift deed may be used in some states.
● Guardian's deed. This type of deed is used by the court-appointed guardian—who is charged with
administering the assets of someone legally incompetent (because of age, senility or the like)—to
convey the title of the incompetent person's property to a purchaser or other party.
● Referee's deed. In many states and localities, the referee's deed is used to convey title sold during a
foreclosure sale.
● Release deed. Also called a deed of release, the release deed is used to remove liens and claims
currently recorded against the property. This is primarily used to remove a trust deed. The lender will
issue the release deed when the outstanding loan has been satisfied.
● Sheriff's deed. In many states and localities, the sheriff's deed is used to convey title sold during a
sheriff's sale or an auction of a property, ordered by the court, to satisfy a judgment. For more
information, see the "Everything You Want to Know About Foreclosures" article.
● Tax deed. When title to the property is sold by the court to satisfy unpaid delinquent taxes (usually real
estate), the tax deed is used to convey the property's title to the purchaser. For more information,
please see the "Buying Tax Sale Properties" article.
● Trust deed. Also called a deed of trust, this instrument is sometimes used instead of a typical mortgage
note to secure a mortgage loan. For more information, see the "Real Estate Trusts" article.
● Trustee's deed. When removing title from a trust, the trustee will often use the trustee's deed to convey
title out of the trust.
General Warranty Deed
For the property buyer, the general warranty deed is the most attractive because it provides the
most protection. The general warranty deed extracts several covenants and guarantees from
the grantor (seller) that the grantor's title to the property is valid, marketable and can be legally
conveyed to the grantee (buyer).
General warranty deeds normally contain at least five covenants, by which the grantor offers
guarantees about the title:
1. Covenant against encumbrances. The grantor provides assurances that property's

title and real estate have no encumbrances other than those expressly stated in the
deed. For more information, see the "Marketable Title" and "All About Easements"
article.
2. Covenant of further assurance. If title defects are subsequently found, this covenant
activates the grantor's promise or agreement to perform any acts required to correct
those defects, within reason.
3. Covenant of quiet enjoyment. This covenant is the grantor's assurance that no other
person or party has claims to the property that are superior to the grantee, except as
spelled out in the deed. The grantor guarantees that the grantee's title ownership will
be good against any other claims of title ownership of the subject property. So, the
grantee can rest easy and not have to worry about being evicted or disturbed by a
third party having better title or lien.
4. Covenant of seisin. The legal term "seisin" or "seizin" assures that the grantor
actually possesses the ownership interest being conveyed and has the right, authority
and legal capacity to convey that ownership interest. For example, if the seller is
conveying fee simple absolute ownership of a parcel of property, that seller would be
violating this guarantee if in fact the seller only had a fee simple defeasible estate.
5. Covenant of warranty forever (warranty of title). If the title conveyed is
subsequently challenged by another person or party claiming actual ownership, this
covenant requires the grantor to pay for any expenses required to defend the title
against that challenge.
The grantee can sue the grantor for damages and/or to force the grantor to correct defects, if it
is later discovered that the title is not as marketable and encumbrance -free as promised. Note
that receiving a general warranty deed does not necessarily mean that the grantee receives
good, clear title. The grantor may be a liar or con artist. The grantee can try to sue the
grantor—if the grantor can be located and forced to comply—but the damage is already done.
Although the above covenants should be clearly included in the general warranty deed, some
states set forth that those covenants are assumed if the deed is identified as a general
warranty deed. For example, Illinois, Wisconsin, Michigan and Minnesota recognize all of the
usual general warranty covenants if the deed contains the granting clause "convey and
warrant." Virginia, West Virginia and Pennsylvania recognize the same with the granting clause
"warrant generally."
Special Warranty Deed
Also called a limited warranty deed, the special warranty deed may be used if the grantor
(seller) does not want to assume all the risk and liabilities of a general warranty deed. Some
states call this a grant deed.
The special warranty deed usually does offer limited covenants of seizin and against
encumbrances . So the grantor assures valid possession and ability to convey title, but limits
guarantees about encumbrances to the period that the grantor actually owned the property. An
"as is" or bankruptcy sale of a property will often use a special warranty deed.
For example, Jack buys a house from Jill. Jack later sells the property to Spot with a special
warranty deed. If Jack had taken out a mortgage loan shortly before selling it to Spot and did
not disclose it—and that mortgage places a lien against Spot's property-—Jack is still liable.
However, if it comes to light that Jill had secretly sold interest to the property before selling it to
Jack and that other party now challenges Spot's title, then the special warranty deed relieves
Jack of any liability.
Quitclaim Deed
The quitclaim deed accomplishes a simple conveyance of the grantor's ownership interests or
claims to ownership interest. The quitclaim deed offers no guarantee that the grantor actually
possesses any ownership interest, let alone has the ability to convey title. In fact, the quitclaim
normally only conveys the grantor's current interest, if any, and not the property itself.
If the grantor's purported interest are false or invalid, no ownership interests or property are
conveyed. Also, if the grantor gains ownership interest after the quitclaim deed is conveyed,
that ownership interest remains with the grantor and is not covered by the outdated quitclaim
deed.
Quitclaims are often used in corrective or simple situations. For example, if the title erroneously
lists the ownership as Susan Jones (instead of Suzanna Jones) Suzanna can record a
quitclaim deed with the correct spelling. Another example is if Quincy helped his daughter
Paula buy a house, and then Quincy wanted to remove his name from the title, he can issue a
quitclaim deed that would remove him from the title.
Quitclaims are also recommended if the grantor (seller) is unsure about the quality of the title
he or she possesses. For example, if you obtained a property through a foreclosure sale or
adverse possession, you may want to consider using a quitclaim deed when you sell it.
Bargain and Sale Deed
Sometimes called a "deed without covenants," the basic bargain and sale deeds offer no
warranties, making them similar to quitclaim deeds. However, there is always a clear
assumption that the grantor actually possesses and is able to convey title to the property. So
unlike the quitclaim deed, the bargain and sale deed actually does convey the land—and not
just the grantor's interests.
Grant Deed
Similar to the special warranty deed, the grant deed only covers the actions of the grantor
(current owner) and makes no promises about previous owners. This may be acceptable to
some buyers, if they conduct a thorough title examination and due diligence, as well as obtain
title insurance coverage. However, many buyers try to stay away from grant deeds, instead
favoring the general warranty or other stronger forms.
Requirements for a Valid Deed

There are several requirements that must be met to make a deed completely valid. The most basic and
overarching of these requirements is that the deed must meet all of the legal requirements of the state in which
the subject property is located.
If the deed is being used to convey title to property in Alaska, the deed must meet all of Alaska's legal
requirements—even if the transaction is being closed in an office in Miami.
Although each state varies, all states have most of the following requirements:
1. Written. The statute of frauds of most states typically requires written deeds, making oral deeds
unacceptable.
2. Identified parties. The full names of both the grantor and grantee must be included, often with their
current official address. The name indicated as grantor should be the same name currently recorded as
titleholder to the property. However, if the indicated name is different from the grantor's true name, the
deed is still valid. Thus, misspellings and different names will not invalidate a deed-in fact, the grantor's
name often does not have to appear in the deed-as long as the grantor adequately signs it. A common
way to confirm this fact is with the use of the term "the undersigned" at the start of the deed.
3. Grantor capacity. The grantor must be of legal age and legal competence to convey the title. Most
states will void a deed if the court has declared the grantor to be insane or mentally incompetent to
understand in a reasonable matter the nature and consequences of the transaction, especially at the
time the deed is signed.
4. Consideration. The deed should clearly describe the consideration, such as the purchase price, being
given to the grantor for conveying the property. But this has become a formality with most deed forms,
so the actual presence of consideration is unnecessary. Consideration may not be even necessary,
especially if the grantor is "giving" the property to the grantee. Note, however, that creditors may
invalidate such gift transfers as fraudulent attempts to circumvent the creditors' rights.
5. Granting clause. Also called words of conveyance, the deed must clearly state the grantor's intention
to convey the title to the grantee. Warranty deeds typically use the phrase "convey and warrant" or
"grant, bargain, and sell." Quitclaim deeds typically use the phrase "convey and quitclaim" or "remise,
release, and forever quitclaim."
6. Habendum clause. The deed's habendum clause describes the estate being conveyed. This clause will
indicate whether the title being conveyed is fee simple, life estate or leasehold. This clause should be
read carefully. For example, whenever a time limit or condition is indicated, the fee simple could be
turned into a leasehold or life estate. Also, if the habendum clause indicates some sort of usage, the
conveyances may just be of an easement, rather than fee simple or leasehold. For more information
about types of estates, please see the "Title and Estates in Land" article.
7. Legal description. A complete and precise legal description of the subject property must be included in
the deed. For more information, see the "Survey and Legal Description" article.
8. Grantor signature. The grantor must sign the completed deed. Note, however, that the grantee's
signature is not required. If the signed name does not match the name indicated in the body of the deed
or the grantor's true legal name, the deed may still be considered valid. [For example, Jonathan Xavier
Jones signs his name John X. Jns, the deed may still be considered valid.] Persons unable to write may
affix their mark with an X or sometimes a thumbprint, but a witness is usually required for such
signatures.
9. Delivery. The deed must be legally delivered by the grantor during the lifetime of the grantor; and some
states require that it be accepted by the grantee to complete the transaction. If the grantor fails to deliver
the deed while he or she is still alive, the deed (even if signed) will not be valid if the grantor has died
before delivering the deed. However, the grantee does not have to receive the deed in order for delivery
to occur. Delivery occurs whenever the grantor has executed the deed and signifies his or her intention
to finalize the deed. Although words and action are normal, deeds can be delivered without one or the
other. Note that silence by the grantee or the official recording of the deed is typically considered
acceptance by the grantee.
10. Recording. To make the conveyance official, the deed must be publicly recorded, usually with the local
county records office. This recording also prevents title challenges from third parties.
Optionally, the deed may also contain the following items:
● Warranties of title. Indicate any covenants or guarantees that the grantor provides with the deed.
● Recitals. Indicate mortgage liens and other encumbrances against the property.
● Exceptions and reservations. The grantor may set aside certain portions of the property or the estate
being conveyed. These exceptions and reservations must be clearly spelled out in the deed.
● Official date. This is customary, but lack of it will not necessarily invalidate the deed.
● Seal. Most states no longer require seals, but a few still do. However, most states require official
corporate seals on deeds executed by a corporation.
● Witnesses. Many states require witness signatures, often two separate persons, to make the deed
official. They are definitely required when the deed is signed and executed with a mark.
● Documentary stamps. Often called transfer stamps, these are forms of taxes charged by states,
counties and municipalities to convey property or to record certain legal documents. For example, a
1999 home purchase in Chicago will incur a $1 per $1,000 (of the sales price) transfer stamp charge
from the state of Illinois, as well 50¢ per $1,000 charge from Cook County and a shocking $7.50 per
$1,000 from the city of Chicago.
It should go without saying that a deed obtained by fraud, forgery, misrepresentation, or coercion can and will be
voided and set aside by the courts. The courts may also set aside mutual mistakes, when both the grantor and
grantee have serious, mistaken assumptions about the transactions.
We hope that you've found our Mortgage and Real Estate Glossary helpful and informative. We welcome all
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All About Easements
Practical considerations inevitably place limits on absolute freedom and control. We have the right to free
speech, but that right can be curtailed when the greater good of the community demands it. Such limits are
definitely the case with real estate, where private ownership is occastionally curtailed in favor of the common
good or the needs of the neighbor.
An easement is the right of an individual or group to use or limit the use of the property owned by another
landowner. Technically, the easement's use is for a special purpose. But in effect, the property owner gives up
control—one of the bundle of ownership rights property owners normally possess—of a portion of his or her
property.
In most cities, the most common type of easement is the sidewalk. The sidewalk cuts across the property of
homeowners and allows the general public to walk through the property. The sidewalk technically belongs to the
property owner; but the community has an easement through the owner's property.
This article will review the following issues regarding easements:
1. Classification of easements
2. Creating & Ending Easements
Classification of Easements
Easements can be either positive or negative:
● Negative. A negative easement prevents or limits the property owner's right to control or use his or her
property with unlimited freedom. [For example, two townhouses are built adjacent to each other, and
Townhouse A builds a sundeck on her roof to enjoy the sun. She can try to get an easement against her
neighbor in Townhouse B to prevent him from increasing his building height in any way that may
significantly block her sunlight.]
● Positive. A positive easement allows an individual or group to use the property of another property
owner. This use must be for a specific purpose. [For example, Laura owns a ten-acre lot next to the
lake. She sells a three-acre portion by the road to Brad, but Brad's land is blocked from the lake by
Laura's remaining seven acres. As part of the sales agreement, therefore, Brad gets an easement to
use a small roadway through Laura's property to access the lake. Brad can only use that easement to
access the lake; he cannot build a guest cottage or garage on it, because his easement use is limited.]
An easement is a legal encumbrance upon a property and its ownership. Easements affect both the title to the
property and the property's physical condition.
There are two general types of easements:
● In Gross. Easements in gross are personal rights given to individuals or specific groups. Once the
easement owner dies or, in the case of corporations, terminates, the easement ends. [For example, if
the above scenario with Brad and Laura was an easement in gross, Brad's heir would not be able to use
the easement after Brad dies, unless special provisions are made.]
● Appurtenant. Appurtenant easements are more permanent and are given to both the property and its
owner. If the property owner with an easement sells the property, the new buyer will receive the
easement rights that belong with the property. [For example, if the above scenario of Brad and Laura
was an appurtenant easement, the right to cross Laura's land to get to the lake would belong in near-
perpetuity to whoever owned Brad's land. If Brad sold it to the Hell's Angels, they would be able to
access the lake through Laura's property.]
Appurtenant Easements
As introduced above, appurtenant easements allow a property owner to use or limit the use of
a portion of a neighboring owner's property. The common phrase associated with appurtenant
easements is that they "run with the land," which means that even if ownership changes, the
easement continues. The appurtenant easement is, in fact, meant to benefit a parcel of
property; it only benefits the property owner indirectly.
This section will review three areas of appurtenant easements
1. Elements of appurtenant easements

2. Easements with leases
3. Party wall easement
4. Easement right to burial
Elements of appurtenant easements
To be a legal appurtenant easement, the properties involved must be

adjacent to each other and must be owned by separate entities. In the above
example of Brad and Laura, if Brad purchased the rest of Laura's land, he
would no longer have an easement-because he would be the owner of both
properties involved in the previous easement.
The two parties to an appurtenant easement have legal titles that describe
their user-victim relationship. Remember, however, that appurtenant
easements belong to the property-not necessarily the person:
● Dominant tenement. The real property that benefits from the

easement is normally called the dominant tenement. In the above
example, Brad's property is the dominant tenement because it is
able to use a portion of Laura's property.
● Servient tenement. The real property that allows itself to be used or
limited is normally called the servient tenement. In the two previous
examples, Laura's property and Townhouse B are servient tenement
because they are the ones being controlled and used by the
easement.
Easements with leases
It is legal for a property owner to give an appurtenant easement to a tenant. It

is still appurtenant, since if the tenant can and does sublease to a new
sublessee, that new tenant (sublessee) can continue to enjoy the benefit of
the easement.
For example, a mall owner leases a large store to a commercial tenant. As

part of the lease, the landlord gives the tenant an appurtenant easement to
drive delivery trucks through the landlord's rear property. If the tenant goes
out of business and sublets the store to another business, that new sub-
lessee business can continue to use the easement.
Party wall easement
Townhouses are, in fact, some of the most common example of appurtenant

easements. Townhouses typically have party walls that straddle the boundary
of two separate parcels of property. This situation is governed by a party wall
easement, in which each owner owns his or her half of the wall but has an
easement over the other half of the wall.
For example, Achilles and Zena own neighboring townhouses that share a
party wall. Achilles owns his half of that wall, but he and his property also
have a party wall easement over Zena's half of the wall. Such an easement
would prevent Zena from causing any damage to her side of the wall that may
affect the party wall as a whole or Achilles' half of the wall.
Easement Right of Burial
Often times, when a purchaser buys a cemetery lot from a cemetery

corporation, that purchaser does not buy a fee simple or leasehold interest in
the property. Instead, the cemetery lot deed usually only provides an
easement right of burial. This deed allows access for the purchaser and
certain others for visitation or to care for the grave.
Note that like other easements, however, this easement can be terminated by
abandonment.
Easement In Gross
As mentioned earlier, easements in gross provide easement rights to individuals or groups for
the life of the easement holder. Because easements in gross are given to individuals, adjoining
properties are not required. In fact, easements in gross can involved only one parcel of
property, since there is only a servient tenement (with no dominant tenement necessary).
The most prevalent easements in gross are commercial easements for utility companies.
Electric, gas, telephone and cable companies use easements to cut through the properties of
landowners to provide utility service to that property owner and the neighboring properties. In
addition, streets, railroads and alleys are sometimes created through easements in gross.
Although the easement in gross normally cannot be transferred, commercial

easements—which are established for profit—can be bought, sold and mortgaged.
Nevertheless, an easement holder cannot transfer to another property greater easement rights
than it actually holds. For example, if an electric company holds a commercial easement to run
wires across properties for the specific purpose of providing electricity, it cannot then
necessarily lease or transfer its easement rights to a cable company. However, if the easement
was to provide electricity and "messages," then such a lease or transfer may be allowed.
Cable access has been a somewhat complicated, developing issue in easement law,
particularly since a 1973 Federal Court decision held that cable television companies were
NOT public utilities.
Easement vs. License
The easement in gross should not be confused with a license, although they
may seem very similar. The easement is a more permanent right, while the
license is temporary. This is reflected by the fact that easements are normally
created by a written document, while the license can be verbal.
The license is a limited privilege, allowing access and, sometimes, use of a

parcel of property, for a specific purpose. For example, purchasing a valid
Wrigley Field ticket would provide you with the right to enter and watch one
Chicago Cubs game. Once the game is over, that privilege terminates. At the
same time, the license is revocable; so Wrigley Field security can expel
unruly or unwanted spectators.
Creating & Ending Easements

The law provide for various ways to establish and end easement (both appurtenant and in gross) rights.
When creating an easement, it is important for the easement granter to define the purpose. If no purpose is
defined, this easement may actually be construed as a full transfer of property.
There are eleven common ways to create an easement:
1. Written agreement. This method uses a simple contract, signed by both parties to the easement
agreement. Many party wall easements are created through an agreement.
2. Express grant in deed. The property owners to the dominant tenement or benefiting party grant a
written instrument describing the terms and parameters of the easement. This is preferably done
through a deed, but not always. Often this easement is simply written into the deed of transfer that is
being used to sell or transfer the property.
3. Express reservation in deed. The deed used to transfer property ownership may also be used to
reserve or create an easement for the seller or other parties. For example, Joey owns a big lakefront lot.
He sells the half along the lake to Richard. As part of the sales agreement and deed, Joey reserves an
easement through Richard's property so that Joey can still access the lake.
4. Implied grant. An easement can be created without a written agreement or deed. Implied grants give
the property buyer or acquirer the easement, even though there is nothing in writing. Such implied
agreements are upheld based on the intention of the parties and the facts on the ground. [For example,
a developer built two adjoining buildings. To save a little money, the developer only builds one rear
staircase to be shared by both buildings, which ran over the boundaries of both buildings. The developer
sold building A to Alvin and building B to Betty. No easement was mentioned in the deeds. Betty
decided to tear down her building and rebuild; however, she could not destroy or compromise the rear
staircase, because Alvin had an implied easement across Betty's property to use the rear staircase.
5. Implied reservation. Similar to express reservation, except that the easement is not in writing—but is
supported by the intention of the parties and the facts on the ground. For both implied grants and
reservations, the prior use must be obvious, in the open, necessary and, in most cases, the separate
parcels must have been owned by one individual when the easement use began.
6. Mortgage. The mortgage instrument can be used to create an easement. For example, if Melvin owns
two adjoining lots (A and B) and decides to mortgage lot B to obtain some cash, the lender may require
that an easement through lot A be created to benefit lot B. That easement can then be created and
recorded with the mortgage instrument.
7. Condemnation. When the government legally takes (through its power of eminent domain) real
property or full use of it from its owner, the government does so through the process of condemnation.
For example, the government uses this process to create back road through a property owner's ranch.
The owner is unwilling to sell, and the court forces an easement over the land. However, the original
property owner, in this case, remains the owner and may still be able to use the subsurface land
beneath the road—as long as the roadway is not compromised.
8. Prescription. Related to squatter rights, easement by prescription is created without agreement by
constant use over time. To acquire such easement rights, the use must be continuous (uninterrupted for
five to 25 years, depending on state), adverse (without the owner's consent), open, apparent, notorious,
under claim of right (doesn't recognize real owner's rights) and separate (not just as a member or
representative of the public, although a related group is acceptable). [For example, Barney attached a
satellite dish that extended over Fred's property. Fred kept complaining to Barney to move it; Barney
just ignored Fred. Fred never took any action besides complaining for more than two decades. When he
finally took Barney to court, Fred lost because Barney had qualified for an easement by prescription.
However, if Fred would have just given Barney temporary permission for the satellite dish, no easement
would have been created.]
9. Necessity. U.S. law holds that land is valuable and should not be wasted by being landlocked. Each
parcel of property has the right to practical ingress and egress for the owner. For example, if a
subdivision creates a landlocked property, with no practical access to roads, an easement by necessity
is allowed and created through one of the neighboring properties. Although similar to implied
easements, easement by necessity is a different category and is actually very rare.
10. Sale of land by reference to a plat. Similar to implied easements, this method gives property owners
certain easements not expressed in any deed or agreement. When a developer subdivides a large
property using a plat (with lots, streets and blocks), each lot buyer receives an easement over the
streets and alleys portrayed in the plat. If the developer wanted to suddenly block off a street to create
additional lots to sell, the owners of the other lots can effectively stop the developer.
11. Estoppel. Similar to an implied easement, an easement by estoppel can be established by the facts on
the ground and the action of the property owner or representative. For example, a resort subdivision
markets its lots with reference to amenities that include use of a community building. An easement by
estoppel has been established; and, if the developers decide to forego the community building, the lot
owners can force such construction.
12. Declaration. With condominium, planned unit development (PUD) and townhouse developments, the
many easements are often set forth in a separate declaration.
As noted earlier, easements are created for a specific purpose. The ownership still belongs to the property owner
in the servient tenement position. This means that any profits from the soil, such as minerals, hay, oil or gas still
belong to the property owner.
There are five common ways to terminate an easement:
● Expiration. Some easements, especially ones created by agreement, will specify a term or period of
time. Once that term expires, the easement also ends.
● End of purpose. Since easements are created with a specific purpose, the end of that purpose would
end the easement. For example, lot X was landlocked, so it had an easement through lot Y. When the
local government built a road behind lot X, lot X no longer needed to use the easement through lot Y,
thereby allowing lot Y to terminate that lease.
● Merger. Remember that appurtenant easements require that the adjacent dominant and servient
tenements must be owned by separate entities. If one individual now owns both properties, the
easement automatically ends.
● Agreement. The person or group who owns and benefits from the easement can always agree to
terminate the agreement. For example, Brad has an easement to cross Laura's property to get to the
lake. Laura could theoretically offer him some money in exchange for Brad voluntarily terminating his
easement rights.
● Abandonment. Depending on the state-set time limits, if the easement is not used, it can be
terminated.
If you are interested in more information, see the "Marketable Title" and "Real Estate Introduction" articles.
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All About Fixtures
Technically speaking, a fixture is any object that has become part of the real estate or real property. A fixture
begins as personal property but becomes real property through the process of attachment or accession . But the
real estate industry distinguishes between different types of fixtures, and they are treated in different ways by the
courts.
For example, the lumber, concrete, wiring and other materials used to build a gazebo are considered personal
property when they are dropped off by the supplier and sitting on the front lawn. When they are attached to the
land to build the gazebo, those same materials become fixtures and real property.
This article reviews the two basic types of fixtures:
1. Regular fixtures
2. Tenant fixtures
The fixture is a legal real estate concept that can cause problems for the parties involved, if one or all of the
parties are ignorant of the law. For example, John builds a fence around his house; that fence becomes a real
estate fixture. When John sells his house (and all its real estate) to Sally, in most instances, he cannot remove
the fence because it is part of the real property.
Regular Fixtures
Regular fixtures are real property and are legally part of the real estate. They are converted from personal
property into real property through the process of attachment. The most common examples of fixtures in a home
are the sinks, toilets, bathtubs, counters and ceiling lights.
Because they are part of the real property, home sellers are usually prohibited from ripping them out when they
sell their real estate. As real estate, fixtures are included in the real estate sales contract and are transferred
through the deed.
Tenant Fixtures
Although many fixtures that a tenant installs to a property are treated like regular fixtures—and cannot be
removed because they become part of the real property—there are three classes of tenant fixtures that may be
removable:
1. Trade fixtures
2. Agricultural fixtures
3. Domestic fixtures
Occasionally, a landlord and tenant—or buyer and seller—may have a dispute about whether an item is a fixture
(and part of the real property) or the removable personal property of the owner. If it goes to court, most
arbitrators and judges consider four questions in determining the status of the object:
● Agreement. A written agreement would be the most clear-cut evidence of an object's status. If the
buyer has any doubts, he or she should specifically itemize assumed fixtures into the real estate sales
contract. By the same token, the seller should itemize any fixtures that the seller wishes to exclude and
sever from the real property. [Note that real estate typically requires a written agreement to be binding;
because fixtures are considered real property, an oral agreement may not be sufficient.]
● Intention. Unless there is a written agreement, the courts must try to ascertain what the parties
intended. For example, it would be a good practice for home sellers is to place notes on fixtures such as
curtain rods, drapes, ceiling fans and bird baths that the seller intends to take away when moving.
Without such explicit notice of intention, the courts will have to try to determine what the seller and buyer
intended to do with those items.
● Attachment. The manner and method of attachment goes a long way in determining fixture status.
Courts will typically rule that an item is a fixture if it is permanently attached to the real property or if its
removal would cause permanent or considerable damage to the real property. For example, a painted
mural would cause extreme damage to the building's wall if it were removed.
● Adaptation. Any objects that are customized or adapted for the specific real property are considered
fixtures and part of the real property. For example, storm windows and built-in shelving may be
removable; but they are normally considered fixtures because they are customized for the real property.
If the courts cannot make a decision based on the preceding four considerations, the established law usually
applies the following priorities:
1. Buyer over the seller

2. Tenant over the landlord
3. Lender over the borrower
Trade fixtures
Trade fixtures, often called "chattel" fixtures, normally come into play with leased property,
especially commercial leases. Trade fixtures are any objects that a tenant attaches to the real
property (land or building) for use in the tenant's business. However, even though they are
attached, often with some permanence, trade fixtures remain the personal property of the
tenant.
For example, business signage, display counters, store shelves, liquor bars and machining
equipment are often well, if not almost permanently, attached to the building or land. However,
they are personal property and can be removed by the tenant, since they are part of the
tenant's business.
There is also an economic logic behind this exception for trade fixtures. If tenants could not
remove them, then landlords would bear the responsibility of outfitting their tenants with such
equipment and materials.
The landlord does have some protection. Any damage to the real property cause by the
tenant's removal of trade fixtures must be repaired or paid for by the tenant.
If a trade fixture is not removed when the tenant moves out, those trade fixtures become the
landlord's property through the process of "accession." For example, if a restaurant goes
bankrupt and the owner foregoes his right and the expense of removing all the kitchen
equipment, dining booths and other trade fixtures, those trade fixtures become the landlord's
property. In this manner, they will no longer be trade fixtures and can actually become regular
fixtures, hence real property.
Agricultural fixtures
Tenant farmers are normally allowed to remove objects and equipment used to operate a
farming business. Similar to trade fixtures, tenants may remove sheds, chicken coops, watering
sloughs, corrals, cider houses and vineyard poles.
However, orchards and other perennial crops often cannot be removed. As noted earlier, the
best approach is to have a clear agreement about which fixtures can and cannot be removed.
Domestic fixtures
In most cases, fixtures installed by a residential tenant are removable, within certain limits.
Bookshelves, curtains, drapes, blinds, chandeliers, ceiling fans and satellite dishes are all
examples of fixtures installed by tenants that can later be removed by the tenant. However, the
landlord is usually allowed to charge for any damage that such installation or removal may
cause to the leased premises.
Note that it is up to the tenant to remove such fixtures. If the tenant fails to remove those
fixtures after the lease has terminated, those fixtures become part of the real property owned
by the landlord through the process of accession .
This process, of course, does not apply to the tenant's personal and other non-attached
properties. Many states require the landlord to put leftover properties in storage, allowing the
tenant to retrieve them for a fee for the landlord's time, services and cost. A common
exception, however, is with evictions, when the tenant's property can be placed at the sidewalk.
For more information about fixtures and related issues, see the "Real Estate Introduction" and "Title and Estates
in Land" articles.
What You Should Know About Foreclosures
Foreclosure is the ultimate penalty for property owners who default on their mortgaged obligations. The true
health of the national economy can often be measured by its foreclosure rate, the percentage of homeowners
falling into default and foreclosure. This is particularly true in America, where great emphasis is placed on
homeownership.
There are many reasons why mortgage borrowers fall into foreclosure . They may have bit off more than they
could chew and obtained a loan they couldn't afford. Most who face foreclosure do so because a dramatic event
has occurred, which has affected their ability to make payments, such as job loss, health problems or major
emergency. Investors who face foreclosure often do so because they miscalculated, though occasionally
mismanagement may be the cause. Regardless of the cause, the foreclosure process is a stressful and drastic
event for most property owners, especially homeowners. Depression and despair are common results of
foreclosure .
But the truth is that property owners facing foreclosure have many tools and options available to them.
Foreclosures can be fought and reversed, and borrowers have the right to redeem their property-even after the
foreclosure sale in many states.
The two biggest obstacles preventing distressed borrowers from successfully fighting (and surviving)
foreclosures are lack of knowledge and lack of hope. This article seeks to provide the knowledge; from there, we
trust that the borrower can and will find hope. This article will approach this task through four sections:
1. History of mortgage foreclosures

2. Types of foreclosures
3. Foreclosure process
4. Relief against foreclosure
Go to next segment: "History of Mortgage Foreclosures"
The "What You Should Know About Foreclosures" article contains the following four sections:
1. History of mortgage foreclosures

2. Types of foreclosures
3. Foreclosure process
4. Relief against foreclosure
All About Leases
A lease agreement is to a leasehold estate as a deed is to a freehold estate, but it's actually a little more. A lease
conveys property just like a deed, but the lease is also a contract and its conveyance is limited and temporary.
For consideration of rent payments, the grantor (landlord) transfers a limited ownership interest in the property.
This discussion of leasehold estates and leases is divided into three parts:
1. Leasehold estates. The four categories of leasehold estates are the legal foundation of real estate
leasing and tenancy.
2. Types of leases. The various types of leases most commonly encountered in the real estate market.
3. Elements of a lease. The requirements, contents and special elements of a lease agreement. Because
of the many elements involved, this portion involves an entirely separate article called "Requirements
and Elements of the Lease."
All states have enacted a statute of frauds, which set requirements for certain contracts. Most states require that
lease agreements of more than one year must be in writing. Monthly and other short-term leases can be oral, but
should be written when possible. Two terms that everyone should understand relate to the two parties of the
lease.
● Lessor. In the lease agreement, the landlord or property owner is called the lessor. The lease
agreement normally gives the lessor a reversionary right to retake possession of the property, if the
tenant defaults.
● Lessee. The legal name for the tenant or renter in a lease agreement is the lessee.
This lengthy discussion, along with the "Requirements and Elements of the Lease" article, provide a detailed
introduction to leases and leasehold law.
Leasehold Estate
The tenant's ownership interest is legally called his or her leasehold estate. Although the real estate lease
agreement concerns real estate, this leasehold estate is legally treated as the personal property of the tenant.
There are four basic categories of leasehold estates (not to be confused with leases):
● Estate for years

● Periodic estate
● Estate at will
● Estate at sufferance
Estate for years
When lease agreements are used to convey a leasehold estate, the specific leasehold category
is normally an estate for years.
The estate for years is a leasehold estate set for a definite period of time. Contrary to its name,
the leasehold estate does not require a term of one or more years. An estate for years can
have a term of three months, six months, one year, 40 years, etc. The key here is the term or
definite period of time. Neither party can arbitrarily terminate the leasehold agreement without
cause.
If the tenant continues to occupy or keep possession of the rental property after the end of the
lease agreement and no provisions have been made, the estate becomes a tenancy at
sufferance. The law usually does not consider the tenant to be a trespasser, because the
tenant's original entry, occupancy and/or possession was legal. The tenant is now subject to
eviction. The landlord must take care not to accept any rental payments during this period, as
the tenant's possession becomes re-legalized and converts into a periodic estate, or periodic
tenancy.
Note that a one-year lease can turn into a year-to-year periodic tenancy (see below) if the lease
has expired and the landlord continues to receive rental payments without indicating the type of
tenancy now in effect. This means that the one-year lease is automatically renewed for another
year. However, this also goes both ways; if the tenant remains after the one-year lease has
expired, the landlord may be able to hold him or her responsible for another full year.
Fortunately, most lease agreements have provisions for such holdover tenancy, normally
converting it into a month-to-month tenancy.
If the tenant dies during the term, the leasehold estate continues; it merely passes on to one of
the tenant's heirs, who assume the lessee role. By the same token, if the landlord dies during
the term of the lease, the landlord's responsibilities passes on to his or her heirs, estate or
executor.
All states have passed statutes regulating the relationship between the landlord and tenant.
When there is no written lease agreement, as in the case of the periodic estate (below), the
relationship is assumed to follow all state and, often, local requirements. However, if there is a
lease agreement, as with an estate for years, the lease agreement may actually amend such
state and local statutes, if allowed by law.
For example, some states give the tenant full exclusive use of the rental unit. The landlord may
not enter the property without the expressed consent of the tenant. However, many written
leases often give the landlord the right to enter the tenant's property without notice for specific
situations, such as emergency or to show the property to prospective tenants or buyers.
The maximum term for leasehold estates and agreements is set by each state. Historically, the
maximum term for a lease had been recognized as 99 years, the same term that was used for
Britain's lease with China for Hong Kong and Portugal's lease with China for Macao.
Periodic estate
When the legal relationship between the landlord and the tenant is verbal and essentially
unwritten, it is usually as a periodic estate, which is sometimes called periodic tenancy or an
estate (tenancy) from period to period. However, the periodic tenancy can sometimes—and
probably always should be—in a written agreement.
When no lease agreement is present, state and local statutes govern the landlord-tenant
relationship. One of the key statutes that apply especially to periodic estate/tenancy is the
notice requirements for termination.
Periodic tenancy continues indefinitely from period to period, and does not end unless the
tenancy is properly terminated. Strictly speaking, a month-to-month tenancy begins anew with
each month's rental payment. In fact, however, the tenancy renews and continues even when
the tenant fails to make a timely payment.
This restriction, however, is normally a two-way street. The tenant's responsibility will continue
indefinitely unless that tenant formally terminates the tenancy. If a tenant decides to vacate the
premise at the end of a paid month, that tenant will continue to be liable for future rent
payments if the tenancy has not been terminated.
A late payment does result in delinquency and default. But to terminate the lease agreement,
the landlord and/or tenant must provide a proper notice of termination. Each state has its own
governing statutes, but most states share similar notice requirements:
● Week-to-week tenancy. The terminating party must give notice to the other party at
least one week in advance.
● Month-to-month tenancy. The terminating party must give notice to the other party at
least one month in advance. Note that when no tenancy period is specified by either
the landlord or tenant, it is assumed to be a month-to-month tenancy.
● Year-to-year tenancy. Although most year-long tenancies are governed by (estate for
years) lease agreements, if it is a periodic estate, notice usually must be provided at
least three to six months in advance. Again, remember that this tenancy or leasehold
estate does not terminate after one year; instead, it renews each year.
If the required termination notice period is not met, the termination notice is effectively void.
Note that when the landlord is processing an eviction, most state and local landlord-tenant laws
require the landlord to reject any rent payments from the tenant. If the landlord does accept a
payment, the periodic tenancy may be reinstated and any eviction attempts would have to be re-
initiated.
Estate at will
Lease Requirements and Elements
A lease agreement is both a contract and a real estate conveyance. Because it is a contract, the normal
requirements of a contract apply. However, there are additional elements that apply particularly to leases.
This discussion seeks to provide a detailed review of the lease agreement and its constituent parts:
1. Basic lease elements

2. Tenant responsibilities
3. Landlord responsibilities
4. Condition of property
5. Termination of lease
Although you can jump directly to any of the above segments by simply clicking on the appropriate link, we
recommend that you review this article in the arranged order.
If you have not yet already done so, please review the "All About Leases" article, which precedes this
presentation.
Go to next segment: "Basic Lease Elements: Part 1 of 3"
The "Requirements and Elements of the Lease" article contains the following segments:
1. Basic lease elements

2. Tenant responsibilities
3. Landlord responsibilities
4. Condition of property
5. Termination of lease
Ground Lease
lease.
tenant defaults.
Leasehold Estate

● Periodic estate
● Estate at will
Estate for years
cause.
tenancy.
executor.
Periodic estate
initiated.
Estate at will
Often called a "tenancy at will," this estate occurs when the landlord allows the tenant to
possess the real property for an indefinite period, usually until an anticipated event occurs. This
is often the type of leasehold arrangement created when the property owner is selling the
property, marketing the rental unit to a third-party renter or awaiting a future time when the
property owner wants to use the property himself or herself.
For example, the strip mall owner allows Ophelia to place her antique wares in the neighboring
empty store while the owner-landlord finds a new tenant. With a tenancy (estate) at will
arrangement, Ophelia would have to move out her items as soon as a new tenant is found.
Either party can terminate this tenancy with sufficient notice, or upon the death or insanity of
either party.
Just as with the periodic estate, proper notice is required to terminate an estate at will.
Estate at sufferance
Also called a "holdover tenancy" or "tenancy at sufferance," this situation occurs when a tenant
continues to possess and occupy a property, even after the tenancy has ended. This is not
trespassing, because the original entrance was lawful. Rather, this is a wrongful possession;
however, if the landlord receives any payments during this holdover, this automatically
becomes a periodic tenancy or estate. Thus, when a landlord is trying to evict a wrongful
tenant, the landlord should not accept any payments from that tenant.
Types of Leases
Although there are many types of lease agreements (particularly because most of them are customized by the
landlord and attorney), the vast majority of leases in the real estate market fall into eight categories:
1. Gross
2. Net
3. Percentage
4. Variable
5. Ground
6. Oil and Gas
7. Lease-Purchase
8. Sale-Leaseback
Gross lease
Often called a flat lease or straight lease, the gross lease is probably the most common type of
lease. It is definitely the standard for residential leases, although it is also often used with
smaller commercial properties.
The basic set-up of the gross lease is that the tenant pays a set amount each month.
Depending on how the lease agreement is set, the tenant will often also be responsible for
utilities consumed by the tenant, such as electricity, gas, heat, sewage, scavenger service and
water. However, most landlords will or can only pass on those extra charges if the tenant is
separately metered—which often require extra set-up expenses for the landlord.
The gross lease assumes that the property owner will be responsible for the property's
operating, maintenance and repair expenses.
Net lease
Also called a net-net (NN or double-net) or net-net-net (NNN or triple-net) lease, the net lease
is most commonly used for commercial and industrial properties. The key element with the net
lease is that in addition to paying a base rent, the tenant must also pay a portion of the
building's operating expenses, which may include maintenance, taxes and insurance.
With multi-tenant facilities, the maintenance expenses are typically called "CAM," or common
area maintenance expenses. For a small strip mall, for example, CAM may cover parking
repaving, repair, cleaning, snow plowing and upkeep, as well as building washing and cleaning.
For an office building, CAM may also include heating and cooling costs for the lobby and
hallways, common area janitorial service, building security systems and landscaping.
The number of operating expenses (maintenance, taxes and/or insurance) that the tenant must
pay in addition to the base rent determines the lease name.
1. Net lease. The net lease charges one of the above operating expenses, usually CAM
or taxes.
2. Double-net lease. The NN or net-net lease charges two of the above operating
expenses, usually the CAM and either the taxes or insurance.
3. Triple-net lease. The best lease for the landlord is the triple-net, which passes on a
prorated portion of all of the property's operating expenses to the tenant.
For example, Acme Personal Services leases office space in a multi-tenant building. The 2,000
square feet of office space it rents is 15% of the total leasable space in the building, which is
now completely occupied. Acme's "triple-net" lease charges them $6 per square foot per year,
plus 15% of the CAM, property taxes and insurance (charged quarterly). So, Acme's base rent
is $12,000 per year (or $1,000 per month); and every quarter, it receives an additional bill for its
portion of the CAM, real estate tax and insurance.
The net lease format can also be combined with the percentage or variable lease format.
Commercial leases get very complicated. For more details, see the "Commercial Leases"
article.
Percentage lease
A lease arrangement used by many larger shopping centers is the percentage lease. This
arrangement ties the rental payments to the success of the tenant's business, and is often used
with properties in which the property itself (and its location) promises to bring customers to the
tenant. A portion of the tenant's rental payment is based on the tenant's gross income.
With shopping malls and centers, for example, where the success of the tenants relies heavily
on the marketing draw of the shopping mall, this gives both the landlord and tenant equal
impetus to successfully market the entire mall.
The percentage lease is normally structured as either a gross or net lease, and occasionally
with a variable lease feature. However, the entire rent payment is not based on a percentage of
the tenant's gross income. A useful example would be a triple-net arrangement, with a base
rent of $5 per square foot plus 1.75% of the tenant's gross income.
Obviously, the lease agreement will require the tenant to open the business' books and
accounts to the landlord's scrutiny. Certified copies of the tenant's business tax returns, audited
financial reports and, sometimes, personal tax returns are normal disclosure requirements.
Property owners who use the percentage lease are usually astute enough to know what market
averages are for the local area and the tenant's industry.
To protect the landlord's bottom line, percentages leases typically give the landlord a recapture
clause, which allows the property owner to reclaim the rental property if minimum sales
projections—as pre-stated in the lease agreement—are not satisfied.
Variable lease
Most long-term leases have some sort of variable lease arrangement that allows the property
owner to raise the rental payment charges. The basic methods for such adjustable leases are
the graduated and the index leases, which are similar to their mortgage counterparts.
The index version of the variable lease makes periodic adjustment to the rental rate based on a
predetermined index. The most commonly used index is the consumer price index (CPI),
issued by the Federal government. However, other indices may also be used, such average
rents reported by industry groups, trade journals, governmental bureaus or business media.
For example, to guarantee that they are not being overcharged for their penthouse office
space, the Chicago accounting firm of Dewey, Cheatham and Associates negotiate an index
leases that ties their base rent to the average base rent paid in the downtown area, as reported
each year by Crain's Chicago Business.
Because index leases can become complicated and expose landlords to disputes about
calculations, some landlords opt for the graduated lease format. The basic graduated lease
normally sets up a stepladder arrangement, in which the base rent increases at predetermined
anniversary dates. For example, an industrial lease may charge a base rent of $4 per square
foot, with annual increases of 7.5% beginning on the third anniversary of the lease signing.
The graduated lease may also be arranged on a seasonal schedule. For example, a
storeowner on the tourist destination of Mackinac Island negotiates a lease, which arranges the
rental payments so that they coincide with the tourist season. So, winter rents are dropped to
$100, while summer rents may be adjusted to $1,200 per month.
Ground lease
Also called a land lease, the ground lease is one in which a tenant simply rents land, often
without improvements of buildings. This is typically a net lease, with the tenant responsible for
taxes, insurance and maintenance.
With ground leases, the tenant will then develop the property and build on the land. Because
the tenant will need to recoup the high cost of development, most ground leases are long-term.
Typical ground leases begin with at least a 40-year term, and sometimes provides for
extensions.
This can be an advantageous arrangement for developers and tenants, as they avoid the cost
of having to purchase the land. This is particularly true in areas with high land costs, such as
downtown urban centers. Leasing also has certain tax advantages compared to purchasing.
Commercial Leases
lease.
tenant defaults.
Leasehold Estate

● Periodic estate
● Estate at will
Estate for years
cause.
tenancy.
executor.
Periodic estate
initiated.
Estate at will
either party.
Types of Leases
1. Gross
2. Net
3. Percentage
4. Variable
5. Ground
6. Oil and Gas
7. Lease-Purchase
8. Sale-Leaseback
Gross lease
Net lease
or taxes.
article.
Percentage lease
Variable lease
Ground lease
extensions.
When the ground lease expires, the entire property—including any buildings added to it—revert
back to the landowner. In some cases, the ground lease may require the tenant to demolish
any buildings.
For much more information, please see the Ground Lease article.
Oil and gas lease
An oil and gas lease allows oil or gas companies to drill for such resources, without having to
buy the entire property. Oil and natural gas are typically found together, with gas trapped with
the oil. The typical oil and gas lease provides the landlord with a flat rent, as well as royalties
on any oil or gas removed. For more information, see the Oil, Gas and Mineral Rights article.
Lease-Purchase
A lease-purchase agreement allows a tenant to lease property, with the option or requirement
to purchase it at a later date. This delayed purchase offers the tenant creative financing
opportunities and possible tax advantages. For more information, see the Lease with Purchase
Option article.
Sale-Leaseback
This arrangement is basically a property sale, in which the seller agrees to become a tenant in
the property after the sale. The lease agreement is normally a net lease, signed prior to the
sale of the property and conditioned on the sale.
For the buyers, it offers a good investment since the rental property comes complete with a
paying tenant. For the seller, this arrangement frees up capital from their property and offers
the tax advantages offered by leasing (which allows businesses to deduct rental payments as a
business expense).
For example, Mark bought a prime industrial lot with the intention of building a new site for his
company, which was currently leasing space. After a decade, Mark realized that he didn't want
to spend the money to develop and build on the lot. So he enters into a sale-leaseback
arrangement with a developer, who buys and develops the property. Mark sells the lot to the
developer (for a nice profit) and moves as a tenant into the facility specially built by the
developer. On the other hand, the developer obtains a good property investment with a long-
term tenant.
For more information, please see the Sale-Leaseback article.
Elements of Leases
As noted earlier, a lease agreement is both a contract and a real estate conveyance. Because it is a contract, the
normal requirements of a contract apply. However, there are additional elements that apply particularly to leases.
For more information, please continue to the "Requirements and Elements of the Lease" article.
Sale-Leaseback
lease.
tenant defaults.
Leasehold Estate

● Periodic estate
● Estate at will
Estate for years
cause.
tenancy.
executor.
Periodic estate
initiated.
Estate at will
either party.
Types of Leases
1. Gross
2. Net
3. Percentage
4. Variable
5. Ground
6. Oil and Gas
7. Lease-Purchase
8. Sale-Leaseback
Gross lease
Net lease
or taxes.
article.
Percentage lease
Variable lease
Ground lease
extensions.
When the ground lease expires, the entire property—including any buildings added to it—revert
back to the landowner. In some cases, the ground lease may require the tenant to demolish
any buildings.
For much more information, please see the "Ground Lease" article.
Oil and gas lease
An oil and gas lease allows oil or gas companies to drill for such resources, without having to
buy the entire property. Oil and natural gas are typically found together, with gas trapped with
the oil. The typical oil and gas lease provides the landlord with a flat rent, as well as royalties
on any oil or gas removed. For more information, see the "Subsurface Rights" article.
Lease-Purchase
A lease-purchase agreement allows a tenant to lease property, with the option or requirement
to purchase it at a later date. This delayed purchase offers the tenant creative financing
opportunities and possible tax advantages. For more information, see the "Buying Real Estate
with Purchase Option" article.
Sale-Leaseback
This arrangement is basically a property sale, in which the seller agrees to become a tenant in
the property after the sale. The lease agreement is normally a net lease, signed prior to the
sale of the property and conditioned on the sale.
For the buyers, it offers a good investment since the rental property comes complete with a
paying tenant. For the seller, this arrangement frees up capital from their property and offers
the tax advantages offered by leasing (which allows businesses to deduct rental payments as a
business expense).
For example, Mark bought a prime industrial lot with the intention of building a new site for his
company, which was currently leasing space. After a decade, Mark realized that he didn't want
to spend the money to develop and build on the lot. So he enters into a sale-leaseback
arrangement with a developer, who buys and develops the property. Mark sells the lot to the
developer (for a nice profit) and moves as a tenant into the facility specially built by the
developer. On the other hand, the developer obtains a good property investment with a long-
term tenant.
For more information, please see the Sale-Leaseback article.
Elements of Leases
As noted earlier, a lease agreement is both a contract and a real estate conveyance. Because it is a contract, the
normal requirements of a contract apply. However, there are additional elements that apply particularly to leases.
Real Estate Closings & Transactions
Also called real estate settlements, real estate closings are typically anxious affairs for most homebuyers and
beginning real estate investors. This is not surprising, when one considers the legal issues being negotiated, the
large sums of moneys involved and the dozens of pages that most buyers have to sign at the closing.
There's nothing we can do in this article about buyer anxiety about the large sums involved, but this article will
review the legal issues being negotiated and the legal documents required in typical real estate closings:
1. The closing process

2. Pre-closing legal issues
3. Real estate closings
4. Mortgage closings
5. Closing in escrow
6. Post-closing issues
Go to the next segment: "Closings and Transactions: The Closing

Process"
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Condominiums
In a little over a decade, condominiums have risen from the ranks of special property types to one of the most
common forms of urban housing. Condominiums have also become more prevalent in the commercial property
market.
Condominiums are individually owned units in one multi-unit project. They are a form of community housing, in
comparison to apartments, cooperatives, planned unit developments (PUDs) and trailer parks.
Condominiums have different elements than do standard housing; consequently, condominium loans have extra
requirements. However, condominiums are still valuable property that may be bought, sold and mortgaged as
normal single-family homes. In fact, condominiums have become a more common option for first-time
homebuyers. This article examines the many facets of the condominium in the following segments:
● Definition of condominium
● Types of condominiums
● Creating a condominium
● Elements of a condominium
● Homeowner association
● Buying and selling a condominium
● Loans for condominiums
The above issues are discussed in great detail in the segments that follow. Although you can skip segments and
jump to the one of concern, we recommend that you go through the entire article in the order provided.
Go to the next segment: "Condominiums: Definition"
The "Condominiums" article contains the following segments
1. Introduction
2. Definition of condominium
3. Types of condominiums
4. Creating a condominium
5. Elements of a condominium
6. Homeowner association
7. Buying and selling a condominium
8. Loans for condominiums
Cooperatives
Cooperative
The individual unit dwellers of a cooperative do not own any property. The entire cooperative is
owned by a corporation and not by individual owners.
The stock members of the cooperative project's corporation gain the right to particular units and
to use common areas. The unit dweller thus leases the unit from the corporation; and it is the
corporation that owns all of the units.
Because the cooperative project is a single corporation, it is taxed as one corporate entity.
Since the units are not individually owned, the entire coop project is financed with a blanket
mortgage. Individual mortgage loans will finance a portion of the entire blanket loan for one of
the stockholders.
A final element of the cooperative project is that prospective unit owners must be approved by
the current shareholders. In this way, the cooperative project can act as an exclusive club or
organization. Cooperative projects present a higher degree of risk for lenders. The most
influential risk factor is that if one unit owner (mortgagor) defaults on his or her loan, the entire
cooperative project can be foreclosed.
Strictly speaking, residents in a cooperative do not own their units. Instead they own shares in the cooperative,
which then assess the individuals based on the specific unit they occupy. Obtaining mortgage financing for
cooperatives is often difficult, with most co-op buyers having to search for banks who specialize in co-op
mortgages.
The individual unit dwellers of a cooperative do not own any property. The entire cooperative is owned by a
corporation and not by individual owners. The shareholders of the cooperative gain the right to particular units
and to use common areas. The unit dweller thus leases the unit from the corporation; and it is the cooperative
that owns all of the units.
Because the cooperative is a single corporation, it is taxed as one corporate entity. Since the units are not
individually owned, the entire co-op project is financed with a blanket mortgage. Individual mortgage loans will
finance a portion of the entire blanket loan for each of the shareholders.
A final element of the cooperative project is that prospective unit owners must be approved by the current
stockholders. In this way, the cooperative project can act as an exclusive club or organization. Cooperative
projects present a higher degree of risk for lenders. The most influential risk factor is that if one unit owner
(mortgagor) defaults on his or her loan, the entire cooperative project can be foreclosed.
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PUDs and Townhouses
PUDs and Co-ops
Two other property types similar in structure to the condominium are the planned unit development (PUD) and
the cooperative ("co-op") project.
Planned Unit Development (PUD)
A PUD is a hybrid mixture of fee simple and condominium ownership. The PUD unit can be a
condominium, townhouse or a standard single-family home. Each unit is an independently
owned property, that is taxed and financed separately.
As with condominium projects, the PUD project will have a homeowners association to care for
mutual needs, such as snow removal and garbage collection. However, everything else such
as utility and hazard insurance is separate, with joint ownership of shared space kept to a
minimum.
Townhouses
Townhouses are similar to condominiums in most respect. They are also processed in a
similar fashion.
The primary difference is that many townhouse owners also own the land on which the
townhouse is built. They also own the walls, although they must share the party walls adjacent
to the neighboring townhouse.
Planned unit developments
PUDs are looser associations normally consisting of houses and residences that are part of a
development or neighborhood. These neighbors are legally part of this PUD, which pools
funds to maintain common areas and responsibilities, such as mowing greenways and snow-
plowing roads.
There are few additional requirements for PUDs. The key tasks involve verification of PUD
assessments and restrictions.
Eminent Domain
The power to take property away from private ownership is one of the four basic governmental powers affecting
real estate (taxation, escheat, police and eminent domain). Eminent domain is a right held by the state and
federal government to take property from its current owner. Through enabling laws and statutes, the state gives
similar powers to the county and municipal government—as well as to quasi-public entities, such as utilities.
This is the power used to build expressways, interstates and major developments. Believe it or not, some states
even allow private individuals to take real property from its owner through eminent domain.
This article will review the two main elements of eminent domain:
1. Requirements
2. Procedure
Requirements
The exercise of eminent domain powers normally involves all three branches of the government involved,
especially the courts. It normally will be up to the court to approve any eminent domain procedures; and such
approval require three conditions:
● Public good
● Fair compensation
● Due process of law
Public good
First of all, the attempted request must be performed for the public good. The government
initiating eminent domain must show that the "taking" is being done to serve the community's
best interest. If the property owner is adamant on blocking any taking, he or she must
effectively argue this element. If the government or entity shows that it meets this criterion, the
other two normally follow quickly.
The most visible application of eminent domain is the taking of land to build transportation
infrastructure, such as roads, highways and interstates. Such improvements often entail the
taking and demolition of homes and buildings in the path of the thoroughfare. In 2001, Chicago
Mayor Richard M. Daley announced an expansion of O'Hare airport that would require the
taking and removal of several homes, stores and industrial facilities in a neighboring suburb.
Previously, the suburban governments surrounding the airport were able to use the state's
police powers to limit the flights and possible expansion at O'Hare. With the growing demand
and strain on air transportation, the trend has moved toward expansion as serving the greater
good.
In some cases, the government can also take land to give it to private developers. This is often
justified in that the intended development will help improve a neighborhood or community. For
example, a city may take property from homeowners and absentee landlords in a blighted area
and give it (or sell it at a major discount) to a developer, who is promising major improvements
such as new housing to retail businesses.
Nevertheless, this can be controversial and has been successfully fought by property owners,
especially when the government fails to demonstrate the public good being served.
Fair compensation
If the eminent domain procedure is deemed valid, the only question remaining is fair
compensation. The government or entity attempting to take property must give the property
owner fair compensation. In most cases, the government will conduct an appraisal and use that
as the basis for its offer.
If the government and property owner cannot arrive at a mutually acceptable fair value, the
question of fair value goes to the courts.
Note, however, that there is often more involved in determining fair compensation than just
market value. Transition costs can also be factored into this equation. For example, a factory's
property may be worth only $50,000 because it is in the low-value part of town; however, when
you consider that it would cost the business more than $300,000 to move all of its equipment,
that relocation cost must be considered.
In many such situations, the government will often bring in relocation specialists and real estate
agents to assist the property owner in finding a new location.
Due process of law
As with all legal proceedings affecting a person's life, liberty or possessions, the property owner
facing eminent domain proceedings is constitutionally entitled to due process. This essentially
means that the government or entity trying to "take" the property must follow established
procedures when exercising its eminent domain powers.
The process by which the government exercises its eminent domain right is commonly called
condemnation.
Procedure
When the government wishes to "take"-that really is the legal term-real property from a private owner, it normally
does so through the process of condemnation. Contrary to what some might believe, condemnation doesn't
apply to dilapidated or dangerous properties. Condemnation is the legal term applied to the process by which the
government takes real property.
Technically, the condemnation process begins when the eminent domain procedure is brought to court or
prepared for court action. But sometimes, the government takes property without having to go through
condemnation.
When the government or an entity wants to take property from its private owner, it normally follows these steps
(or something similar):
1. Plans. The power of eminent domain cannot be exercised on a whim. It requires advance planning and
documentation, as well as budgeting. There is no sense getting land for a park, if there won't be any
funds for its creation or upkeep.
2. Government approval. The plan to take property must be approved by the appropriate office or groups.
For example, municipal attempts to take property often must be approved by the city council or at least
a development committee. In some cases, a government executive office or department may have
advance approval to initiate eminent domain proceedings.
3. Direct negotiations. It's more efficient and usually cost-effective to take property without involving the
courts. Whenever possible, the government or entity may simply try to negotiate an outright purchase
with current owner. Of course, the this is never like a simple purchase transaction, because there is
always the implied threat behind the government's offer.
4. Court proceedings. If direct negotiation doesn't work, the government can then begin condemnation
proceedings through the courts. As previously discussed, the court provides the property owner with
due process of the law in determining the validity of the eminent domain attempt and in arriving at a fair
compensation. Court decisions can be appealed, of course; but reversals are rare.
5. Condemnation judgment. The court proceedings conclude with a judgment in favor of the government,
transferring ownership rights to the property from the current owner to the government or other entity.
The condemnation procedure can be to obtain either fee simple title or an easement, depending on what the
government or condemnor needs. If an easement is all that is required, then that is often all that is given by the
court. The property owner retains ownership of the property; the government, utility or other entity simply
receives an easement over that person's property.
This is an important point, because the easement may eventually be terminated; and the property owner would
then have full control of his or her property once again. For example, the government may acquire an easement
to build a road through a property owner's land. However, if the need for that road disappears and the road is
essentially abandoned, then the landowner may be able to terminate the easement. See the "All About
Easements" article for a review of the events or conditions that may terminate an easement.
Inverse Condemnation
Property owners also have the legal right to force a condemnation, against the wishes of the
government or condemning entity. This may sound strange, but there's a logic to it.
If the government or another condemning entity does something that lowers the value of an
owner's property—or limits the owner's ability to use that property—that property owner can
force an inverse condemnation upon the government or entity.
For example, if the city built a new expressway right next to Harry's house and the nonstop
noise and congestion from the highway has lowered Harry's property value, then Harry can sue
for inverse condemnation and force the city to pay him fair compensation (typically pre-
expressway) for his property.
Similarly, if the government only takes a portion of a property owner's property, that property
owner can sue for inverse condemnation of the remaining portion or for monetary
compensation for any loss of value. For example, Martin owned a small ranch by the sea.
When the state took away all of the beachfront portions of his property, the remaining portion of
his property automatically lost much of its value-because its beach access was one of its best
assets. So Martin can keep his remaining parcel and sue for monetary compensation for the
loss in value; or he can try to force an inverse condemnation on the remaining parcel.
If you are interested in learning more about basic real estate principles, laws and procedures, please see the
"Real Estate Introduction" article.
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Marketable Title
The goal of most real estate transactions is to convey a marketable title in exchange for the purchase price.
Sometimes called merchantable title, the marketable title is one that the seller or grantor truly owns; it must also
be free from any encumbrances and defects not permitted.
The definition is simple enough, but the truth is that providing a marketable title is actually very challenging. To
provide clear title, the seller's attorney or title company must examine the property's past and present. The title's
past chain of title and current situation must be examined.
The difficulty of this task becomes apparent when you consider that titles to properties in the U.S. alone have
exchanged owners numerous times over two centuries in some places. This difficulty is compounded by the fact
that sometimes those transfers are not adequately recorded.
Nevertheless, all buyers have a right to demand clear, marketable title. A clear, marketable title means that the
buyer or grantee should be able to hold the title without fear of litigation. Practical considerations have forced
attorneys, courts and local officials to arrive at certain accepted standards as to what constitutes marketable title.
For example, it is not necessary in Illinois to go back more than 40 years when examining the chain of title.
Marketable title does not mean that there are no clouds or liens on the title. Rather, marketable title means that
only those encumbrances , liens or clouds permitted by the contract or buyer are allowed on the title. The
following are some of most common encumbrances, liens, clouds and issues that may hinder the ability to
provide clear title:
● Seller's true ownership

● Liens
● Easements
● Building and zoning restrictions
● Leases and tenants
● Encroachments
● Title insurance coverage
All of these elements will be discussed in detail below.
Buyers and their attorneys approach marketability issues with great care. It's important that marketability issues
be handled prior to the closing. After the transaction is concluded, there is very little that the buyer (now the new
owner) can do to collect damages, except through a lengthy and costly lawsuit.
On the other hand, sellers must also be aware of the true marketability of their title. Attorneys for buyers who
decide to try to back out of a deal often examine the title carefully to search for any minute issue that can be
used to deem the property non-marketable.
Seller's True Ownership

The first crucial issue when assuring that marketable title will be conveyed is to confirm that the seller actually
owns the property. In this regard, the following elements must be considered and analyzed:
1. All owners may need to agree

2. Chain of title
3. Grantor identification
4. Property identification
All owners may need to agree
All of the current owners normally must agree to the sale. If a property has multiple owners and
the buyer intends to buy the entire property, all of the current sellers identified on the title must
agree to the sale or conveyance. Otherwise, the purchase contract and any deed to convey the
title will be invalid.
It is sometimes possible to transfer only a portion of the ownership interest in a property, such
as when the one of two (or more) co-owners possesses ownership rights through a Tenancy in
Common or a Joint Tenancy with Rights of Survivorship. For example, Ben, Charlie and Dana
are co-owners of a farm, through a tenancy in common. Charlie wants to sell his ownership
interest in the property to Englebert. After the closing, Englebert will become co-owner with Ben
and Dana.
Chain of title
True ownership is primarily supported by a good chain of title. The chain of title provides a list
of all conveyances and other documents recorded against the property. The chain of title
should indicate that all of the conveyances between buyers and sellers are legitimate and
unbroken. For example, Fred sold to Gene, Gene sold to Harriet, Harriet sold to Indira, and
Indira sold to Jesse.
The chain should be uninterrupted. For example, the chain of title should not indicate that
Quentin sold to Roy, and then Ursula sold to Vivian. How did the title get from Roy to Ursula?
In addition to recording conveyances, however, the title records will also record liens,
easements, leases and other documents. The title examiner must be able to see through that
clutter and clearly identify the rightful chain of title. However, the title examiner must also
examine those other recorded documents to be sure that they no longer present a cloud on the
title. For example, previously paid mortgage and other liens from the past should have a
matching release of lien, indicating that they have been satisfied and no longer pose an
encumbrance .
Grantor identification
The seller must be properly identified on the sales contract, deed and evidence of title. The
seller name on the deed conveying the title should exactly match the name of the current seller
identified on the title. The seller name on the real estate sales contract should likewise match
the deed and title, although most contracts now simply identify the seller as "owner of record."
If the seller's name has changed—e.g., through marriage, through divorce, etc.—or if previous
recordings resulted in typographical errors, the grantor (seller) may have to provide a name
affidavit or correct the error.
Property identification
The property identification on the deed of conveyance should match the property identification
on the title. The various real estate documents should provide three forms of property
identification: full street address, the tax identification number and the legal description. The
legal description and tax (or property) identification number should match on both the deed and
title.
Liens
Perhaps the most common encumbrances on most titles are liens, especially tax and mortgage liens. Other
types of liens that may also encumber the title include judgment liens, mechanic's liens and debt-related liens.
These liens are all encumbrances on the title. But their existence may not necessarily mean that the title is not
marketable. Buyers have a right and typically do demand that all liens are removed. However, tax and mortgage
liens are often satisfied from the proceeds of the buyer's purchase funds. Escrow closings allow the escrow
agent to satisfy and release all non-permitted liens without jeopardizing the buyer's title and funds.
Easements
An easement is the right of an individual or group to use or limit the use of the property owned by another
property owner. You may be able to get an easement to cross another person's property; or your neighbor can
get an easement forcing you to cut your trees along his building.
An easement is an encumbrance and can technically create a title defect that could make the title non-
marketable. But easements need not jeopardize the title's marketability. As long as the real estate contract
indicates that the buyer must accept a title with easements, the title would still be considered clear, acceptable
and marketable.
Moreover, even if the real estate purchase (sale) contract does not mention any easements, recent court
decisions have established that the title would still be considered marketable-as long as the easement is visible.
For example, the city has an easement over the residential property to place a sidewalk through the front yard,
along the street. Although the real estate contract and evidence of title makes no mention of the easement, the
title would still be considered otherwise marketable.
Sellers should automatically state in the contract that the buyer must accept the title subject to easements, which
will not reduce the property's marketability. Whenever possible, the seller should check the property's title and
specifically mention in the contract the document number of the easement.
Buyers should in fact insist on specific indication of any easement. Buyers should not sign a contract that refers
to "subject to easements of record" as it leaves them open to potential problems. For more information about
easements, see the "All About Easements" article.
Building and Zoning Restrictions

Local governments, through their police powers, are allowed to establish rules and regulations that limit what and
how the owner may improve the property. These rules and regulations are often general statutes that are not
specifically recorded against individual titles. These zoning laws and building restrictions are common practice,
especially in cities, towns and developing areas.
Occasionally, these regulations are recorded on a property's title as a specific encumbrance , usually in the form
of a covenant or restriction. More often than not, however, these restrictions are recorded by developers and
current property owners.
Example: Restrictive Covenants
HAL Developers create a planned subdivision community in the suburbs for

active seniors. To maintain the wide-open look and expansive design of the
community, as well as the value of the individual properties, HAL Developers
records a restriction into all of the subdivided parcels: all buildings must be
set back at least 100 feet from the street. All future buyers and owners must
accept this building restriction.
The law is on the buyer's side with these types of easements. Unless the contract specifically describes the
building restriction as an encumbrance, which the buyer must accept, the buyer can reject the title as non-
marketable.
Local zoning laws and building codes, on the other hand, are usually not recorded on the title and are usually not
considered encumbrances that would make the title non-marketable. The exception to this rule is if the current
property violates those zoning laws and building codes. The court tends to consider those violations as defects
or encumbrances, even if those violations are not recorded. This same principle applies, even if the property
complies with all zoning and building codes, if the property currently violates restrictions recorded against it.
Example: Zoning Violations
Biff owns a parcel, on which he has built a three-unit residential building. Biff
was not allowed to do that, as there is a recorded restriction against the
property stating that only single-family homes can be built on the land. Biff
tries to sell the property to Chuck. When Chuck discovers the restriction on
the title and sees the property violations, he realizes that the title is defective
and non-marketable.
Buyers should avoid any contract that refers to "restrictions of record," as this would expose the buyer to a wide
array of restrictive encumbrances. Strike it from the contract or demand a specific itemization of all restrictions on
the title. This is especially important for developers and individuals buying land to be improved. You need to be
assured that you will be able to develop or improve the property as you planned.
For more information, please see the "Zoning Laws and Building Codes" article.
Leases and Tenants

Lease agreements encumber the property, because current leases effectively transfer possession and use of the
property (or portions of it) to a third party. Leases can be considered as encumbrances on the title that could
render it non-marketable, even if those leases are not publicly recorded.
The seller should make sure that the real estate contract clearly states that the title will be subject to leases or
tenancies, as applicable. The buyer, on the other hand, should avoid signing any contracts that refer to existing
leases or tenancies without receiving an opportunity to first examine those leases. At the very least, the buyer's
attorney should use the attorney review period to demand copies of the lease agreements and approve them.
For more information about lease agreements, see the "All About Leases" article.
Encroachments
Encroachments are serious title defects, although they are usually not recorded on the title. Surveys are normally
required to uncover or disclose encroachments. Unfortunately, most buyers typically do not receive a copy of the
survey until the day of closing.
Buyers and their attorneys must review the real estate contract carefully, to ensure that they won't be forced to
accept encroachments. Many sellers will try to protect themselves by inserting a clause in the contract stating
that the buyer will accept a title "subject to questions of survey" or "subject to such a state of facts as an accurate
survey would show." By signing a contract that contains such a clause, the buyer would agree that any
encroachment revealed by the survey would not make the title non-marketable.
Buyers should insist that the real estate contract require the seller to deliver a marketable title "free from all
encumbrances and encroachments." This would protect the buyer, by giving the buyer the option to accept or
reject encroachments. Oftentimes, the encroachments are trivial, such as when the encroachment is a matter of
two inches. Nevertheless, this clause would allow the buyer to judge the situation for his or her benefit and give
that buyer the option to cancel the deal.
Encroachment refers to improvements that extend over the property owner's legal boundaries. There are three
common forms of encroachments:
● Improvements on the subject property extend into public properties (or rights of way), such as streets
and alleys.
● Improvements on the subject property extend over a neighbor's property, such as when the eaves on
your roof protrude over your lot line into your neighbor's air space.
● Improvements on the neighboring property that extends over the subject property, such as when your
neighbor's fence has been built on your side of the boundary line.
The danger posed by encroachments—and technically makes the title non-marketable—is that the aggrieved
property owner may demand removal of the encroachment. The aggrieved property owner would be entitled to
sue for such a cure. Most courts will routinely agree with the aggrieved property owner, except where the court
deems that the encroachment is trivial. Triviality is fairly relative, but usually extends to a couple of inches, with
regard to fixtures. Permanent improvements such as buildings are another matter.
Removal of an encroachment can be very expensive when the improvement involved is a building, rather than a
fixture.
Example: Construction Errors
Preston has hired Dopey Construction to build his dream home. Dopey
Construction misreads their survey and builds the home so that Preston's
detached garage is about three feet into his neighbor's lot. When Preston and
his neighbor discover the error, Preston tries to buy the additional three feet
into his neighbor's lot. Unfortunately, city ordinances have set a minimum
width on all properties so that Preston's neighbor couldn't sell off part of her
lot, even if she wanted to sell. Preston is forced to tear down the garage and
rebuild it at the right location. Fortunately, Dopey Construction will be
responsible for the cost.
Courts have been a little more forgiving when the subject property being purchased is the aggrieved property, as
in when the neighbor's improvements extend over the subject property. It's still all relative. If the encroachment is
deemed insignificant, most courts have ruled that the title is still marketable.
For more information, please see the "Surveys and Legal Description" article.
Title insurance coverage

Many sellers and buyers hold the mistaken belief that a defective title can be made marketable with title
insurance. The fact that a title company is willing to insure the seller's title does not make it marketable. The title
insurance does give liability protection to the property owner against many damages that may arise because of
the encumbrance or defect. Nevertheless, the title remains non-marketable, and the buyer would have the right
to back out of the deal because of that defect.
However, the title insurance's protection extends only over those items specifically listed in the title insurance
commitment. If an encroachment is not recorded and amended into the insurance commitment, the title
insurance policy will not cover that encroachment.
For more information, please see the "Title and Title Insurance" article.
Mortgage Deed & Promissory Note
A mortgage loan is any debt in which the
borrower conveys to the lender an interest in
real property, as security for the debt. What
Mortgage many people fail to realize is that the mortgage
Calculator & loan contains two inter-connected but
essentially separate parts: the mortgage and
Amortization Table
the promissory note.
● Calculate This lengthy article will review the elements and

payments issues of both important documents in the
● Review following sections (click to jump to link):
amortization
table
● Consider ● Dissecting the Mortgage Deed
prepayment ● Analyzing the Promissory Note
options
The mortgage instrument is the document that
the borrower uses to give his or her property as
collateral for the loan. Much like but not quite a
deed, the mortgage instrument conveys an
interest in the real property to the lender
(mortgagee). The promissory note is the
contract by which the borrower promises to
repay the loan.
As most property owners may have noticed

during their purchase loan closing, two of the
most important documents signed during the
closing were the promissory note and the
mortgage instrument. They correspond to the
two parts of the mortgage loan-the mortgage
and the loan. Both parts will be discussed in
greater detail below. You can also view a
sample mortgage deed or sample promissory
note by clicking on the links.
Go to next section:
"Dissecting the Mortgage"
The "Mortgage Deed and Promissory Note"

article containst the following sections and
segments:
● Dissecting the Mortgage Deed

1. History
2. Types
3. Elements
● Analyzing the Promissory Note
1. Types and procedure
2. Elements and issues
We hope that you've found our Mortgage and

Real Estate Resource helpful and informative.
We welcome all comments, critiques and
suggestions; please send emails to
atlas@atlastitle.net. Remember that whether
your are buying a home or an office building,
you are investing in real estate. As with all
investments, the best investors are those who
can gather the most knowledge, tools and
resources. Regardless of whether you use our
lending services, please spread the word about
our resource center to anyone you know who
may benefit from our site.

Mortgage
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preapproval to determine your optimum loan
qualification, please complete the Preapproval
Application form. We will obtain a preliminary
approval for you, based on the information you
provide in the application. There are no
obligations on your part; you may decide to
cancel at any time until the closing, and even
until three days after the closing with refinances
of owner-occupied properties.

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Real Estate Sales Contract
Unlike most other properties, the purchase of real estate will require a sales or purchase contract. A written
contract is required because of the importance of real estate and the many details involved in the sale of real
estate.
The conveyance of property not only involves the basic physical aspects of the real estate, such as the land itself
and the buildings on it. Real estate transactions will also involve the degrees of ownership being conveyed, the
warranties and covenants being offered by the seller, the condition of the title being received by the buyer and
the other fixtures involved with the property.
Many elements, issues and considerations go into a contract. This article and its segments will try to provide a
complete review of real estate contracts in a brief, concise discussion. It will cover the following basic areas that
buyers and sellers should understand:
1. Contract basics. The basic elements and issues behind all contracts.
2. Elements of the real estate contract. The basic real estate sale and purchase agreement.
3. Alternative types of real estate contracts. Alternative forms, methods and agreements used to sell or
purchase real estate.
4. Buyer Issues to Consider. The main issues that the buyer should review before signing any real estate
contract.
5. Seller Issues to Consider. The main issues that the seller should review before signing any real estate
contract.
6. Remedies. A discussion of remedies and options available to both sellers and buyers when faced with
some uncommon and common problems involved with the real estate transactions.
Go to next segment: "Contract Basics"
The "Real Estate Sales Contract" article contains the following segments:
1. Contract basics
2. Elements of the real estate contract
3. Alternative types of real estate contracts
4. Buyer Issues to Consider
5. Seller Issues to Consider
6. Remedies
Real Estate Fraud
Caveat emptor, let the buyer beware. Because
of the large amounts involved with real estate,
however, courts and the government have
Mortgage offered buyers some measure of relief. In fact,
Calculator & the trend in the courts has been away from the
"caveat emptor" approach.
Amortization Table
Property buyers have two lawsuit options if and

● Calculate when they feel they have been defrauded by
payments the seller (or the seller's agent):
● Review
amortization
table ● Sue for damages. The buyer can
● Consider keep the newly purchased property but
prepayment sue the seller for damages incurred
from the fraud. For example, if the
options
furnace is not working as warranted by
the seller, the buyer can sue the seller
for the cost of the replacement or
repair-after the purchase closing has
already been consummated.
● Sue to set aside the sale. The buyer
can also try to get the whole
transaction rescinded. If the buyer is
successful in the lawsuit, the property
is returned to the seller and the funds
are returned to the buyer.
The two tactics require different level of proofs

from the buyer initiating the suit. To win a suit
for damages, the buyer has to prove that the
seller intentionally lied about the issue behind
the damage. To win a ruling to set aside the
sale, the buyer only needs to demonstrate a
material fact; the buyer does not need to show
that the seller intentionally lied.
Fraud committed by the seller's agent is

basically fraud committed in the seller's name.
The seller will still be liable. There are three
basic ways in which sellers can commit fraud:
1. Misrepresentation
2. Conduct
3. Non-disclosure
Misrepresentation
As the term suggests, the

seller's words can be deemed
fraud if they misrepresent the
true nature of the subject
property or transaction. For
example, if the seller or the
seller's agent advertises the
property as having all-new
electrical wiring, when in truth
only the outlets were
changed, the advertisement is
a misrepresentation; it is
fraud. Misrepresentation
applies to both spoken and
written communication by the
seller or the seller's agent.
Conduct
Buyers and the courts will

examine the seller's conduct,
as well as the seller's words.
Conduct can also be the
source and evidence of fraud.
For example, Joanie owns a

condominium that she was
planning to sell. She
accidentally left the windows
open while she was away on
a two-week vacation. As a
result of ongoing
thunderstorms, her carpet
was completely waterlogged
and developed mold. After the
carpet had dried, the mold left
a nasty odor and the carpet
was effectively ruined. Joanie
did not want to pay for the
cost of new carpeting, so she
lathered it with perfume and
deodorant to mask the smell.
She sold it to Arthur; he didn't

ask and she never mentioned
the carpet damage. Arthur
discovered the damaged
carpet after moving in. He had
to replace the carpet; but he
filed suit for damages against
Joanie. Her actions were
sufficient evidence to prove
that she knew of the damage.
Non-disclosure
Federal and state laws now

require sellers of residential
properties to provide a
disclosure of all know defects
afflicting the property. In
addition, if the home was built
before 1978, the seller must
also provide a disclosure
about any know lead-based
paint hazards.
The seller of residential

properties is legally obligated
to disclose all known defects,
which would not be readily
apparent with a standard
inspection. Failure to do so
may not be fraud in the
strictest of terms, but it would
be grounds for damages or a
rescission of the transaction.
For example, Warren's home

is in unincorporated McHenry
County, Illinois, and must use
a septic tank. The septic tank
needs to be replaced, due to
lack of maintenance; but the
damage is invisible from the
surface. Warren sells his
home to Lana without
disclosing the problem with
the septic tank. After moving
in, Lana has to spend about
$5,000 to repair the septic
tank. Lana can sue Warren
for damages, if not rescission.
Many jurisdictions now

recognize that undesirable
history that is not revealed to
the buyer may also be
grounds for damages or
rescission. For example,
properties that were the
scene of vicious crimes (such
as murder) may be subject to
rescission of the sale, if that
history is not revealed to the
buyer.
This requirement for
disclosure is balanced
somewhat by the buyer's
responsibility to do some due
diligence. The basic rule is
that if the information is
readily available to the buyer,
the buyer may not be able to
sue the seller for
misrepresentation or
nondisclosure.
For example, a tour of the

property reveals water stains
on the basement walls. Those
were obviously caused by
flood or water damage. The
buyer decides to skip on the
cost of an inspection, and the
buyer does not ask questions
about the water stains. This
buyer may have a difficult
time winning a suit for
damages or rescission,
because the damage was
apparent and the buyer did
not make any attempts to
ascertain the facts.
Fraud issues is not limited to the condition of

the property. In fact, most fraud suits revolve
around problems with the title. For more
information about title considerations and the
legal industry that has mushroomed around this
one topic, please see the "Marketable Title" and
"Title and Title Insurance" articles.

Mortgage


Real Estate Taxes & Special Assessments
Many property owners have quickly discovered that real estate taxes and special assessments are the truly
unavoidable cost of real estate. States, counties, cities, towns, villages, sanitary districts, school districts, park
districts and many other taxation authorities depend on real estate taxes for their operating revenue. Because
real estate taxes are so common and accepted, many property owners and most homeowners seldom take the
time to understand how real estate taxes work.
More importantly, too many property owners fail to understand how they can use the system for their optimum
benefit, either to make improvements that will increase the value of their properties or to challenge the taxes they
are being required to pay. This article will dissect the real estate tax, as well as its offshoot, the special
assessment, into four elements:
1. Types
2. Process
3. Enforcement
4. Challenging assessments
Go to next segment: "Types of Real Estate Taxes and Assessments"
The "Real Estate Taxes and Assessments" article contains the following segments:
● Types
● Process
● Enforcement
● Challenging assessments
Real Estate Investment Trusts
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The REIT is a type of legal business organization and securitization that was created by the U.S. Congress to
encourage real estate investment. Ownership interests in REITs are normally traded much like other securities
such as stocks and bonds.
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Recording
The act of publicly recording a real estate transaction is normally the final step required to fully establish the
validity of that transaction. In fact, recording laws are structured to protect the bona fide purchasers and owners
of the real property. If a real estate transaction—such as a sale, mortgage or easement agreement—is not
recorded, it may be deemed unenforceable.
This article will review the following three issues regarding recording:
● Why recording is necessary

● The recording process
● Chronological order
All states have established recording laws, typically called recording acts. Most states assign the responsibility
for recording real estate transactions to the local counties. Although failure to record a real estate instrument or
transaction will not necessarily invalidate or void that transaction, it may make such instruments ineffective with
subsequent transactions.
Example: Recording
Tom wants to buy a $90,000 house. The bank will lend him a $70,000 first
mortgage loan; he has to come up with the other $20,000. Heather lends Tom
$20,000 so that Tom can buy a house. As part of their agreement, Tom signs
a second mortgage agreement with Heather, so Heather can record a claim
against the property until that second mortgage is paid. Unfortunately,
Heather forgets to record it.
After a couple of years, Tom decides to sell the property for $100,000. From
the proceeds, the closing agent automatically pays off the bank's recorded
first mortgage lien. Since there is no second mortgage lien recorded for
Heather, Tom gets all the rest of the proceeds. Of course, Heather can sue
Tom for repayment, but it would have been much easier if she had recorded
her second mortgage lien.
Why Recording Is Necessary

The preceding example shows why recording real estate instruments is important. In the legal realm, recording is
necessary because it provides what is called "constructive notice" to the public. Recording allows the public to
know about the legal condition of the subject property, especially when someone is interested in buying it or
obtaining an interest in that property.
By the same token, no one can legally claim ignorance of recorded documents and instruments. That is exactly
why public recording was established. For example, if someone buys a parcel of land that has a recorded
easement from it. That buyer cannot later claim ignorance of the easement as the basis for negating the closed
purchase or removing the easement.
In this way, the law can protect individuals from an endless series of battles against unrecorded claims. Proper
recording provides protection for individuals against all other rival claimants.
Example: Public Notice
Ellen decides to sell her ranch to Hector. After completing the transaction and
conveying the deed, it is left to Hector to record the deed. Unfortunately,
Hector fails to record it. A few years later, Ellen dies. Her heirs do not realize
that Hector had already bought the property, and they decide to sell her
ranch; an unwitting Achilles decides to buy it from Ellen's heirs. Achilles
promptly records his new deed. When Hector finds out about Achilles'
purchase, he tries to assert his ownership interest in the property.
Unfortunately, because Hector failed to record his deed, the courts side with
Achilles; Hector loses the property.
Because Ellen's heirs and Achilles were ignorant of any unrecorded liens,
claims or deeds to Ellen's ranch, the court protected them. However, if one of
them knew that Hector had purchased the property from Ellen, the court may
invalidate the sale to Achilles or force the knowing party to compensate
Hector. In fact, if Ellen's heirs or Achilles saw that Hector was in possession
of and currently using the property, that open use may serve as constructive
notice and support Hector's unrecorded claim.
For example, Wolfgang buys a house and obtains a mortgage from Fifth Utah Bank. Through some clerical error,
the mortgage is not recorded. Wolfgang later sells the house to Charlie, subject to the existing mortgage.
Because Charlie has been informed of the mortgage's existence (albeit unrecorded) Charlie cannot claim
ignorance of it and his responsibilities.
The Recording Process

As mentioned above, recording is typically handled by the county government. The specific official responsible
for this duty is usually called the "recorder of deeds," "registrar of deeds" or "county recorder." In some locales,
this is may be an elected position.
When a deed, mortgage, lease or other instrument is to be publicly recorded, these steps are usually followed:
● Acknowledgment. Before filing an instrument, it must be properly signed by at least the grantor and
acknowledged. The acknowledgment is simply a public declaration by the signer that he or she is
agreeing to the instrument voluntarily and without coercion. In lieu of an acknowledgment, witness
signatures are sometimes acceptable. But absence of an acknowledgment or witness signatures may
invalidate an otherwise recorded instrument.
● Submission. The instrument to be recorded is submitted with the recorder. The original document must
be submitted; copies cannot be recorded. Instruments made in foreign languages may remain binding
between the parties involved, but their recording may be invalidated. Sometimes, an application form
must also be filled out. As soon as the instrument has been submitted, it is considered "filed for
recording," and for all practical purpose it is recorded as of that date.
● Fee. Most counties will charge a recording fee for each instrument or document recorded. The person
seeking to record the instrument must prepay this fee before the document can be fully recorded.
● Stamp/certification. The recorder's office will typically stamp the original documents as received for
recording, which will permanently indicate the date of submission for future reference.
● Copying of document. Upon receiving the submitted instrument and required fee, the recorder's office
will typically copy the instrument unto its archives, usually via microfiche.
● Indexing. The copy of the recorded instrument is indexed in the recorder's filing system, which will allow
for easy and efficient future retrieval, as may be necessary in the future.
● Return. The original instrument—complete with all stamps, certification and notes—are returned to the
person who filed it. Note that the recorder does not make judgments as to the validity, truthfulness or
even authenticity of the instrument's contents. The recorder merely records whatever has been
submitted as having been publicly recorded. At the same time, most states have laws against the
knowing filing of fraudulent documents.
Most recorder's offices maintain an index of names, usually called a Grantor-Grantee Index. This provides an
alphabetical listings of all grantors and grantees. By locating the name on this index, someone can trace that
person to a specific instrument, as well as investigate a property's "chain of title," or the list of owners, liens and
encumbrances recorded against that property—so that someone can get the full recorded history of that
property.
Some states—especially ones with low population density and larger tracts of land, such as Iowa, Louisiana,
Nebraska, North Dakota, Oklahoma, South Dakota, Utah, Wisconsin, and Wyoming—provide a Tract Index
instead of, or in addition to, the Grantor-Grantee Index. The Tract Index provides a simple way for investigating
the property's chain of title, by giving each parcel of property with its own page. This parcel page then identifies
all of the recorded instruments against that property.
Chronological Order
The term "chain of title" refers to a chronological order. To be considered "properly" recorded, the instrument or
document must be properly placed in the chain of title, or chronological order.
For example, Cicero obtains a mortgage loan from ABC Bank to buy a piece of property. However, ABC Bank
jumps the gun and files the mortgage on April 1, 2001, even though Cicero doesn't actually conclude his
purchase until April 3, 2001. Because Cicero did not own the property on April 1—and therefore did not have
authority to have instruments recorded on it—ABC Bank's April 1 recording is invalid. Don't worry though, ABC
Bank simply works with Cicero to correct the error and re-record the mortgage deed.
Some liens, such as real estate taxes, special assessments and inheritance tax liens, do not need to be recorded
to remain binding.
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Subsurface Rights
Mineral, Oil and

Mortgage
Calculator &
Gas Rights
Amortization Table
● Calculate
payments Often times, the most valuable portion of a
● Review parcel of real estate is not what's above the
amortization surface, but what's below it. As with other parts
table of a real property—such as air rights and usage
● Consider rights—subsurface elements can be separated
prepayment from the real property. This chapter will discuss
options the two basic types of subsurface commodities:
1. Mineral Rights
2. Oil and gas
Mineral Rights
The right to mine a parcel of property can be
separated from the ownership and other uses
and control of that property. Mineral rights allow
its owner to control the mining of a parcel of
property for coal, gems, copper and other
minerals.
A property owner can sell mineral rights while

keeping the rest of her property. Similarly, the
same property owner can sell the land while
retaining the mineral rights to the property. The
sale or transfer of mineral rights may impose
limitations on how mining operations can
proceed, especially if the owner of the rest of
the property is still using the surface.
When a parcel of property is purchased, the

mineral rights are normally included with the
rest of real estate being transferred—unless it
is explicitly stated that the mineral rights have
been separated from the rest of the real estate
transaction. When in doubt, check the county
property records office. Any sale or lease of
mineral rights normally must be recorded to be
official.
The minerals involved can be precious gems,

copper or coal. But it is rare for the mineral right
to identify one mineral and exclude all others
from being extracted. When mineral rights are
transferred, it usually covers everything
underground, starting at a certain depth and
proceeding downwards.
For example, a farm owner may sell the mineral

rights to his property and continue to farm the
surface of the property. The miner who
purchases the mineral rights is allowed to dig
shafts into the ground and start removing dirt
and minerals. As long as the miner's work
doesn't cause a surface collapse or doesn't
affect the farmer's ability to farm, this should
prove to be a stable relationship.
Interestingly, many locales allow the miner to

continue to own the subsurface rights even
after all the minerals have been removed.
Oil and Gas Rights

Subsurface oil and gas are treated in a slightly
different manner as compared to hard minerals.
Much of this is because oil and gas are not
permanently fixed like minerals. When oil and
gas are pumped from a parcel of land, the
person who removed the oil or gas—and is
authorized to do so—owns the removed oil or
gas as personal property.
Once pumped oil or gas becomes personal

property, it normally stays that way even if it is
put back into the ground. No one else can then
pump out that oil or gas a second time and
claim it his or her personal property. That re-
pumped oil or gas is considered the personal
property of the person who first pumped it out.
But while oil or gas remains in the ground, their

ownership is, in fact, governed by two legal
theories or approaches, depending on the state
in which property is located:
● Law of Capture. States such as

California, Oklahoma and Louisiana
follow the "law of capture," which rule
that the property owner actually does
not own the oil and gas until they are
pumped out of the ground or captured.
This approach is based on the belief
that oil and gas are fluid and may
move from one parcel of property to
another.
● Law of Ownership. Many states, such
as Mississippi, Ohio, Texas and West
Virginia, are more pro-landowner.
These states believe that oil and gas
are naturally trapped, so oil and gas
are owned by the property owner, just
as hard minerals are owned.
Who is right? In a way, both are correct, based

on how you look at it.
Oil and gas normally come together; but they

are not part of some underground river or lake
of crude. In fact, oil is actually found compacted
and trapped within the millions of miniscule
pores inside porous rock. Natural gas is
trapped within or with the oil itself. So in its
natural state, oil and gas really are fixed.
Oil and gas are tightly packed in their natural

situation and are under a great deal of
pressure. When a well is dug into these
deposits, the pressure sends the oil and gas
toward the low-pressure area of the well
opening. Drilling actually forces oil and gas to
shift from one area to another in search of the
lower-pressure area. The law of capture
recognizes this shifting as the basis of its
approach.
Regardless of the state, if a person drills a well

and pumps oil or gas out from his land, that oil
or gas belongs to him. Even if his drill begins to
suck oil or gas from his neighbor's deposit, that
extracted oil or gas belongs to the person who
has captured it. In order to protect her interest,
the neighbor can drill an offset well on her
property to capture her own oil or gas, as well
as alleviate the pressure that pushes the oil or
gas into her neighbor's land.
This law of capture is not absolute, however.

Often, water or gas is injected into the ground
to force more oil or natural gas out. This can
sometimes drain oil or gas away from
neighboring properties. Some states provide for
damages to be awarded to the property owner
who loses oil or natural gas because of such
drainage.
Oil or Gas Leases
Oil and gas drilling has

become an increasingly
complex and advanced
operation. Because most
property owners who possibly
have significant subsurface oil
or gas deposits do not have
the knowledge or resources to
competitively drill their own
wells, they normally enter into
an oil lease with an oil
company. Through the oil
lease, the property owner is
guaranteed a steady source
of income from the oil or gas
in the owner's land:
● Cash bonus. The

property owner
normally receives a
cash bonus at the
time of initial signing
of the oil lease.
● Royalty. The
property owner
(lessor) receives a
royalty on the oil or
gas removed through
wells on his or her
property. A typical
arrangement in the
past would give the
lessor one-eighth
(1/8) of the oil or gas
removed through the
well on the lessor's
property.
● Delay rental. If the
lessee fails to begin
drilling or delays its
start, a delay rental is
sometimes paid to
the owner. In fact,
most oil leases will
terminate
automatically if the
lessee fails to begin
drilling.

Mortgage


Survey & Legal Description
Land is complex but valuable commodity. In order to legally treat it as a valuable commodity, a method of
separating and clearly identifying parcels has always been necessary since the dawn of civilization as we know
it.
A legal description of each parcel of property is required and used for practically every deed and mortgage, to fix
the boundaries of the property that is being bought, sold, mortgaged, leased or transferred.
A street address will not suffice, because it does not have the precision required by our legal and economic
system.
The legal description is a verbal representation of the property's boundaries, usually based on a survey. The
survey is often depicted as a two-dimensional graphic drawing of the parcel. However, it is through a legal
description that the survey achieves its full usefulness.
In the United States, three methods of surveying land have developed through the years, with most states using
a combination of two of the following:
1. Metes and bounds. This is the oldest method, adopted from English custom and law; and it is still used
by about 20 states.
2. Government survey system. Also called the "rectangular" or geodetic survey system, this system was
established in the U.S. in 1785 to provide a more efficient method of surveying property.
3. Plat of survey. Also called the recorded plat and the lot-block-tract method, this system is in use in
many cities, where land parcels have been subdivided into numbered parcels and clearly recorded for
uniform use.
The main product of the survey is the clear identification of a real property's boundaries. But their benefit is the
assistance they offer to the general economy and order. In many ways, surveys and surveyors are the backbone
of the American real estate economy. Surveys are routinely required with most sale or transfer of real property.
They also avoid problems by revealing potential problems, such as encroachments, dangerous subsurface
utilities and misaligned buildings.
Each state has a survey standard, usually promoted and exercised by the state's land survey association. There
are two most commonly accepted standards in the U.S.:
● The American Land Title Association (ALTA) standards.

● The American Congress on Surveying and Mapping standards.
These standards establish minimum details and criteria for precision to be used by land title surveyors, such as
the scale(s) to be applied and preferred map orientation (North).
In most real estate transactions, one of two types of surveys is provided by the seller:
● Survey sketch. The basic survey provides the location and dimension of a parcel of land. This normally
shows the parcel relative to its neighboring parcels and/or an adjacent street or marker.
● Spot survey. Most real estate purchases require a spot survey, which also indicate the location and
dimensions of buildings on the identified parcel.
Sometimes, surveys and legal descriptions must take on a three-dimensional approach by including elevation.
This is particularly important with high-rise condominiums and air lots.
When a survey must indicate an elevation, it does so based on a datum. A datum is found in most cities and
provide an index level from which elevations can be measured. Most American surveyors use the U.S. Coast
and Geodetic Survey (USGS) datum, which is based on the mean sea level in New York harbor. In addition, the
USGS have placed bronze "benchmark" markers across the country that provide elevation above sea level.
Metes and Bounds

Do you remember those old Pirate movies and cartoons, where they locate buried treasure by measuring off
paces. They were basically using the metes and bounds system.
Metes is an Old English word for distance and bounds refers to direction. This surveying system identified the
property's boundaries by walking the reader along its path.
Just as in the old Pirate cartoons and movies, the metes and bounds system makes use of monuments, both
natural or artificial, such as trees, boulders, stakes and concrete markers. In fact, the metes and bounds system
usually begins and ends with a monument.
The metes and bounds approach includes three elements:
Point of Beginning. The POB is where the survey description begins, and is usually established relative to a
clearly defined monument. It is usually one corner of the property's boundaries. For example, the POB may
begin 100' from the street corner.
Distances. In the U.S., the distance is usually described in feet.
Directions. At the corners of each parcel of property, the survey indicates which way the boundary line turns
with compass bearings (adjusted to true north, NOT magnetic north). Compass bearings are measured in
degrees (360 degrees in a full circle), minutes (60 minutes in each degree) and seconds (60 seconds in each
minute). Note that the turn's compass bearing is not angle-measured from boundary, but from true north.
Here's an example of a metes and bounds survey:
"Starting at a monument located at the southwest corner of Sheffield Avenue and Waveland
Avenue, proceed 12 feet directly south along Sheffield Avenue to the POB, then continue south
another 600 feet, then West for 610 feet, then N 30º 15' W (north 30 degrees 15 minutes west)
for 750 feet, then directly East 720 feet to POB.
The main disadvantages to the metes and bounds approach are that they can be very lengthy and complex, and
they are subject to shifting monuments.
Government Survey System
As with so many legal precepts, the government survey system was created by the U.S. in the wake of its
triumph in the Revolutionary War. The newly independent United States found itself the owner of the area that
now includes Ohio, Indiana, Michigan, Illinois and Wisconsin. The U.S. also found itself with serious debts
incurred during the war.
So, the new government decided to raise revenues by selling parts of its new "northwest" territories to settlers.
But the government couldn't use the old metes and bounds methods, because these new lands were essentially
un-surveyed and it would take years (or decades) to do so with the old system.
Consequently, necessity forced the young U.S. government to create a rectangular survey system that was more
easier and cost-effective to perform, as well as more precise. About three-fourths (3/4) of the continental U.S.
now use this system.
The government survey system attempts to lay out a grid over the entire country, at least the parts that use this
system. Parcels of real property are then surveyed and located relative to this grid of intersecting lines. This
system employs four types of lines that are now part of our political and economic vocabulary:
● Principal meridians. North-south lines that offer a principal north-south reference. There are 36
irregularly spaced principal meridians in the U.S., which usually sited from a substantial landmark, such
as the mouth of a river. These meridians have been either numbered (such as First P.M., running north
from the mouth of the Great Miami River separating Ohio and Indiana) or named (such as the
Tallahassee Meridian and the San Bernardino Meridian). Parcels are referenced to a PM, though not
necessarily the nearest one.
● Base lines. East-west lines that offer a principal east-west reference, and which usually intersect a
principal meridian at some prominent point.
● Range lines. North-south lines (parallel to PMs) that are six miles apart and form ranges (the columnar
area between range lines). With township lines, they establish square townships.
● Township lines. East-west lines (parallel to base lines) that are also six miles apart. With the
intersecting range lines, they establish townships. Since both range and township lines are six miles
apart, each township contains 36 square miles (or 23,040 acres).
Sections
As noted above, each township contains 36 square miles. These correspond to 36 sections. There is a uniform
numbering system to sections, which begins with section 1 at the township's northeast corner and ending with
section 36 at the township's southeast corner.
In each township, section number 16 is reserved as the school section. This section was chosen because of it
central location. All or parts of this section can be sold, with the proceeds supposed to be directed for school use.
North
6 5 4 3 2 1
7 8 9 10 11 12
18 17 16 15 14 13
19 20 21 22 23 24
30 29 28 27 26 25
31 32 33 34 35 36
S16 = School Section
Legal description
Each section is further divided into halves and quarters, commonly referred to as aliquot parts. The specific
parcels being surveyed are normally described relative to aliquot parts.
When using the rectangular survey system, the legal description will follow a five-part format:
1. Part of the section.

2. Section number.
3. Township row (sometimes, with the name of the township).
4. Range column.
5. Name or number of the principal meridian.
For example, the following is part of a sample legal description of a Chicago condominium, using the government
system: "…the northeast 1/4 of section 4, township 39 North, Range 14, East of the Third Principal Meridian."
The following example is one section further broken down into aliquot parts and smaller parcels. The legal
description indicates the portion and location within each section as follows:
1,320 feet 2,640 feet

(20 chains) (40 chains = 160 rods)
E 1/2 of NW 1/4 NE 1/4

(80 acres) (160 acres)
NW 1/4 of SW 1/4
(40 acres) 1,320 feet
(20 chains)
E 1/2 of SW 1/4
(80 acres)
Corrective adjustments
In its ideal state, the rectangular survey system assumes a flat Earth and accurate surveys. Unfortunately, that is
not so. Early surveying equipment were adequate for the time, but were not always precise or accurate; and the
range lines running true north-south are actually converging toward the north pole.
In truth, few if any townships are actually 36 square miles. The adopted standard for states using the rectangular
system is to make township adjustments along its northern and western boundaries. That would be section 1
through 7 and 18, 19, 30 and 31.
Adjusted sections that are either undersized or oversized are typically titled fractional sections. If the adjusted
section is smaller than a full quarter section (160 acres or 9 square miles), it is normally labeled a government lot
and placed in a fractional section.
To compensate for the Earth's curvature, the rectangular/government survey system includes adjustment lines:
1. Guide meridians. Every fourth range line is identified as a guide meridian. These are true north lines
used in conjunction with intersecting correction lines.
2. Correction lines. Also called standard parallel lines, every fourth township line is identified as a
correction line. These correction lines are shorter than a regular township line.
Plat of Survey Method

In most subdivided urban areas, the plat of survey method is used (along with the government/rectangular
survey system) to provide a precise and more efficient method of legal description. This is especially true in
areas where larger parcels of land have been subdivided into small building lots.
On its own, the preceding government survey method becomes cumbersome or impractical with smaller parcels
of property. Instead of a long metes and bounds or rectangular survey description, the plat method is used.
The key to this approach is the plat book which provides a detailed survey of all lots, blocks, tracts, roads and
boundaries in a subdivided neighborhood. These separate lots are distinctly numbered by the recorded plat.
Consequently, the legal description simply refers to the lot number, as recorded in the official plat book.
For example, Lawndale Investment Developers (LID) buys a large farm with the intention of subdividing it. LID
hires a surveyors to divide the property into blocks-with separating streets-and then further divides the blocks
into separate lots. Each block is numbered; then each lot is likewise numbered.
The surveyor's final product is the plat (or map of the subdivision), with precise dimensions, labels, sizes and
numbers of all the blocks, lots, streets and other elements. The plat will typically include the quarter-section line.
This plat is then submitted by the developer to the local property records and local building and planning
departments. If approved, the plat is filed and recorded. From now on, all legal descriptions can merely refer to
the block number, lot number and plat book label or number.
To prohibit unmanageably small lots, most states enact plat acts. These plat acts specify the minimum size any
lot parcel may have.
Title & Estates in Land
Although America's allodial system of real estate law allows full individual ownership of real property, not all
property owners have such full ownership. For just as land may be separated into surface, air rights, sub-surface
mineral rights and even owner/co-owner portions, the ownership of the real property may also be divided into
separate levels of ownership.
For example, an apartment lease effectively creates two owners for the subject unit. The tenant has a temporary
and limited ownership interest, while the property owner has the superior, indefinite ownership interest. With the
lease, the landlord compromises his ownership a little in favor of the tenant.
Such varying ownership interests in land are called estates. An estate refers to the type, degree, nature,
duration, level and extent of ownership interest that a person (natural or artificial) can have in real property. In
fact, the term real estate actually refers to ownership of land and its improvements.
The U.S. allodial system categorizes estates into two general categories, which are then further subdivided into
subcategories and even sub-subcategories:
● Freehold estates. An estate of indefinite length is called freehold. As explained below, freehold estates
are divided into fee simple and life estates, depending on whether they are inheritable estates.
● Leasehold estates. Unlike and less than freehold estates, leasehold estates are for a definite term. As
explained below, the four basic types of leasehold estates are estate for years, periodic estate, estate at
will and estate at sufferance.
The type of estate that a person has in a parcel of property will affect that person's bundle of ownership rights to
a property. It can especially limit what that person can do with the property and how (if at all) that person can
dispose, enjoy, possess or control that property.
Freehold Estates
Of the two general categories of estates, the freehold estates offer the higher level of ownership. Within this
category, there are two basic classes of freehold estates, which are also further subdivided:
● Fee simple estate. The most complete form of ownership is the fee simple, which allows the fee simple
property owner to pass on the property to heirs or other parties. However, fee simple estates are further
divided between fee simple absolute and the more conditional fee simple defeasible.
● Life estate. Freehold estates that are based on the life of a person are called life estates. The ability of
life estate owners to transfer property to heirs and other parties is severely limited. The two basic types
of life estates are conventional life estates and legal life estates.
Fee simple estate
Inheritable freehold estates are called fee simple estates. There are two types of fee simple
estates, based on their level of full ownership:
1. Fee simple absolute

2. Fee simple defeasible
Fee simple absolute
The most complete type of ownership is fee simple absolute, which means that the
estate owner has no limits on his or her ownership rights (except as required by law).
Most importantly, the fee simple absolute estate allows the owner to pass on the
property to heirs or other parties. Practically all homes with mortgages on them are
required to be fee simple absolute estates.
Fee simple defeasible
Also sometimes called a determinable fee, conditional fee or qualified fee estate, the
fee simple defeasible estate is a slightly more restricted for of inheritable, fee simple
ownership. The basic restriction of the fee simple defeasible estate is that the
ownership interest is conditional on either a current status (condition precedent) or
until a new event or status (condition subsequent).
❍ Condition precedent. A "fee simple subject to condition precedent" is a type

of fee simple defeasible estate that requires that a specific condition be met
to keep the estate. This type of ownership lasts as long as that condition is
satisfied. For example, Felix grants a large parcel of property to the city of
Fresno with a "fee simple subject to condition precedent" that the city
maintains a school on that property. If the city ever closes down the school,
the estate ends; and the property will be returned to Felix or his heirs
(reversion interest) or to another group (remainder interest). As long as the
condition is met, the city may be free to sell or mortgage the land (as long as
that is not one of the conditional restrictions). However, the end of the estate
is automatic as soon as the condition ends.
❍ Condition subsequent. A "fee simple subject to condition subsequent" is a
type of fee simple defeasible estate that maintains the estate ownership
unless an event or situation occurs. Often called a "must not do" or "but if"
estate, this version of the fee simple defeasible estate stipulates certain
events or conditions that must be avoided. However, if that restricted event or
situation does occur, the end of the estate is not necessarily automatic. If the
restricted condition does occur, the grantor (or grantor's heirs or a third party)
instead has a right of reentry, or a right to take back the property. For
example, Hilda gives a Park Avenue penthouse to her niece Jill with a "fee
simple subject to condition subsequent" that Jill never commits a felony or
allows a felony to be committed in the property. Jill can actually sell this
penthouse, but the buyers would be purchasing a fee simple defeasible
estate and they have to meet the conditions. During a wild party in the
penthouse, the cops arrive and arrest (and later convict) Jill for selling drugs
at the party. Hilda now has the right of reentry, or the ability to rescind Jill's
ownership interests and take back the penthouse.
Real Estate Trusts
Contrary to what some may believe, a trust is not necessarily a legal instrument. Rather, a trust is a relationship
or entity formed around a legal obligation. This formal relationship or entity is usually established through a legal
instrument, such as a will, trust deed or trust agreement.
Although there are many types of trusts that will handle real estate, they tend to fall into four basic types:
1. Living and testamentary trusts

2. Land trusts
3. Real estate investment trusts (REIT)
Living & Testamentary Trust

A living trust, also called an "inter vivos" trust, is one that is created by the property owner, while he or she is still
alive. In contrast, the testamentary trust is created after the property owner's death, usually through a will.
A trust arrangement normally involves three parties, although not necessarily three separate persons:
1. Trustor. The trustor is the person or entity that transfers any property into a trust arrangement. With real
estate, this is usually the current owner. Note that trustor can transfer fee simple title, as well as
separate air rights, mineral rights and easements, into the trust.
2. Trustee. The trust is controlled and managed by the trustee, so the trustee technically holds legal title to
the properties in the trust. However, the trustee is normally bound by a fiduciary relationship with the
trustor and beneficiary, which legally restricts and controls what the trustee can, will and must do.
3. Beneficiary. The beneficiary is the person or group that will benefit from the properties and assets in
the trust. With land trusts, the property owner will typically designate himself or herself as both the
trustor and beneficiary.
For a simple example, Gertrude decides to set up a trust fund for her grandson Nick. As trustor, Gertrude
transfer some of her assets into the trust fund, which will be administered by her attorney's firm (trustee). Nick is
obviously the beneficiary of the trust fund. However, Nick's benefits will be controlled by the rules established by
Gertrude (trustor) and administered by the trustee. Nick may want all of the money right away; but if the trust only
allows monthly allowances, that is all that the trustee will disburse.
Land Trusts
A popular instrument among individual real estate investors (as well as homeowners) is the land trust. Note that
most, though not all, states recognize land trusts. Florida, Illinois, Indiana, North Dakota and Virginia all
recognize land trusts.
The fee simple defeasible estate can end; and when it does the ownership
interest in the property is transferred away from that defeasible estate owner.
The fee simple defeasible estate will indicate to whom the property will then
be transferred, based on the defined interest:
❍ Reversion interest. In this situation, the real property ownership "reverts"

back to the original grantor, or that grantor's heirs.
❍ Remainder interest. In this situation, the real property ownership is given to
a third party, which is normally specified by the original grantor.
For example, in the above scenario of Hilda and Jill. If the Hilda (as the
original grantor) stipulates a reversionary interest, the penthouse reverts back
to Hilda or, if Hilda is now deceased, one of her heirs.
However, let's say that Hilda had instead stipulated that the property go to
Jill's goody-two-shoes brother, Jack. In this situation, Jack has a remainder
interest.
Life estate
An indefinite freehold estate that is nonetheless based on a person's life is called a life estate.
As opposed to fee simple freehold estates, life estates are not inheritable—so they cannot be
passed on by the life tenant (the owner of the life estate) to his or her heir.
There are two classes of life estates, which are further divided into specific types:
● Conventional life estates. The conventional life estate is created by grantor and
continues as long as the life tenant is alive (ordinary) or while the grantor or another
person is alive (pur autre vie).
● Legal life estates. Also known as statutory estates, the different types of legal life
estates are created by state laws. The three basic types are dower, curtesy and
homestead estates.
The owner of the life estate, also called the life tenant, has true ownership interest in the
property. The life tenant can use, enjoy and dispose of the property. As such, the life tenant
can sell, mortgage or lease the life estate. The basic condition is that the life tenant cannot
commit "waste," a legal real estate term meaning injury or damage to the property, either
through malice, intention or neglect.
Conventional life estates
As soon as the person, on whose life the life estate is based, has died, the life
estate ends. However, as explained below, that person doesn't have to be the
life tenant.
● Ordinary life estates. When the life estate is based on the life of the
owner of the life tenant, it is called an ordinary life estate. When the
life tenant dies, the real property either reverts back to the grantor
and heirs (reversionary interest) or to a third party (remainder
interest).
● Pur autre vie. This French term meaning "for the life of another," is
self-explanatory. This life estate is based on the life of someone
other than the life tenant. The life estate thus continues as long as
that "other person" is alive. When that other person dies, the
property either reverts to the grantor (or grantor's heir) or to a third
party (remainder interest).
A common example of an ordinary life estate is when a man dies and leaves
his estate to his wife in a life estate that stipulates a remainder interest to their
children. When the wife eventually dies, the life estate transfers all interests to
their children. At this point, their children would probably own the property
with a fee simple absolute estate.
Legal life estates
Also called statutory life estates, the legal life estate is created by a law or
statute. Each state has its own established parameters and requirements,
and not all states recognize the three basic types of legal life estates:
● Dower. This life estate protects the wife's interest. Dower rights refer
to the legal life estate interest that a wife has in her deceased
husband's property. The husband cannot transfer his wife's dower
rights without her permission. This dower right usually remains
applicable even if the wife is not on the property's title. [For example,
Kevin sells their home without his wife Isabel's permission. When he
subsequently dies (sometimes even before), Isabel can demand
return of her dower interest from the buyer or title insurer.]
● Curtesy. Similar to dower rights, this life estate instead protects the
husband's interest. Dower rights refer to the legal life estate interest
that a husband has in his wife's property. The wife also cannot
transfer her husband's curtesy rights without his permission. This
curtesy right usually remains applicable even if the husband is not on
the property's title.
● Homestead. This legal life estate was created to protect
homeowners from creditors, by reserving a portion of the home's
value against creditor demands and judgments for debt. The
exemption amount varies by state. Most mortgage lenders will
require home loan borrowers to waive their homestead exemption
rights, so as to satisfy the lender's collateral requirements.
For more information about dower, curtesy and homestead rights, please see
the "Spousal & Co-Ownership Rights" article.
Leasehold Estates
Compared to freehold estates, the leasehold estate normally does not last as long and does not convey as much
ownership rights. The leasehold estate, nevertheless, does convey some ownership interest to the holder of the
leasehold estate.
Leasehold estates are created by a lease agreement, which effectively transfer an ownership interest from the
grantor (landlord) to the tenant, usually in return for rent or other consideration. The ownership interest
transferred is limited, typically only the right of possession.
All states have enacted a statute of frauds, which set requirements for certain contract. Most states require that
should be written when possible.
tenant defaults.
● Lessee. The tenant is called the lessee.
There are four basic categories of leasehold estates:
1. Estate for years. This leasehold estate continues for a definite period of time. Contrary to its name, this
most popular of the leasehold estates does not require a term of one or more years. The key here is the
term. If the tenant dies during the term, the leasehold estate continues; it merely passes on to one of the
tenant's heirs, who assume the lessee role.
2. Periodic estate. Also called estate from period to period, this leasehold estate is more open-ended.
This leasehold is for one, usually short, period at a time, and renews every time the consideration (rent)
is paid. For example, the month-to-month rent has a period of one month. Every time the rent is paid,
the lease-which is normally oral-renews for another month. Termination of this leasehold does require
advance notice: usually one week for weekly lease, one month for a monthly, and three to six months
for a yearly lease.
3. Estate at will. Often called a "tenancy at will," this estate occurs when the landlord allows the tenant to
possess the real property for an indefinite period. For example, the strip mall owner allows Ophelia to
place her antique wares in the neighboring empty store while the owner-landlord finds a new tenant.
With a tenancy (estate) at will arrangement, Ophelia would have to move out her items as soon as a
new tenant is found. Either party can terminate this tenancy with sufficient notice, or upon the death or
insanity of either party.
4. Estate at sufferance. Also called a "holdover tenancy" or "tenancy at sufferance," this situation occurs
when a tenant continues to possess and occupy a property, even after the tenancy has ended. This is
not trespassing, because the original entrance was lawful. This is a wrongful possession; however, if the
landlord receives any payments during this holdover, this automatically becomes a periodic tenancy or
estate. Thus, when a landlord is trying to evict a wrongful tenant, the landlord should not accept any
payments from that tenant.
For a more detailed discussion of leases and leasehold estates, see the "All About Leases" article.
Title & Title Insurance
The heart of the real estate transaction is the conveyance of title to real estate for money. The funds are
exchanged for the title. The land itself cannot be moved; it is the title to that land that is conveyed. Mortgage
loans and tax issues all revolve around this core issue.
As the real estate market evolved over the past century, the importance of assuring clear evidence of title
became urgent. There is usually few if any questions about the validity of funds provided at closing. The deed
conveying the title typically is not released until the check clears. But how is the buyer assured the title being
conveyed and the deeds conveying the title are both valid and marketable.
A marketable title is one that is free and clear of title defects and encumbrances, except for those encumbrances
that the buyer agrees to accept. The "Marketable Title" article explores the issues regarding title marketability in
greater detail.
Title insurance has arisen as one of the most common methods for assuring the buyer or assignee that the title
they are receiving is marketable. But there are other methods for ensuring that the title is acceptable and
marketable. This article will review those methods, as well as the process and evidences of title used in most real
estate transactions, in the following sections:
1. Abstracts and title examination

2. Title certification
3. Torrens system
4. Title insurance
Abstracts and Title Examination

A real estate abstract is an historical summary of the title to a parcel of real estate. The abstract usually includes
a chain of title, which describes the sequence of recorded conveyances of the property. A satisfactory chain of
title will demonstrate an unbroken line of conveyances, wherein each seller was a former buyer or assignee of
the property. This unbroken chain of title will verify that the current seller—owner truly does own the property and
has the authority to convey the title.
The abstract will also indicate all other documents recorded upon the property's title. Such items would include
mortgages, liens, releases of liens, wills, tax sales, easements, covenants and other encumbrances. The
abstract will not go into all of the details contained in those deeds and recorded documents. The abstract will
usually just itemize the type of document, relevant parties, dates and amounts.
The most complete abstracts can go all the way back to original granting of the land to an individual by the
government. However, most transactions and title abstracts no longer need to go that far, except for only the
very largest or most important real estate transactions.
Abstracts are prepared by abstractors, who are usually attorneys, former public officials and, increasingly, title
company employees. Abstractors arose and became more prevalent as America's westward expansion began in
earnest. Prior to their emergence, most conveyances were simple matters performed at the local courthouse,
which usually doubled as the county recorder of deeds. Because there were often few transactions until those
early days, many recorders were intimately familiar with the histories of all property transactions in their county.
These assurances were usually sufficient to guarantee that the title was marketable.
As the volume increased, that became more difficult if not impossible. Nor was it ever the court's or government's
responsibility to provide a chain of title or anything that resembled an abstract. They would only make available
for review the recorded documents, as time and personnel allowed.
Abstractors soon emerged to fill the void. They maintained their own abstract records of all properties, and they
assigned their employees to perform regular updates. The records that abstractors assembled were often more
convenient than having to go down to the records office to research property records. Remember that this was
before the time of computers and databases.
Each state has similar "recording acts" governing how documents are recorded into public record, especially real
estate documents, deeds, liens and encumbrances . For example, most states will indicate the type of deed
required to convey title in common and different circumstances. The buyer (grantee), buyer's attorney or escrow
agent will usually provide to the recorder's office the deed used to convey title. This recorder enters a copy of the
deed into the public records, making the deed publicly accessible. The original deed is usually returned to the
grantee (buyer) or the grantee's attorney. Note that the recorder does not make a judgment as to the validity of
the deed or recorded document. The recorder only enters it into public record, regardless of its authenticity or
validity. The buyer or grantee would depend on the abstract and related certifications to provide assurances that
the deed and title are acceptable and valid.
Buyers and sellers in a real estate transaction would hire an abstract company to provide an abstract that
confirms the title being conveyed is clear and marketable. The abstractor would use his records to create an
abstract of the subject property; and they might send an employee to the courthouse to conduct a quick review of
any current recordings that may affect the title. The abstract would be provided to the buyer's attorney (if any) for
examination and opinion.
The abstract usually also includes an abstractor's certificate, which describes what the abstractor examined to
develop the abstract.
The problem with abstracts was that they were prone to mistakes and oversights. Although buyers and mortgage
lenders depended on abstractors to note any defects or questions that may arise from their examination of
records, abstracts did not protect the buyer or assignee from all damages caused by these defects.
The abstractor does have the responsibility to perform the title examination with due care, professionalism and
good faith; the abstractor's certificate extends the abstractor's liability only to the work performed. The abstractor
will be responsible for missed or omitted records that they should have uncovered. However, the abstractor does
not provide any guarantees or opinion about the title itself.
Title Certification
Unlike an abstract certification, the title certification actually does attest to the validity of the title. The most
common example, until recently, of title certification involves an attorney issuing an opinion of the title that he or
she has examined. Many areas no longer use abstracts, but rely primarily on attorney examination with an
attorney's written opinion.
Still, much like the abstractor's certificate, the attorney's opinion extends the attorney's liability only to the
recorded documents that he or she examined. This is also the same level of liability exposure that the title
insurance policy entails.
Torrens System
The Torrens system is an alternative method for conveying title, practiced in a few areas of the country. It is,
however, quickly falling into disuse, because regular title insurance has become more acceptable. However, they
are still accepted in metropolitan areas, such as Boston, Chicago, Minneapolis and New York City.
The typical process for obtaining evidence of title through the Torrens system is as follows:
1. Abstract report. The grantor (owner) obtains an abstract report from an abstract company, title
insurance company or qualified attorney.
2. Application for title registration. The grantor then files a suit against all names on the title,
challenging them to come forward if they wish to contest the grantor's application for a registration of
title. The grantor doesn't actually have to sue; the application for title registration simply operates in the
same fashion. The application must list all parties with any interest in the property.
3. Court judgment. If the owner who filed for title registration successfully establishes his or her claim to
the title, the court issues its findings and an order. This court document will list the liens, encumbrances
and clouds that must remain on the title. So the owner's interest in the property is effectively subject to
those encumbrances .
4. Court order. Following the court's judgment, the registrar of title will be ordered to register the grantor
or owner's title.
5. Certification. After registering the title, the registrar will issue a certificate confirming that the title has
been issued in the grantor's name, with the required encumbrances and conditions. This certification
becomes public record.
The Torrens system creates a different obstacle for real estate transactions. Deeds, encumbrances and other
transactions must be registered with the registrar in order to become official. The registrar will then analyze the
deed or document filed for recording. If the registrar finds the new deed acceptable, the old Torrens certificate
will be canceled and a new Torrens certificate will be issued to the new owner. The registrar then retains the
original deed.
Unlike the standard recording office, the Torrens system registrar actually examines the deed and delivers a
judgment as to the validity of the conveyance. Another difference between the standard method and the Torrens
system is that with Torrens, the property is officially conveyed with the certificate; the standard method uses a
deed to convey the title.
The Torrens system is not title insurance , and the registrar is not required to defend the title if a challenge ever
occurs. Defending the title remains the owner's responsibility and expense.
Title Insurance
The most common and accepted method of obtaining an evidence of title, and assurances to its marketability, is
now the title insurance. Title insurance has actually been around since shortly after the Civil War (late 1800s).
The first title insurance policies were actually provided by abstractors. As the role of abstractors expanded, they
began to answer the need for more assurances to the buyer that he or she was receiving clear and marketable
title to the desired property. So abstractors would have their attorneys analyze the abstract report, render a legal
opinion as to its validity and then issue a title insurance policy to protect the owner against hidden risks, such as
the following:
● Forgery. Legally recorded documents may actually be forgeries. Although they are invalid, they will
remain on the property's title until they are removed through legal process.
● Unqualified grantor. The grantor or assignor may be unqualified to execute the recorded deed. The
deed or recorded document is therefore invalid and subject to removal from the title.
● Spousal rights. An incorrect marital status indicated on a deed or release may later hamper a deed or
release, because dower and curtesy rights may create an encumbrance on the title.
● Defective deeds. Some recorded deeds may be invalid because of improper delivery or recording. For
example, Bagwell signs a quitclaim deed to Natasha, but Natasha does not record the deed. Bagwell
meanwhile has a mortgage on the property that goes into foreclosure. The lender forecloses the
property and gains the title to the property. Natasha records the quitclaim deed after the foreclosure, but
her deed will be invalid.
Title insurance companies soon grew to replace abstract companies, in providing title abstract and insurance
protection. Over the decades, the title insurance industry continued to develop and provide a wider array of
protection for its policyholders. Soon, the American Land Title Association (ALTA) was formed to provide national
benchmarks and standards for its member title insurers.
Like all insurance policies, the title insurance policy is an agreement between the insurer and the policyholder.
The insurer will defend the policyholder against lawsuits based on title defects covered by the insurance policy.
The title insurance policy essentially covers the title examination and certification performed by the title insurance
company. The covered defects must arise from issues or title elements that were in existence prior to the
issuance of the coverage.
Most insurance policies will list exceptions and conditions to its coverage. title insurance is no exception. Title
insurers will still issue a policy, even if the title has encumbrances . However, those encumbrances will be listed
as conditions to the coverage. Other typical conditions include encroachments, easements and other issues that
would be revealed by a survey, when no survey has been provided to the title insurer. Also, the title insurer
cannot provide full protection against unrecorded claims or rights to the property by other people.
Unlike standard insurance policies, title insurance is not limited to a specified period. The policy coverage is often
good for the entire period of ownership. There are actually several types of title insurance policies available:
1. Owner's policy
2. Lender policy
3. Residential policy
4. Endorsements
5. Leasehold policy
Owner's policy
Most real estate transactions require a basic owner's policy. The one-time premium is paid,
usually by the seller or grantor, at the time of the sales transaction. The policy remains in force
until the policy-holding owner sells the property.
Lender policy
When mortgage financing is involved, with either purchases or refinances, a lender's title policy
is normally required. The one-time premium is paid at the closing. But unlike the owner's policy,
the lender's policy does have a limited lifetime. The policy remains in force only until the loan
principal is paid off. However, if the loan is foreclosed, the policy continues.
Residential policy
Current ALTA insurers now offer a special type of coverage for homeowners. This residential
policy offers a dramatically more expansive coverage:
● Unrecorded liabilities. This new policy protects the homeowner against

encroachments, easements, unrecorded liens and other issues normally not covered
by the typical policy.
● Inflation protection. The new residential policy will increase its coverage protection
by ten percent (10%) annually for the first five years, so that the policy coverage could
provide some remedy for inflation. Obviously, this would assume that inflation does not
go into hyperinflationary mode.
● Actual loss coverage. Insurers will now reimburse homeowners if they are forced to
remove or move portions (or all) of their home because of building code violations,
encroachments or zoning issues.
● Inability to use. If the homeowner is unable to use the property because of a claim
against the title or use it as a single-family home because of contradictions with
recorded restrictions or zoning laws, the title insurer will cover the loss.
Endorsements
In addition to the basic policy, ALTA title insurers also offer additional endorsements (or riders)
to the policy. There are endorsements available for encroachments, zoning issues, restrictions,
environmental issues and site location.
Leasehold policy
Tenants are similar to buyers in that property is conveyed to them, albeit on a temporary basis.
Tenants of larger properties or more substantial leases have a vested interest in ensuring the
property's title will not present problems that may jeopardize their use of the leased property.
Leasehold policies are designed especially for tenants. For more information, see the "All
About Leases" article.
Title Transfers and Wills
One of the three methods of voluntary alienation, or the voluntary transfer of title to real estate, is through a will.
The legalese term that applies to this scenario is "testate," which is used to refer to the death of a person with a
will.
Depending on whether the will is transferring personal property or real property, different terms and processes
are involved. Before reviewing the differences between the transfer of personal property and real property
through a will, let's review the common elements and parties involved with the disposition of either type of
properties:
● Testator. The deceased person who created the will or for whom the will was created is called the
testator; however, this person may also be called the testatrix, if female. The testator is the person
whose property is being disposed through the will.
● Executor. The person named in the will to administer the terms of the will is called the executor. This
person may also be called the executrix, if female.
● Administrator. If the deceased person has died intestate (without a will), the probate court may appoint
an administrator to oversee the distribution of the deceased person's estate. An administrator may also
be appointed if the will does not specify an executor. The female version is often called an
administratrix.
● Probate. The process by which probate court settles the estate of a deceased person is called probate.
Probate court is typically required when someone with assets dies without a valid will.
Personal property
The will may dispose of both real and personal property. The portion of the will dealing with personal property
uses different legal terms:
● Testator. With personal property, however, the testator/testatrix bequeaths personal property (such as
cash and other objects) to the beneficiary or legatee.
● Bequest. The process of disposing personal—as opposed to real—property through a will. Sometimes
called the legacy, this would include any cash or non-real estate property.
● Beneficiary. The person receiving personal—as opposed to real—property through a will. Sometimes
called the legatee, this would include disposition of cash.
Real property
The transfer of real estate by will often involves the following parties, terms and elements:
● Devisor. The person (deceased) who is giving real property through the will is called a devisor. The
operative element here is real estate. The devisor and testator are often the same person. It is simply
that when real estate property is involved, that portion of the process is considered the devising and
involves the devisor and devisee.
● Devisee. The person who is receiving real property through the will is the devisee. The devisee and
beneficiary to a will may be the same person. The basic difference is whether the property being
received is real property or personal property. In the portion of the will that deals with real property, the
receiver is the devisee.
● Devise. The process of disposing real—as opposed to personal—property through a will is technically
called the devise. The will may involve a devise and a bequest; the difference is that the devise handles
the disposition of real property, while the bequest handles the disposition of personal (non-real)
property.
Will-Conveyance Process
The will normally names an executor or executrix to administer the terms of the will and dispose of the testator's
remaining assets. If the will fails to name an executor, or if that executor is no longer capable or alive, the
(probate) court may appoint an administrator.
When a person with a will dies, the will is filed with the probate court (normally where the deceased resided). The
probate court will determine the will's validity, settle the estate's debts and distribute the remaining assets. To be
completely valid, the will must meet six criteria:
1. Legal age. The testator/testatrix must be of legal age, which is usually 18 in most states.
2. Sound mind. The testator/testatrix must understand the purpose, terms and contents of the will, at the
time the will is created and signed.
3. Written and signed. The testator/testatrix must sign and date the will. The testator/testatrix may also be
required to actually create the will, by script, handwriting or typing.
4. Free will. The testator/testatrix may not be coerced to make the will, or complete under undue
influence.
5. Last will. The will should have proper language that cancels all previous wills and declares the official
will as the last one made and the only one applicable.
6. Witnessed. The testator/testatrix must sign the will with at least two witnesses. None of the witnesses
can be beneficiaries or devisee of the will.
When a person dies without a will—also called intestate—the probate court appoint an administrator to oversee
the settlement of the deceased's debts and disposition of the deceased's remaining assets.
There are three alternative types of wills:
● Nuncupative. The nuncupative will is a verbal will created by person, who is usually near death. Such
verbal wills are often not enforceable for real property, although they may be acceptable for personal
property.
● Holographic. The holographic will is one created by the testator and in the testator's script or
handwriting. However, unlike a standard will the holographic will is not witnessed; and not all states
recognize them as binding.
● Codicil. Amendments and additions to a will are called codicils. They must fulfill the other requirements
of a standard will, except for being the last will.
Spousal Rights
Most states have passed statutes that provide the surviving spouse with additional rights to the deceased
person's property.
Renouncing the will. Some states allow the spouse to renounce the will. This may be a favorable tactic, as
some states have statutes that give the surviving spouse a defined percentage of the deceased's estate.
Subservient to legal life estates. In states that recognize dower and curtesy rights, these legal life estates
normally supercede the will's relevant terms and contents.
For more information, see the "Co-Owner and Spousal Rights" article.
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Transferring Title
The transfer of title to real estate between buyers and sellers is the essence of the real estate market; it is also a
significant part of the U.S. economy. This article analyzes the different ways, levels and manner of transferring
real estate.
The legal term for transferring real estate is called alienation. Depending on whether or not the property owner
consents to the transfer, the transfer of real estate is normally divided into two categories:
1. Involuntary. The property is alienated from the property owner, without that owner's consent.
2. Voluntary. The property owner consents to the transfer of title, usually through sale, gift or will.
Involuntary Alienation
The involuntary transfer of title is usually accomplished through one of six methods:
● Eminent domain. The government's four basic powers are taxation, police powers, escheat and
eminent domain. The power of eminent domain refers to the government's ability to take property from
private ownership, normally through the process of condemnation. For more information, see the
"Eminent Domain" article.
● Escheat. The government's power of escheat refers to its prerogative of receiving the property of any
person who dies intestate (without a will) and without any heirs. Depending on the location, the property
will revert either to the state or the local county.
● Descent. The laws of descent—also called intestacy laws—are used to govern the disposition of real
property of a person who has died intestate (without a will), but with heirs. The court appoints an
administrator who will settle the debts of deceased person and dispose of any remaining assets. The
deceased's remaining property are normally distributed to heirs according to that state's laws of
descent.
● Lien enforcement. Property may be taken from its current owners by one of the lien holders with claims
against the property's title. Such foreclosures are normally initiated and conducted for delinquent real
estate tax liens or defaulted mortgage liens. Most mechanics' liens and judgment liens normally are not
allowed to initiate foreclosure proceedings.
● Accretion. The gradual removal of land through either natural or human causes is called accretion.
Loss of land through natural causes is typically labeled erosion.
● Adverse possession. Also called title by prescription or loosely referred to as squatter's rights, this is
the process by which a person can take property from its owner, without that owner's consent.
States have varying statutes that the taker must meet to adversely possess another person's property, but the
four basic requirements are as follows:
1. Continuous use. The person who wishes to take the land must have occupied and/or used the property
continuously for a minimum time period, specific to each state. [Note that usage without occupancy may
give that person an easement by adverse prescription, rather than full ownership of the property.]
2. Adverse. The person's use must be done without the owner's consent and/or against the owner's
complaint. If the owner decides to give the person limited permission, then the right to adverse
possession may be terminated.
3. Open and notorious. The person's continuous use must be in the open, without attempt to hide or
camouflage. It must be visible to all who care to look.
4. Exclusive. The person, family or group adversely using the property must possess it exclusively,
without sharing it with either the owner or other parties.
Voluntary Alienation
The three basic methods of voluntary alienation are through a will, gift or sale.
For more information about the process of transferring property through a will, please see the "Conveying Title
Through Wills" article.
Conveying title to property through a gift or sale is normally accomplished with a deed. However, there are many
kinds of deeds; for more information about this lengthy topic, see the "All About Deeds" article.
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Glossary—A
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1099
An IRS-designated form used by businesses to report payments to consultants or service providers who are paid
on a contractual basis. A copy of the 1099 is provided to the contractor for preparing income taxes and
documenting gross income. Mortgage lenders will sometimes review a borrower's 1099, if any to confirm tax
return figures. For more information, see the "Analyzing Employment and Income" article in the "Loan Process"
section.
A-Credit
An informal term referring to borrowers and applicants with very good credit history; they usually have credit
scores of 650+, with A-plus credit starting at 720. Conforming loan programs require A-credit of its applicants. In
the mortgage industry, A-credit borrowers must satisfy all of the following requirements: (1) no foreclosure or
bankruptcy within the past seven years; (2) no late payments on their mortgage history during the past year and
no more than one late payment in the past two years; (3) no more than one late payment on any installment loan
during the past year and no more than two during the past two years; (4) no more than two late payments on
revolving accounts during the past year and no more than four during the past two years; (5) no open collection
accounts; and (6) a credit score of at least 650. For more information, see the "Analyzing Credit Reports" article
in the "Loan Process" section.
A-Frame Roof
A type of gable roof with high, steep (chalet-like) roofs. It is ideal for areas with high snowfall, as it allows gravity
to prevent dangerous build-up.
Abandonment
The surrender of a property's ownership without a formal or legal successor. Abandonment can apply to either
fee simple or leasehold properties. Landlords must follow local laws when trying to reclaim rental units
abandoned by the tenant; for more information, see the "All About Leases" article.
Absentee Owner
An owner of real estate property who does not manage or reside at the subject property. For more information,
see the "Basics of Property Management" article in the "Real Estate Investing" section.
Absorption Cooling System
A method of air cooling that begins by boiling a water and lithium bromide solution (the absorbent). The steam
goes through a separator, which takes away the lithium bromide and sends it back to the absorber. The steam,
however, continues on to a condenser, where it turns back into water. That water then flows into an evaporator,
where it is turned into a very cold water vapor (the refrigerant). This refrigerant is then pumped through coils in
the furnace where it cools the air or water that is then used to cool rooms.
Absorption Rate
The period required to lease a property. For more information, see the "Basics of Property Management" article
in the "Real Estate Investing" section.
Abstract of Title
The summary history of the documents affecting the title to a real estate property, documenting its conveyances
and encumbrances. For more information about title abstracts and different types of title evidences in general,
see the "Marketable Title" and "Title and title insurance " articles in the "Real Estate In-Depth" section.
Abstract of Title with Attorney's Opinion
A type of evidence of title that begins with the compilation of a title abstract, followed by an attorney's review and
written opinion of the status and marketability of title. This opinion is not a guarantee, but a legal opinion that is
often sufficient to perfecting title. For more information, see the "Marketable Title" and "Title and Title Insurance"
articles in the "Real Estate In-Depth" section.
Accelerated Cost Recovery System
A method of depreciation introduced by the Economic Recovery Act of 1981. It calculates the useful life of
various property types, for the purpose of determining depreciation . For more information, see the depreciation
entry or the "Investment Property Tax Advantages: Depreciation Deductions" article in the "Real Estate
Investing" section.
Accelerated Depreciation
A faster method of depreciation than the straight-line method. For more information, see the depreciation entry
or the "Investment Property Tax Advantages: Depreciation Deductions" article in the "Real Estate Investing"
section.
Acceleration Clause
The clause in a mortgage, or deed of trust, that allows the lender to "accelerate" the payment
schedule—demanding immediate payment of the loan principal. Standard residential mortgage loans do not
allow unrestricted acceleration clauses; this clause is normally used by the lender to demand the entire balance
due immediately if the borrower fails to meet loan obligations (i.e., default). For more information, see the
"Mortgage Deeds and Promissory Notes" article in the "Real Estate In-Depth" section.
Access Right
The legal right of entrance or exit to a real estate property. American real estate laws prohibits properties from
being landlocked and requires easements through neighboring properties to provide access to landlocked
properties. For more information, see the "All About Easements" article in the "Real Estate In-Depth" section.
Accession
Real estate term referring to the legal process by which trade fixtures permanently become part of the real
property, usually when the fixture is not removed by a departing tenant. For more information, please see the "All
About Fixtures" article in the "Real Estate In-Depth" section.
Accretion
The gradual addition of land by force of nature. For example, tidal forces may shift sand from one coastline to an
inlet several miles down. The inlet is experiencing accretion. For more information, see the "Real Estate
Environmental Issues" article in the "Real Estate In-Depth" section.
Accrual Basis
An accounting method that records expense and income amounts as soon as they are incurred--regardless of
whether funds have been disbursed or collected. Compare with the Cash Basis entry.
Accrued Depreciation, Accumulated Depreciation
The total of depreciation that has been claimed on a property. Owners of investment real estate must claim
depreciation deductions on their annual tax returns for the investment property. When the property is sold, the
accrued depreciation deductions must be reclaimed and taxes must be paid on the accrued depreciation . For
more information, see the depreciation entry or the "Investment Property Tax Advantages: Depreciation
Deductions" article in the "Real Estate Investing" section.
Accrued (Closing) Expenses
Those expenses payable at closing that have been accumulated but not yet paid by the seller. For example, real
estate taxes that are paid in arrears must be prorated to debit the seller for unpaid accrued taxes.
Accrued Interest
Unpaid but due interest payments on a loan.
Acknowledgment
With deeds, the acknowledgment is a witnessing declaration verifying the validity of the grantor's signature. For
more information, see the "All About Deeds" and "Mortgage Deed and Promissory Note" articles in the "Real
Estate In-Depth" section.
Acquisition Cost
Charges and expenses related to a real estate purchase, over and above the property's price. These expenses
will include title insurance , credit checks, property appraisals and legal fees. This is usually called the “closing”
or “settlement” costs. For more information, see the "About The Good Faith Estimate" article in the "Applying for
a Loan" section.
Acre
The traditional measurement of land size consisting of 43,560 square feet or 4,840 square yards. Farm land,
unimproved land and residential properties are often indicated in acres. For more information, see the "Surveys
and Legal Description" article in the "Real Estate In-Depth" section.
Active Income
Revenue or income generated from a person's direct effort or investor's active participation in a business'
operations. Salary and wages from regular employment or self-employment are primary examples of active
income. This label comes into play in discussions about Tax Shelters, which contrasts active income with
portfolio and passive income, which are the three types of ordinary income. For more information, see the
"Investment Property Tax Advantages" article in the "Real Estate Investing" section.
Actual Cash Value
The type of coverage reimbursement provided by standard property insurance policies. This value is based on
the original cost of the subject property minus depreciation. Compare with full replacement coverage. For more
information, see the "Hazard Insurance" article in the "Mortgage Industry" section.
Actual Eviction
A legal remedy available to landlords who have lessees in holdover tenancy. Actual eviction requires the
landlord to decline all attempted rent payments, give the holdover tenant adequate notice and filing for court
action to forcibly remove the holdover tenant. Federal, state and local consumer protection laws normally require
landlords to follow strict guidelines when trying to evict tenants. In most cases, the eviction process can take
several months as the eviction must be approved by the local courts and enforced by the sheriff's office. For
more information about evictions, please see the "Real Estate Management: Tenant Issues" article in the "Real
Estate Investing" section.
Actual Notice
Legal term referring to information that a person or party has received through reading, seeing or hearing.
Compare with Constructive Notice entry.
Ad valorem tax
A standard term for the real estate tax of a specific parcel of property. As the name suggests, this tax is based
on the valuation of the property. The traditional method for calculating a parcel’s property tax assessment is to
multiply the assessed value—after any adjustments or deductions for homestead owners, senior citizens,
etc.—by the official tax “millage” rate and any equalizer rate. For more information, please see the "Real Estate
Taxes & Special Assessments" article in the "Real Estate In-Depth" section.
Addendum
An addition to a note, deed or other legal document that amends or clarifies the terms of the original document.
Adjustable Rate Mortgage (ARM)
A type of mortgage financing that allows the lender to periodically make interest rate adjustments, with
consequent payment recalculation. The adjustments are according to an independent market index, such as
U.S. Treasury Bill yields or the Federal Reserve's Cost of Funds Index (COFI). Adjustments are normally made
once each period, at the anniversary of the loan; for example, a 2-year ARM adjusts its interest rates every two
years. The primary exception is ARM loans based on the Prime rate, which are adjusted sporadically by major
banks. A more detailed discussion of the ARM loan is available in the "ARM Loans" article of the "Loan
Programs" section.
Adjusted Gross Income (AGI)
With tax returns, this is the consumer's taxable income after all deductions, carry-overs and adjustments have
been included. Mortgage lenders do not use this amount for their gross qualifying income calculation. However,
mortgage lenders do often include the AGI in its qualifying income calculation for self-employed applicant. For
more information, see the "Real Estate Investment Analysis Tools" article in the "Real Estate Investing" section.
Adjusted Tax Basis
Also called, adjusted cost basis, this is the net book value of a property, on which a capital gain or loss is based.
This calculation begins with the basis (original purchase price), to which capital improvements made since the
purchase and buying expenses are added; any depreciation taken for tax-related deductions is then subtracted
from that amount to arrive at the adjusted tax basis. When the property is sold, the capital gains tax is calculated
as the new sales price minus the tax basis. For more information, see the "All About Capital Gains" article in the
"Real Estate Investing" section.
Adjustment Interval
On an adjustable rate mortgage (ARM) loan, the time between changes in the interest rate and/or monthly
payment—typically ranging from six months and one year to ten years, depending on the specific program
selected. For more information, see the "ARM Loans" article in the "Loan Programs" section.
Administrator
A court-appointed individual for the purpose of directing and eventually disposing of the property of a person who
has died without a will. For more information, see the "Title Transfers & Wills" article in the "Real Estate In-
Depth" section.
Administrator's Deed
A deed that conveys to a purchaser the real estate property of an individual who has died intestate (without a
will). For more information, see the "Title Transfers & Wills" article in the "Real Estate In-Depth" section.
Adverse Possession
Similar to squatter rights, adverse possession is a statute of limitation that bars the true owner from asserting his
claim to a real estate property. However, this is only applicable if that owner has not made any notices or actions
to stop the adverse occupant during the proscribed statutory period. Typical statutory periods are seven to thirty
years. As long as the true owner makes a notice to the occupant at least once during the statutory period, the
statutory term begins anew. This should not be confused with involuntary alienation, which is more of an active
legal maneuver. For more information, see the "Real Estate Introduction" article in the "Real Estate In-Depth"
section.
After-Tax Cash Flow
The income funds remaining after all operating expenses, including taxes, are paid.
After-Tax Rate
The rate of return calculation based on the after-tax income divided by the equity. For more information, see the
"Real Estate Investment Analysis Tools" article in the "Real Estate Investing" section.
Agency
A legal relationship between a principal and an agent arising from a contract in which the principal engages the
agent to perform certain acts on the principal's behalf. Agencies are typically created in one of four ways:
expressed agency, implied agency, agency by estoppel and agency by necessity. For more information, see the
"Real Estate Sales Contract " article in the "Real Estate In-Depth" section.
Agency By Estoppel
A type of agency relationship created when a principal, through statements or actions, leads a third party to
believe that someone is his or her agent--and that third party relies on it. Even if no previous agency relationship
existed, that someone is now an agent for the principal in the context of this third party. For more information,
see the "Selling Your Real Estate" article in the "Real Estate In-Depth" section.
Agency By Necessity
A type of agency relationship created in an emergency situation, when it may be unnecessary to obtain the
principal's consent to expand or create an agency. For more information, see the "Selling Your Real Estate"
article in the "Real Estate In-Depth" section.
Agency Guidelines
In the mortgage industry, Fannie Mae, Freddie Mac and Ginnie Mae are considered agencies because they were
established by the government to develop the secondary mortgage market. For more information, see the
"Conforming Loans" article in the "Loan Programs" section.
Agreement of Sale
Known by various names, such as contract of purchase, purchase agreement, or sales agreement according to
location or jurisdiction. A contract in which a seller agrees to sell and a buyer agrees to buy, under certain
specific terms and conditions spelled out in writing and signed by both parties. For more information, see the
"Real Estate Sales Contract " article in the "Real Estate In-Depth" section.
Air Rights
Property right providing for legal ownership of space above a parcel of land or within a building. For example,
developers may negotiate for control air rights above urban railways and then construct buildings above these
railways. The most common application of air rights are condominiums: in most cases, unit owners only own the
air space within the unit walls. For more information, see the "Air Rights" article in the "Real Estate In-Depth"
section.
Alienation Clause
Also called a due-on-sale clause, this is an element in mortgage deeds that allows the lender to demand full
repayment of the current principal balance if the title is ever transferred or substantially altered, without prior
consent from the lender. Essentially, this is a provision to prohibit loan assumptions and title assignments. For
more information, see the "Mortgage Deed and Promissory Note" article in the "Real Estate In-Depth" section.
Alienation of Property
A legal term describing the transfer of property from the current owner. Such alienation can either be voluntary
(as in the case of a lease) or involuntary. For more information, see the "Transferring Title" article in the "Real
Estate In-Depth" se
Glossary—B
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B-Credit
An informal term referring to borrowers and applicants with several recent minor delinquencies or credit
problems; they usually have credit scores between 580 to 650. Conforming programs tend to deny B-credit
applicants. However, B-credit applicants usually have a good chance of improving to A-credit in a relatively short
period of one to two years. In the mortgage industry, B-credit borrowers normally have one or more of the
following traits: (1) no bankruptcies or foreclosures in the past five years and no repossessions or major
judgments in the past four years; (2) three to six late payments on mortgage and installment debts during the
past two years; (3) five to eight late payments on revolving debts in the past two years; (4) unpaid collections of
$500 to $10,000. Note that a borrower with no recorded credit history is normally graded B. For more
information, see the "Analyzing Credit Reports" article in the "Loan Process" section.
Back-End Ratio
When qualifying the applicant's income, the back-end ratio is the total debt-to-income (DTI) ratio limit that deals
with all long-term liabilities. Unlike the front-end ratio that considers only the housing expense
qualification—which is also considered long-term—the back-end ratio includes all other long-term debts, as well
as the housing expense. The conforming loan limit for the back-end ratio is usually 33% to 38%, which means
that the sum total of all long-term monthly payments (including total housing expenses) should not exceed 33%
to 38% of the borrower's gross income, depending on the specific loan program. Thus, if you add together the
monthly payments on all your loans, credit cards and projected housing expenses, then divide by your gross
monthly income, you will arrive at your projected back-end ratio. However, certain nonconforming programs
allow back-end ratios in excess of 55%. For more information, see the "Analyzing Employment and Income"
article in the "Loan Process" section.
Back-Up Contract
A real estate purchase agreement that becomes effective only if a primary contract with another party fails to
close. The buyer in the back-up contract understands that he or she may not be able to purchase the property,
particularly if the primary buyer is able to complete a purchase. For more information, see the "Real Estate Sale
Contracts" article in the "Real Estate In-Depth" section.
Backfill
The gravel, soil or other material replaced in the space around a building wall after the foundation and external
subterranean walls have been set.
Bad Debt Allowance
Accounting terminology used in real estate that enters a reduction allowance against the gross income of an
investment. The bad debt allowance assumes that certain invoices or payable rent will never be collected.
Balance Sheet
A financial statement that calculates an entity's assets, liabilities and equity for a defined period. The balance
sheet normally displays the equity amount as equaling the total of asset and liability entries.
Balloon Frame
The basic method used with many homes, in which light wood beams (joists) were nailed to supports (studs) to
form a framework for exterior and interior finishing. This framing style was a by-product of the industrial
revolution which was able to mass-produce necessary building material to meet growing housing needs. The
key element of the balloon frame is the web of lighter materials.
Balloon Loan
A type of loan whose term is less than the length of the amortization. It is usually a short-term fixed-rate loan
which involves small payments for a certain period of time and one large payment for the remaining amount of
the principal at a time specified in the contract. For example, a 5-year balloon is one in which the loan matures
in 5 years but is amortized for 30 years. [Translation: the monthly payments are calculated for a 30-year pay-
back period (so they're lower); but after five years, the loan term expires and the borrower must repay or
refinance the entire remaining balance.] The balloon loan interest rate and monthly payments are lower than
standard fixed-rate loans, but the entire principal balance is due at the end of the term—hence a large balloon
payment. The most typical balloon loans are 5-year and 7-year balloons, although 10-year and 15-year balloons
are also available. For more information, see the "Balloon Loans" article in the "Loan Programs" section.
Baluster
Small posts or vertical ornaments between stairs and their bannister.
Bankruptcy
The formal court order that provides protection to debtors so as to allow them to reorganize their finances. U.S.
bankruptcy laws provide many consumers with a method to reestablish their financial health, without being
completely drained by creditors. There are primarily two types of personal bankruptcy options: chapter 13 and
chapter 7. Chapter 13 essentially reorganizes the consumer's debts, while the chapter 7 eliminates debts after
liquidation of available assets. However, a bankruptcy will have a severe impact on the applicant’s financing
efforts for a period of five to ten years. For more information, see the "Bankruptcy and Mortgage Options" article
in the "Credit Repair" section.
Bank Statement
The periodic itemization of transactions that is provided by depository institutions to its clients. Many lenders will
request copies of the applicant's bank statements to document existence and source of sufficient funds, as well
as to provide an alternative method for documenting income. [With “limited documentation” loan program, the
applicant can use the average monthly deposits for the past 12 months as his or her qualifying income.] For
more information, see the "Analyzing Assets" article in the "Loan Process" section.
Bannister
Hand rails for stairs.
Bargain and Sale Deed
A type of deed that offers the grantee no expressed guarantees against encumbrances, unless specifically
stated. However, a covenant of seisin is normally assumed. For more information, see the "All About Deeds"
Base Line
A real estate surveying term used with the rectangular survey system, base lines refer to identified lines running
east-to-west across the nation, from which specific parcels of property are measured. Base lines are normally
used in conjunction with range lines, principal meridians, township lines, townships and sections. For more
information, see the "Survey and Legal Description" article in the "Real Estate In-Depth" section.
Base Molding, Baseboard
Construction term referring to trim-work placed along the bottom of a wall, effectively covering the wall-floor
corner. For more information about the different types of trim or molding, see the Trim entry.
Base Rent
The minimum rent due under a lease agreement that requires additional assessments based on the property's
operating expenses. Triple-Net lease arrangements, for example, charges the tenant a base rent plus additional
assessments for the tenant's share of taxes, insurance premiums and operating expenses. For more information,
see the "All About Leases" article in the "Real Estate In-Depth" section.
Basecoat
When plaster is used, the first coat of plaster is often used to set a base. The second coat is called a brown
coat.
Basis
The owner's basis is the initial cost of the property. However, when calculating potential capital gain taxes, the
property owner must apply the adjusted tax basis--which takes into account other capital improvements,
purchase costs and depreciations taken. For more information, see the Tax Basis and Adjusted Tax Basis
entries; for even more information, see the "All About Capital Gains Tax" article in the "Real Estate Investing"
section.
Basis Point
A calculation of 1/100 of one percent. A point is calculated as one percent of a gross amount. A basis point is
1/100th of that point.
Batten
Any strip of wood used to cover a joint. Most often, it is a narrow piece of board used to cover the vertical joints
of plywood siding.
Batter Board
Horizontal boards used to mark a building's layout prior to construction.
Bay
The unfinished area or space between a row of columns and the bearing wall.
Bay Window
A type of window that projects from the side wall of a house or structure. Typical bay windows actually consists
of three windows: the central one is parallel to the wall, while the side windows angle from the side of the central
window to the wall. Bay windows can provide more light and ventilation than standard configurations, as well as
add space to a room. For more information about the parts and styles of windows, see the Windows entry.
Bay Depth
The distance from the corridor wall to the real window or wall.
Bead
A narrow, rounded type of trim molding.
Beam
A horizontal load-supporting length of wood, metal or other very strong material.
Bearing Wall
A wall that supports a floor or roof of a building.
Before-Tax Cash Flow

Zoning & Building Codes
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properties.

The income or revenue available after operating expenses, but before the payment of any taxes. Compare to
the After-Tax Cash Flow entry. For more information, see the "Real Estate Investment Analysis Tools" article in
the "Real Estate Investment" section.
Benchmark
A real estate surveying term referring to the bronze markers used by the U.S. Coast Guard & Geodetic Survey to
indicate sea level measurement at various points in the country. Surveyors can use these benchmarks as local
datum from which to measure elevation. For more information, see the "Survey and Legal Description" article in
the "Real Estate In-Depth" section.
Beneficiary
Essentially, the beneficiary is the person or party who will benefit from a particular agreement or deed. With
trusts, the beneficiary is the person or party who benefits from the trust. For more information about trusts,
please see the "Real Estate Trust" article in the "Real
Glossary—C
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C-Credit
An informal term referring to borrowers and applicants with damaged and poor credit. C-grade consumers are
usually delinquent on several accounts, and demonstrate an inability to efficiently manage debt; they usually
have credit scores obetween 500 to 579. For most C-grade consumers, their only financing hope would be with
non-conforming loan programs. In the mortgage industry, C-credit borrowers usually have one or more of the
following traits: (1) a bankruptcy, foreclosure or repossession during the past two to three years; (2) at least 60-
90 days behind on mortgage or large installment debts ; (3) at least nine late payments on revolving accounts in
the past two years; and (4) more than one open collection account. However, with proper attention to debt
payments, a C-credit borrower can usually return to A-grade within two to three years. For more information, see
the "Analyzing the Credit Report" article in the "Loan Process" section.
Calendar Year
The 12-month period beginning January 1 and ending December 31.
Call Provision
Similar to the acceleration clause, this clause in certain mortgage documents allows the lender to accelerate the
debt payments. However, the call provision is conditioned on certain events--unlike the acceleration clause,
which is activated only by default. For more information, see the "Mortgage Deed and Promissory Note" article in
Canceled Check
A check used for payment that has been processed through the issuer's bank and returned to the issuing payer.
The canceled check will normally have processing ink-stamps on its back and can be used as proof of payment.
Cant
A slanting roof board used to eliminate sharp right angles.
Cantilever
A beam that is fixed on one end but is left free floating on the other end. This is sometimes used for roofs and
overhanging porches.
Cap (Interest)
The maximum adjustment that a lender may make to the interest rate of an Adjustable Rate Mortgage (ARM)
loan. There are mainly two types of interest rate caps: periodic and lifetime. The periodic cap limits rate
adjustments from one period to the next, while the lifetime cap limits the maximum interest rate to which the loan
may rise throughout the entire life of the loan.
Cap (Payment)
The maximum adjustment that a lender may make to the monthly payment of an Adjustable Rate Mortgage
(ARM) loan. The payment cap limits periodic adjustments to the monthly loan payment, regardless of any
interest rate adjustment. Note, however, that ARM loans with payment caps often produce negative
amortization, wherein the principal increases instead of decreases.
Cap (Principal)
Glossary—D
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D-Credit
An informal term referring to borrowers and applicants with extremely damaged and abysmal credit, usually with
credit scores below 500. The only financing hope for D-credit borrowers would be expensive non-conforming
loan programs. D-grade borrowers are often currently in foreclosure , bankruptcy or repossession—or have just
completed such actions within the past year. Consumers can still be graded "D" when the foreclosure ,
bankruptcy or repossession is two to five years old if that consumer has not made strides in rebuilding credit.
However, with proper attention to debt payments, a D-credit borrower can usually return to A-grade within five to
seven years. For more information, see the "Analyzing Credit Reports" article in the "About Loan Processing"
section.
Daily Interest
The current interest charge for each day. The daily interest is used with prepaid expenses and per diem
assessments. Interest rates are normally indicated as annual rates. The daily interest rate is usually calculated
as the current principal balance times the annual rate, divided by 365 days.
Damper
The hinged lid in a fireplace flue that controls the draft coming in and out of the fireplace. The damper is kept
closed when the fireplace is not being used.
Datum
A real estate surveying term referring to the level surface from which elevations are measured. Every large city
has a datum, although most surveyors use the U.S. Coast Guard & Geodetic Survey datum. For more
information, see the "Survey and Legal Description" article in the "Real Estate In-Depth" section.
De Minimus PUD (Planned Unit Development)
A planned unit development (PUD) that has a relatively minimal amount of common property and improvements.
For more information, see the "PUD" article in the "Real Estate In-Depth" section.
Debt
The borrower's obligation to repay a lender. It is sometimes referred to as liabilities. For more information, see
the "Mortgage Deed and Promissory Note" article in the "Real Estate In-Depth" section.
Debt Service
The regular payment amount required by a loan debt. With most mortgage loans, the debt service refers to the
monthly or annual P&I payment.
Debt Service Ratio
Also called the "debt coverage ratio," the DSR is the a measurement of a property's ability to handle a loan debt.
The DSR is the projected debt service payments divided by the after-tax net operating income. Commercial
lenders often impose minimum DSR restrictions of 1.10 to 1.35. The most common DSR is 1.2, which means
that lenders require the property to produce net operating income that is at least 120% higher than the projected
debt service payments. For more information, see the "Real Estate Investment Analysis Tools" article in the
Debt-To-Income (DTI) Ratio
The primary method used by lenders to qualify prospective borrowers for mortgage financing. The DTI ratio is
basically the total monthly debt payments divided by the gross monthly income. Two types of income ratios are
normally considered by most lenders: the front-end (housing) ratio and the back-end (total debt) ratio. The
housing ratio is the projected housing payment divided by the gross monthly income; the total debt ratio is the
projected housing payment plus all other long-term debt payments, divided by the gross monthly income. For
more information, see the "Analyzing Employment and Income" article in the "Loan Process" section.
Declaration of Condominium
Sometimes called a master deed, this document provides basic information about the community’s land,
structures, buildings, common areas, division and map of units and description of intended usage. This is
sometimes called declaration of covenants and restrictions. For more information, see the "Condominiums"
Deed
Written instrument used to record or transfer property ownership. The deed transfers the property from the
grantor to the grantee. The most common type of real estate deeds are the general warranty, special warranty,
bargain & sale, quitclaim and grant deeds.
A variety of special purpose deeds used in many states include administrator's, executor's, sheriff's, guardian's,
referee's, tax, trustee's, trust, release and gift deeds, as well as the deed in trust and deed in lieu of foreclosure .
For more information, see the "All About Deeds" article in the "Real Estate In-Depth" section.
Deed of Conveyance
A legal instrument used to transfer a property's title. For more information, see the "All About Deeds" article in
Deed in Lieu of foreclosure
A real estate deed used to convey title to a property from the current owner to the owner's lender or creditor.
This deed is normally used when the current owner is in default or foreclosure proceedings. By voluntarily
surrendering the property, both parties avoid the costs and delay of further legal proceedings. The lender
receives title without going through the usual court and auction process; in exchange, the loan is terminated.
Similar to the power of sale clause, this is a type of non-judicial foreclosure . For more information, see the "All
About Deeds" and "Everything You Need To Know About Foreclosures" articles in the "Real Estate In-Depth"
section.
Deed in Trust
A legal instrument used to establish a land trust and transfer property into it. The grantor conveys the property to
the trustee. Note that the deed in trust is different from a deed of trust. For more information, see the "Real
Estate Trusts" article in the "Real Estate In-Depth" section.
Deed of Reconveyance
See Trustee's Deed entry. For more information, see the "Real Estate Trusts" article in the "Real Estate In-
Depth" section.
Deed of Release
See Release Deed entry. For more information, see the "All About Deeds" and "Mortgage Deeds and Promissory
Notes" articles in the "Real Estate In-Depth" section.
Deed of Trust
A type of mortgage deed in which a third party holds the title in trust as a security, while the borrower continues
to make payments to the lender. Most residential mortgage lenders will not allow the loan to close while the
subject property is in a trust. The loan programs that will close with a trust normally use a deed of trust. The
borrower conveys the legal title to the trustee, who retains the property until the debt to the lender is paid in full.
If the borrower defaults, the trustee may sell the subject property to satisfy the debt, without benefit of foreclosure
proceedings.
Note that the deed of trust is different from the deed in trust. For more information, see the "All About Deeds" and
"Mortgage Deeds and Promissory Notes" articles in the "Real Estate In-Depth" section.
Deed Restriction
A clause in the deed that restricts the use of the property. For example, a residential property normally cannot
be converted into a commercial property. Deed restrictions placed by developers to control the quality or
aesthetics of a subdivision are often called restrictive covenants. Note that when zoning and restrictions conflict,
whichever is more restrictive is usually followed. Unlawful deed restrictions are unenforceable. For more
information, see the "Zoning and Building Codes" article in the "Real Estate In-Depth" section.
Default
Failure to meet or perform a contract obligation. With mortgage loans, the lender may declare the loan in default
any time after a payment becomes past due beyond the grace period. However, most lenders will not declare
default until the borrower is at least one to three months behind. A default notice will activate the foreclosure
proscriptions of the mortgage deed. For more information, see the "Mortgage Deeds and Promissory Notes"
Default Clause
The promissory notes of mortgage loans typically have default clauses that allow lenders to exercise its option to
accelerate scheduled payments or foreclose the subject property. For more information, see the "Mortgage
Deeds and Promissory Notes" article in the "Real Estate In-Depth" section.
Defeasance Clause
In title theory states, the defeasance clause is a mortgage provision or clause allowing the borrower to regain his
or her property when the loan is fully paid. For more information, see the "Mortgage Deeds and Promissory
Notes" article in the "Real Estate In-Depth" section.
Defect in Title
See Title Defect entry. For more information, see the "Marketable Title" article in the "Real Estate In-Depth"
section.
Deferred Interest
When the monthly payment is insufficient to satisfy the interest rate charge, the difference is added to the
principal balance as negative amortization. This deferred interest increases (rather than decrease) the principal
balance. For more information, see the "ARM Loans" article in the "Loan Programs" section.
Deferred Interest Mortgage (DIM)
A mortgage loan that involves deferred interest, because the interest actually charged and collected is
insufficient to satisfy the interest due on the loan. This typically resuts in negative amortization. Some GPM and
ARM loans with payment caps may have deferred interest characteristics.
Deferred Maintenance
Property repair, maintenance and improvement requirements that have been delayed. Such maintenance are
ones that are considered mandatory, but have not been performed. Deferred maintenance often occurs in
properties that are under-performing or do not generate enough cash to meet all repair and maintenance needs.
For more information, see the "Analyzing Appraisal Reports" and "Basics of Property Management" articles in
the "Real Estate Investing" section.
Deficiency Judgment
A court order stating that the borrower's obligations continue to be in default and payable. For example, if a
lender forecloses a property and sells it for a loss, that lender may apply for a deficiency judgment against the
former borrower to recoup the loss. The deficiency judgment is a general judgment against the individual, rather
than a specific judgment against a single property. For more information, see the "Everything You Need To Know
About Foreclosures" article in the "Real Estate In-Depth" section.
Degree of Operating Leverage
A rental property management calculation that displays the effect of new tenants on operating income. This
measurement indicates the percentage change in net operating income that comes from a change in occupancy
level. For more information, see the "Real Estate Investment Analysis Tools" article in the "Real Estate
Investment" section.
Delinquency
Failure or inability to make loan payments according to the terms of the promissory note and mortgage deed. A
delinquency can result in a finding and notice of default, which can eventually result in foreclosure. For more
information, see the "Everything You Want To Know about Foreclosures" article in the "Real Estate In-Depth"
section.
Delivery and Acceptance
Legal real estate term referring to the actual time that a title to property is fully conveyed: when the grantor
delivers and the grantee accepts the title. Silence by the grantee or the proper recording of the deed is legally
considered acceptance. With escrow closings, the actual time of delivery and acceptance reverts to the time
when the grantor delivers the title to the escrowee. For more information, see the "Tranferring Title" article in the
"Real Estate In-Depth" section.
Demand Feature
The mortgage and promissory note clause that allows the lender to accelerate the loan and demand immediate,
full repayment of the loan balance. The typical mortgage loan provides for a demand feature if the borrower
defaults on the loan or the ownership of the property is ever altered or transferred. For more information, see the
"Mortgage Deed and Promissory Note" article in the "Real Estate In-Depth" section.
Demised Property
Another term for leased properties. This legal term applies to premises or any portion of a real estate property
whose interests or rights are temporarily transferred by the owner to another party. See the Lease entry. For
more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Demising Clause
The formal provision in the lease through which the property owner (or its agent) leases the property to the
tenant, and by which the tenant takes the property.
Demolition Clause
A provision in a lease indicating that when the ground lease expires, the building and its leased premises will be
demolished.
Density
The average number of persons or units in a particular space. Zoning laws typically impose specific density
limits, depending on the type of property. These density requirements, for example, will limit the number of
houses in a typical block or the occupancy capacity of a proposed development. For more information, see the
"Zoning and Building Codes" article in the "Real Estate In-Depth" section.
Depreciable Basis
The amount in a property's value that may be depreciated. This is generally the basis less the value of the land.
For more information, see the "All About Capital Gains" article in the "Real Estate Investing" section.
Depreciable Life
This tax-related term refers to the number of years for which a property owner can depreciate the value of the
property's improvements.
Depreciation
The loss or decrease in property value because of obsolescence, wear and tear, economic factors or age.
Depreciation has functional, economic and tax elements. In appraisals, the three classes of depreciation used
in the cost approach are physical deterioration, functional obsolescence and economic obsolescence. Such
depreciation can be further labeled curable or incurable.
Under standard actual cash value coverage, insurance policies will deduct depreciation from original cost when
calculating reimbursements. For tax deduction purposes, however, depreciation can only be taken on property
used in a business, trade or income generation. Personal residences cannot claim depreciation deductions.
Depreciation deductions can be calculated with either the straight line method or accelerated cost recovery
system. For more information, see the "Deducting Depreciation" and "Investment Property Tax Advantages"
articles in the "Real Estate Investing" section.
Derogatory Credit Entries
Sometimes referred to as “derogatories,” these are any negative items—such as late payments, collections,
judgments or inquiries—on a credit report. For more information, see the "Damaged Credit Options" article in the
"Credit Repair" section.
Descent
Legal term for situation in which the property owner dies without the subject property being included in a will.
The property is then acquired, usually by the government or a court-appointed administrator, through descent.
For more information, see the "Title Transfers and Wills " article in the "Real Estate In-Depth" section.
Design Development
The stage and process during a development project, during which the architect completes the plans and
specifications for the proposed development. This stage usually begins after the architect's initial schematic
design has been approved by the developer. For more information, see the "Construction Loans" article in the
"Loan Programs" section.
Designated Agent
In the real estate market, the salespeople who work for a broker and are authorized to act as agent for a seller or
buyer--as designated by the broker.
Deteriorating Area
A real estate industry term referring to areas whose properties display marked neglect, disrepair and subsequent
decrease in relative demand.
Determinable Fee
See the Fee Simple Defeasible entry. For more information, see the "Real Estate Introduction" article in the
Developer
An individual or entity who undertakes the transformation of undeveloped or underdeveloped land into an
improved property. For more information, see the "Real Estate Investment Tactics" article in the "Real Estate
Investing" section.
Development
The improvement of a property. Development may entail everything from subdividing large plats, creating
infrastructure improvements and constructing the buildings. For more information, see the "Real Estate
Investment Tactics" article in the "Real Estate Investing" section.
Development Contract
An agreement by which a developer agrees to construct a particular improvement and the client agrees to
purchase the improvement and (normally) property upon completion. For more information, see the "Real Estate
Investment Tactics" article in the "Real Estate Investing" section.
Development Loan
Funds loaned for infrastructure improvements (building of streets or utilities, etc.) to make property suitable for
sale or construction.
Devise
The act of conveying title to a property through a will. For more information, see the "Title Transfers and Wills"
Dimension Lumber
The standardized type of load-supporting lumber used for most construction as girders, joists, planks, posts,
rafters and studs. Dimension lumber is typically 2" to 5" thick and up to 12" wide.
Diminishing Return
An investment term referring to the relationship between the cost of an investment or improvement and the value
it adds, in which the value increases less than the amount of the investment. For more information, see the "Real
Estate Investment Analysis Tools" article in the "Real Estate Investing" section.
Direct Participation Program
A real estate investment program, in which investors participate directly in the cash flow and tax benefits of an
investment. Such a program, for example, would pass-through much of the property's operating profits and
allowable tax deductions to the investors. For more information, see the "Loan Programs" section.
Disbursement
The release of funds. With a purchase mortgage, the closing agent disburses the loan proceeds at the
conclusion of the closing. However, if a borrower is refinancing a primary residential property, the disbursement
must be delayed three business days. This three-day delay is called the “Rescission Period,” and allows the
borrower to reconsider and possibly cancel the refinance loan. For more information, see the "Closings and
Transactions" article in the "Real Estate In-Depth" section.
Discharge Date
With bankruptcies, the discharge date is the official date on which the bankruptcy filing is formally ended. When
a bankruptcy is discharged, the bankruptcy reorganization or disbursement is completed and bankruptcy
protection ends. For more information, see the "Bankruptcy and Mortgage Financing" article in the "Credit
Repair" section.
Disclosure
A release of information. Real estate transactions normally require the seller to disclose specific information
about the subject property. Mortgage loans require the lender to provide the borrower with several government-
required disclosures. For more information, see the "About the Application Packet" article in the "Applying for a
Loan" section.
Discount Fee, Points
The discount fee is a charge by the lender and can be assessed as either a dollar amount or as points
(percentage of the loan amount). The discount fee is normally charged in conjunction with a lowering of the
interest rate. For more information, see the "About the Good Faith Estimate" article in the "Applying for a Loan"
section.
Discount Rate
The measurement of the difference between the current cost of money and future cost of money. It is used in
the discounted cash flow analysis to determine the present value of future projected cash flow.
Discounted Cash Flow
A financial expression of the estimated current value of future cash flow. This measurement helps to estimate
the current value of a property, based on its future earnings. By comparing this current value estimate with the
projected development cost, the real estate investor can analyze the profitability of the investment. This
calculation begins with the projected future cash flow, and then reduces that cash flow by the discount rate. For
more information, see the "Real Estate Investment Analysis Tools" article in the "Real Estate Investing"
Glossary—E
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Earnest Money
Portion of the down payment delivered to the seller or an escrow agent as evidence of good faith so as to legally
bind the purchase. When a purchase contract is offered and accepted by the seller, the buyer must typically
provide an earnest money deposit. This deposit will be credited to the buyer's account, at the time of closing, as
a portion of the down payment. [A typical earnest money requirement with many residential purchases is at least
$1,000 at the time of signing and up to 5% of the entire purchase price within a few days after contract review.]
For more information, see the Down Payment Requirements article in the "Homebuyer Guide" section.
Easement
A right to use the land of another person for a specific purpose, such as for a right-of-way or utilities. For
example, a utility company may obtain a right-of-way across a private property when deemed necessary by the
local community. Easements can be positive or negative; they are also either appurtenant or in gross. For more
information, see the "All About Easements" article in the "Real Estate In-Depth" section.
Easement by Necessity
An easement created by law or the court, especially to provide access to landlocked property owners. For more
Easement by Prescription
A method of establishing an involuntary easement allowed by most states. By openly and continuously using
someone's land without consent for a number of years, a neighboring landowner may obtain an easement
through his neighbor's property. For more information, see the "All About Easements" article in the "Real Estate
In-Depth" section.
Easement In Gross
A type of easement right that is held by individuals and normally terminate with the death of one of the parties
involved. For example, a farmer gets an easement (in gross) right to store some equipment on her neighbor's
adjacent lot. If either the farmer or her neighbor dies, the easement right ends. The most common form is the
commercial easement in gross. For more information, see the "All About Easements" article in the "Real Estate
In-Depth" section.
Eave
The bottom portion of the roof's exposed overhang.
Economic Base
The underlying commercial and industrial components on an area that provides employment and revenue to the
area.
Economic Conversion
The process of converting a property’s usage—with subsequent renovations—to a different use. For example,
an industrial loft warehouse may be converted into stylish apartments. If the profits justify the cost, this would be
a good economic conversion. For more information, see the "Real Estate Investment Tactics" article in the "Real
Economic Depreciation
The decrease in a property's value caused by external forces. For example, a loss of the major employer in an
area can affect the demand for new residential and retail developments in that area. For more information, see
the "Analyzing the Appraisal Report" article in the "Loan Processing" section.
Economic Feasibility Study
An analysis of a proposed investment that focuses on the economic and financial factors that will affect the
subject property and influence the investment's future success. For more information, see the "Real Estate
Investment Analysis Tools" article in the "Real Estate Investing" section.
Economic Life
The projected length of time that a property, building or improvement can be expected to satisfy the demands of
its intended use or application. For more information, see the "Analyzing the Appraisal Report" article in the
"Loan Processing" section.
Economic Obsolescence
Also called external obsolescence, the type of obsolescence that occurs when a property or element of a
property loses its value or attractiveness to the market. All economic obsolescence are always incurable. For
more information, see the "Analyzing the Appraisal Report" article in the "Loan Processing" section.
Effective Age
In contrast to a building or improvement's chronological age, the effective age considers the property's age
based on wear and tear. For example, a poorly maintained building may only be 30 years, but the unchecked
deterioration could give it an effective age of 60 years. This neglected building would thus physically resemble a
maintained building twice its age. For more information, see the "Analyzing the Appraisal Report" article in the
"Loan Processing" section.
Effective Gross Income
This projected amount is the scheduled gross income and other miscellaneous revenues, less the projected
vacancy rate. For more information, see the "Real Estate Investment Analysis Tools" article in the "Real Estate
Investing" section.
Effective Monthly Income
For income qualifying purposes, this is the gross monthly income amount used to qualify the applicant. Effective
monthly income must come from a stable and acceptable source, such as regular employment, investments or
court-ordered judgments. Undocumented income is normally not acceptable. For more information, see the
"Real Estate Investment Analysis Tools" article in the "Real Estate Investing" section.
Efflorescence
White deposit sometimes found on brick walls.
Egress
Access from a property to an exit or public road.
Electrified Floor
A method of interior design that runs power and telephone lines beneath the floor of each building level. This
design allows quick installation of phone and electric outlets at more points with fewer visible wiring.
Emblements
Cultivated annual crops, which are considered personal property. See Fruits of Industry entry. For more
information, see the "Real Estate Introduction" article in the "Real Estate In-Depth" section.
Eminent Domain
A legal term referring to the power of the government to take land from private owners for public use. This is one
of the four basic government powers of taxation, eminent domain, escheat and police powers. Congress later
expanded this power of eminent domain to public utilities. When a property is taken from its private owner, the
property is then legally condemned and the owner must be paid fair market rates or fair compensation. The
government exercise its eminent domain power through condemnation. For more information, see the "Eminent
Domain" article in the "Real Estate In-Depth" section.
Enabling Declaration
See the Declaration of Condominium entry. For more information, see the "Condominiums" article in the "Real
Enabling Legislation
Specific legislation by state governments that gives local governments (county or municipality) the authority to
exercise certain government powers, such as taxation or police powers. However, some local governments
receive those powers through Home Rule Powers in the state's constitution.
Encroachment
Any structure or object that protrudes beyond a property's legal boundary, into a neighboring property. The
encroachment must be corrected or be insured by the title insurance before a mortgage loan can be closed for its
purchase or financing. For example, if your fence is accidentally built on your neighbor's property then that fence
is an encroachment. Even if your neighbor allows it, the title company must insure this encroachment or obtain a
"hold harmless" letter before concluding the settlement. For more information, see the "All About Easements"
Encumbrance
Any legal claim, charge, liability, intrusion, restriction or obstruction against property ownership. Encumbrances
affect the marketability of the property and, thus, its value. For example, past due tax and mortgage liens are
considered encumbrances because property ownership cannot be fully sold and transferred unless those items
are completely paid or somehow addressed. Other types of encumbrances include zoning ordinances,
easement rights, restrictive covenants and claims. For more information, see the "Marketable Title" article in the
End Loan
Sometimes called a permanent loan, the end loan refers to a long-term refinance loan that pays off a short-term
construction loan. For more information, see the "Construction Loans" article in the "Loan Programs" section.
Energy Efficient Glass
See Low Emissivity Glass entry.
English Tudor
See Tudor entry.
Entertainment Property
Real estate indstry term referring to a type of retail property used for entertainment purposes. This can run the
gamut from movie theaters to amusement parks. Note that this is not the same as recreeational property. For
more information, see the "Investing in Retail Properties" article in the "Real Estate Investing" section.
Entitlement
In the mortgage industry, this refers to a military veteran's available benefits with a VA-guaranteed loan. For
more information, see the "VA and FHA Loans" article in the "Loan Programs" section.
Environmental Impact Statement
A report required by the EPA on all development projects to determine the impact of developments on the
surrounding environment. For more information, see the "Environmental Issues " article in the "Real Estate In-
Depth" section.
Environmental Protection Agency (EPA)
The EPA was established as an independent agency in 1970, charged with administering and enforcing
environmental laws, including the Clean Air Act, National Environmental Policy Act, Clean Water Act, Resources
Conservation & Recovery Act, Comprehensive Environmental Response, Compensation & Liability Act,
Superfund Amendment & Reauthorization Act, Coastal Zone Management Act and the Lead-Based Paint Hazard
& Reduction Act. For more information, see the "Environmental Issues " article in the "Real Estate In-Depth"
section.
EPA Endorsement
The guarantee issued by the title search company or attorney that the subject property is clear, according to the
title search, of any potential environmental (pollution) violations, based on past zoning, usage or ownership. For
more information, see the "Analyzing the Title Report" article in the "Loan Processing" section.
Equal Credit Opportunity Act (ECOA)
A federal law that prohibits creditors, lenders and brokers from discriminating against an applicant on the basis of
race, color, religion, national or ethnic origin, sex, age, marital status, receipt of income from public assistance
programs, or past complaints based on the Consumer Credit Protection Act. For more information, see the
"About the Application Packet" article in the "Applying for a Loan" section.
Equalizer
A formula or constant applied to real estate assessments, to assure state-wide or local equality when
determining tax assessments. For more information, see the "Real Estate Taxes and Special Assessments"
Equitable Lien
Any lien established by the courts to ensure fairness or justice. For more information, see the "Transferring Title"
Equitable Title
The limited interest provided by a purchase agreement to a buyer who has agreed to purchase a property but
has not closed on the transaction. For more information, see the "Title and Estates in Real Property" article in the
Equitable Right of Redemption
A property owner's interest in a real property that has been removed due to a mortgage default and/or
foreclosure ; and the property owner's right to redeem the property from foreclosure . For more information, see
the "Everything You Need To Know About foreclosure " article in the "Real Estate In-Depth" section.
Equity
The economic resource of the subject property owed to the property owner. More precisely, it is the portion of
the property's value beyond the liabilities or liens against the property. Thus, a $120,000 home with $75,000 in
mortgage liens has a net equity of approximately $45,000 ($120,000 - $75,000). If the property is ever sold, that
is gross profit that the owner can anticipate.
Equity Build-Up
A property's net worth that is produced by the appreciation of the property's value and the simultaneous paying
down of any mortgage debt.
Equity Dividend Rate
A rate of return measurement that analyzes the strength of a property's income stream. The equity dividend rate
is derived from the before-tax cash flow divided by the property's equity. For more information, see the "Real
Equity Kicker
A financing arrangement that provides the lender with a portion of the cash flow and/or resale proceeds. This is
obviously a concession to persuade the lender to make the loan. For more information, see the "Loan Programs"
section.
Equity Loan
A type of mortgage loan that converts a property’s equity into cash. If this equity financing involves absorption or
repayment of an existing mortgage lien—in addition to cashing equity—then it is often called a cash-out
refinance loan. For more information, see the "Refinance Loans" article in the "Loan Programs" section.
Equity REIT
A type of real estate investment trust that invests in the ownership and management of real estate properties.
For more information, see the "Real Estate Trusts" article in the "Real Estate In-Depth" section.
Erosion
The wearing away of land through either natural or artificial causes. This can have legal implications for real
estate owners whose property abuts a body of water. Many real estate title will define the parcel's boundaries as
ending at the water's edge. As land is eroded and the water's edge creeps further into the parcel, the actual
parcel size begins to shrink. For more information, see the "Environmental Issues" article in the "Real Estate In-
Depth" section.
Errors and Omissions Insurance
Insurance coverage obtained by brokers and agents to protect themselves from liabilities arising from errors,
negligence and mistakes.
Escalation, Escalator Clause
The right of a lender to increase the interest rate of an adjustable rate loan agreement. For example, ARM loans
have escalation rights that allow the lender to adjust the loan's interest rate once every period or based on the
movement of an index. For more information, see the "ARM Loans" article in the "Loan Programs " section.
Escheat
A legal doctrine by which property reverts to the state when there is no legal owner. This can occur whenever
the property owner dies without an heir or legal claimant. If the owner dies without a will, a relative or other
claimant can avoid the escheat by filing a claim for the property--and paying all the required taxes. For more
information, see the "Title Transfers and Wills" article in the "Real Estate In-Depth" section.
Escrow Account
Property or money held by a third party, usually a bank. Both the title company and the mortgage lender
maintain different escrow accounts—sometimes called “impound” accounts. The title company’s escrow account
collects all closing funds and disburses them to satisfy liens and appropriate parties. With many purchases, the
title company will often hold an impound account containing tax payments from and by the seller—which will be
applied as soon as the next real estate tax bill arrives.
For residential mortgage purposes, the escrow is established and maintained by the lender to pay for future
property taxes and insurance premiums. When it comes time to pay the property taxes and insurance premium,
the lender will use the funds in the escrow. For more information, see the "Monthly Payments" and "Escrow
Account" articles in the "Homebuyer Guide" section.
Escrow Agent
A neutral individual who coordinates an escrow closing. The agent is usually someone from the title company,
lender's escrow department or one of the representing attorneys. For more information, see the "Closings and
Transactions" article in the "Real Estate In-Depth" section.
Escrow Clause
The clause in insurance policies indicating the lender (mortgagee) and its assignees as beneficiaries of the
insurance policy. If the subject property is destroyed, the insurer will normally first pay off the existing mortgage
balance before disbursing any surplus insurance claims to the home owner. The exception would be if the
insurance disbursements were earmarked directly toward reconstruction. Otherwise, lenders may be left holding
the bag for a large mortgage balance on a property now worth only the land. For more information, see the
"Hazard Insurance" article in the "Mortgage Industry" section.
Escrow Closing
A commonly used method of closing in which not all of the parties are present. The parties involved enter into an
escrow agreement, and the escrow agent will typically obtain assurances of marketable title, collect all require
funds and documents, deposit and disburse funds and record all pertinent deeds and documents. With escrow
closings, the official date of title conveyance is when the title was delivered to the escrow. For more information,
see the "Closings and Transactions" article in the "Real Estate In-Depth" section.
Escrow Disclosure
Informational notice detailing the current and projected escrow collections and disbursements. This disclosure is
normally provided to the borrower during the loan closing. For more information, see the "About the Application
Packet" article in the "Applying for a Loan" section.
Escrow Waiver
With the payment of an escrow waiver fee, qualified borrowers may forego the escrow requirements. With many
conforming loans, the borrower may waive the escrow requirement if the loan is only at 75% LTV ratio or
below—at least 25% down payment or equity. The lender may still re-impose the escrow requirement at a later
time if the borrower proves subsequently delinquent in paying property taxes and insurance premiums. For more
information, see the "Monthly Payments" article in the "Homebuyer Guide" section.
Escrowee
The managing agent of an escrow. With escrow closings, the escrowee receives and holds the different assets,
properties and consideration until ready for proper distribution or delivery.
Escutcheon
The decorative plate around door knobs, locks and pipes passing through a wall or floor.
Estate
In the real estate industry, the term estate refers to the interest an individual has in real property. The term
estate encompasses the degree, nature and extent of ownership rights. Estates are generally divided into two
groups: freehold estates of indefinite length and leasehold estates for a fixed term. For more information, see the
"Title and Estates in Real Property" article in the "Real Estate In-Depth" section.
Estate at Sufferance
Commonly called Tenancy at Sufferance, this legal term applies to the unpermitted occupancy by a tenant of a
property after the lease term has expired. For more information, see the "Title and Estates in Real Property"
Estate at Will
Legal term describing the permitted occupancy of a property--with or without a lease agreement--for an
unspecified term. This arrangement can be terminated by either the owner or tenant at any time. For more
information, see the "Title and Estates in Real Property" article in the "Real Estate In-Depth" section.
Estate for Life
Legal term referring to an interest in a property that terminates upon the death of a specified individual. For more
Estate for Years
Legal term referring to an interest in a property for a specified period of time. This is the most common type of
leasehold estate. The lessee must vacate at end of the lease term or otherwise becomes a holdover tenant.
Sale of property or death normally does not end a lease. For more information, see the "All About Leases" and
"Title and Estates in Real Property" articles in the "Real Estate In-Depth" section.
Estate from Period to Period
See Periodic Estate entry.
Estate in Reversion
An estate left by a grantor that begins after the termination of estate granted by that individual. For more
Estate Tax
The tax assessment based on the value of a property left by a decedent.
Estoppel Letter
A legal letter confirming the current facts of an agreement or transaction. At most closings, the borrower will sign
an estoppel letter confirming the transaction and loan amounts. The estoppel is a legal concept that prohibits a
party from denying facts that were once acknowledged by a person as true and accepted by others as factual.
Evaporator
A device found in many cooling systems that receives water from a condenser. The evaporator converts the
cooled water from the condenser into cold water vapor. Air or water is then passed over coils in the evaporator
before being forced to rooms that need to be cooled.
Eviction
The process of terminating the occupancy of a tenant. Actual evictions are initiated by the landlord; while
constructive evictions are initiated by the tenant. For more information, see the "Tenant Issues—Evictions"
segment of the "Basics of Property Management" article, as well as the "All About Leases" and "Lease Elements
and Requirements" articles in the "Real Estate In-Depth" section.
Eviction Notice
A formal notice provided by a landlord to a tenant who is currently in default on either the lease terms or rental
obligations. For more information, see the "All About Leases" and "Lease Elements and Requirements" articles
in the "Real Estate In-Depth" section.
Evidence of Title
Documented proof of valid ownership interest and right to convey title. Evidence is not a guarantee, but they
offer proof acceptable in most transactions. The four most common types of evidence of title are abstract of title
with attorney's opinion, Torrens certificate, certificate of title and title insurance. For more information, see the
"Title and title insurance " and "Marketable Title" articles in the "Real Estate In-Depth" section.
Excavation
Usually, the first step in building on land. This prepares the ground by removing earth and ensuring that it is
sufficiently flat and firm.
Exchange
A tax-free exchange of similar properties, permitted under Section 1031 of the Internal Revenue Code. For more
information, see the "Avoiding Capital Gain Taxes with Exchanges" article in the "Real Estate Investing" section.
Exclusive Listing
A type of listing agreement between sellers and real estate agents that gives the listing agent exclusivity among
all other real estate agents. However, the seller can avoid paying any commissions if the seller finds the buyer
without assistance from the seller. If the property is sold through any other real estate agent, the listing agent
receives a commission from the seller. Compare this to open listing (non-exclusive) and exclusive right of sale
(totally exclusive). For more information, see the "Shopping with Realtors" article in the "Homebuyer Guide"
section.
Exclusive Right of Sale, Exclusive Right to Sell
A type of listing agreement between sellers and real estate agents that commits the buyer to pay commission to
the listing agent when the property is sold, regardless if the property is sold through the listing or without any
agents. Compare this to open listing (non-exclusive) and exclusive listing (somewhat exclusive). For more
information, see the "Shopping with Realtors" article in the "Homebuyer Guide" section.
Exculpatory Clause
A provision in a mortgage or lease agreement holding harmless the lender or landlord for losses suffered by the
borrower or tenant in relation to the subject property or agreement. Most states prohibit or limit such clauses in
leases. For more information, see the "All About Leases" and "Mortga
Glossary—F
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Facade
The exterior front of a building.
Face Value
The dollar amount indicated on a contract, security or or financial instrument. The face value often differs from
the cash value of an instrument. For example, a life insurance policy may have a face value of $100,000 but
have a current cash value equal to a portion of the insured person's deposit to date.
Factory Outlet
A retail store owned and operated by a manufacturer for the purpose of marketing the manufacturer's products
directly to the public. For more information, see the "Investing in Retail Properties" article in the "Real Estate
Investing" section.
Fair Compensation
When the government exercises its eminent domain powers and takes property through condemnation
procedures, the property owner must receive fair market value and necessary compensation. For more
information, see the "Eminent Domain" article in the "Real Estate In-Depth" section.
Fair Credit Reporting Act
A 1977 federal legislation that regulates credit reporting agencies and the access to and use of consumer credit
data. Credit bureaus can only provide access by court order or, with the consumer's permission, for credit,
insurance and employment. Also, credit bureaus must correct or remove errors brought to their attention and
provide file data to the consumer. Lenders who reject an application because of adverse credit information,
must inform the borrower about the source of that information and make credit information on file available.
Fair Housing Act of 1968
Actually contained in Title 8 of the Civil Rights Act of 1968, this federal legislation expanded the fair housing
coverage reestablished with CRA 1964. It was subsequently amended in 1988 to ban discrimination on the
basis of race, skin color, national origin, gender, familial status and physical or mental handicap. This act also
prohibited discriminatory advertising practices. For more information, see the "Real Estate Fraud" article in the
Fair Market Value
Real estate term referring to the price or estimated value that most accurately reflect market supply and demand
conditions. See also Market Value entry. For more information, see the "Analyzing Appraisal Reports" article in
the "Loan Process" section.
Fannie Mae (FNMA)
See the Federal National Mortgage Association entry.
Farmers Home Administration (FmHA)
A government agency within the U.S. Department of Agriculture, that administers assistance to buyers of homes
and farms in rural areas.
Fascia
The outer beams of a rafter or the outer end joist attached to the ends of rafter beams. The outermost rafter
beams that are the most exposed to the exterior is normally called fascia rafters.
Fashion-Oriented Center
A retail shopping mall containing primarily apparel, boutique, handcraft and often high-end specialty stores. For
more information, see the "Investing in Retail Properties" article in the "Real Estate Investing" section.
Feasibility Study
An investigation to examine anticipated results of a development or improvement project, with the goal of
determining the potential and probability of success. Developers should always conduct at least a preliminary
feasibility study before investing large sums into a potentially money-losing effort. For more information, see the
"Overview of the Real Estate Investment Process" article in the "Real Estate Investing" section.
Federal Deposit Insurance Corporation (FDIC)
A public corporation established by the U.S. government in 1933 for the purpose of regaining and maintaining
consumer confidence in commercial banks. The FDIC insures individual deposits in commercial banks up to
$100,000 for each depositor.
Federal Emergency Management Agency (FEMA)
This federal agency is most widely known for its task of responding to disaster assessment and relief. However,
they also perform a crucial, preemptory task for the real estate market by determining flood zones and drawing
the flood map. Properties that are located in a FEMA-determined flood zone will not receive residential mortgage
financing, unless the borrower purchase federally subsidized, but still expensive flood insurance.
Federal Home Loan Mortgage Corporation (FHLMC)
Better known as "Freddie Mac," the FHLMC is a quasi-government agency and publicly traded company that
raises money to purchase mortgage loans from lenders through the sale of FHLMC-guaranteed mortgage
participation certificates (PCs). Similar to Fannie Mae (FNMA), Freddie Mac plays an important connection for
the flow of funds between the financial investment market (supply) and loan borrowers (demand). Because of
Fannie Mae and Freddie Mac, more funds are made available for the housing market—thus making
homeownership generally more affordable. For more information, see the "Conforming Loans" article in the
Federal Housing Administration (FHA)
An office of the Department of Housing and Urban Development. Through the FHA loan , the FHA encourages
lending to low-income Americans by ensuring certain loans made by qualified lenders. The FHA does not fund
loans, it merely acts as an alternative type of mortgage insurance to protect FHA lenders from losses on FHA
loans. For more information, see the "FHA and VA Loans" article in the "Loan Programs" section.
Federal National Mortgage Association (FNMA)
"Fannie Mae" is a publicly listed corporation that supports the secondary mortgage market by purchasing
conventional mortgages, as well as FHA- and VA-backed loans, from lenders nationwide. FNMA then packages
and resells these loans as securities. Similar to Freddie Mac (FHLMC), Fannie Mae plays an important
connection for the flow of funds between the financial investment market (supply) and loan borrowers (demand).
Because of Fannie Mae and Freddie Mac, more funds are made available for the housing market—thus making
homeownership generally more affordable. For more information, see the "Fannie Mae" article in the "Mortgage
Industry" section.
Federal Reserve Bank, System
The Fed was established in 1913 by the U.S. Congress to manage the nation's credit infrastructure and fiscal
stability. It does so by controlling its discount rate, reserve requirements and open market activities. The country
is divided into 12 districts, with a district reserve bank, whose governors are the core directors of the federal
reserve board.
Fee Simple
Fee simple is an Old English word for the type of property ownership that provides permanent and absolute
ownership of property—as compared to a lease. Landholders transferred property by granting an estate, then
called a “fee,” to a vassal or other person for money or services. For more information, see the "Real Estate
Introduction" and "Title and Estates in Real Property" articles in the "Real Estate In-Depth" section.
Fee Simple Absolute
A real estate term referring to the highest form of ownership--complete and indefinite ownership, subject only to
government regulation. This is one of the two types of inheritable freehold estates; compare with fee simple
defeasible. For more information, see the "Real Estate Introduction" and "Title and Estates in Real Property"
Fee Simple Defeasible
A real estate term referring to one of the two types of inheritable or fee simple freehold estates. Sometimes
called determinable fee, conditional fee or qualified fee, fee simple defeasible estates are subject to conditions of
when the estate will begin or end. Depending on whether the fee simple defeasible is subject to condition
precedent or subject to condition subsequent, this estate terminates when approved conditions end or when
prohibited uses arise. When a fee simple defeasible ends, the title passes by one of three possibilities: a
reversion interest to the original grantor; a reversion interest to the grantor's heir; or a remainder interest to a
specified third part. For more information, see the "Real Estate Introduction" and "Title and Estates in Real
Property" articles in the "Real Estate In-Depth" section.
Felt Paper
Sheet paper commonly used in construction for roofing and sheathing against moisture or dampness.
Fenestration
The design and placement of windows in a building. [Trivia note: defenestration means to throw someone or
something through a window.]
Feudal System
The precursor to modern allodial system of ownership, feudal system placed ownership of all lands in royal
hands, with some exceptions for clerical or religious properties. For more information, see the "Real Estate
Introduction" and "Title and Estates in Real Property" articles in the "Real Estate In-Depth" section.
FHA Loan
A loan insured by the Federal Housing Administration (FHA). FHA does not provide loan funds, it insures
qualified loans by accepted residential lenders—making FHA a form of mortgage insurance. For more
information, see the "FHA and VA Loans" article in the
Glossary—G
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Mortgage
Calculator &
Amortization Table
● Calculate Gable
payments
● Review The triangular section atop the side exterior
amortization walls, between the sloping roofs.
table
● Consider
prepayment Gable Roof
options
The most common type of roofing used in most
residential homes today. The basic gable roof
consists of two sloping roofs attached to a
central ridge board running through the center-
top of the roof frame. Unlike a hipped roof, the
gable roof has vertical gables at the ends of the
roof skeletons.
Gain
An increase in the value of property or assets.

See Capital Gain entry. For more information,
see the "All About Capital Gains" article in the
Galvanized
Iron or steel elements that has been coated

with zinc
Gambrel Roof
A variation of the gable roof seen in many old-

fashion barns. The gambrel's roof still use a
central ridge board and gables on the ends.
However, the gambrel actually has four slopes
instead of the gable's normal two. Each side of
the roof actually contains two slopes dropping
from the ridge board, with the lower one having
a very steep incline.
Gap Loan
Additional mortgage financing that fills a

shortfall or spread with the current mortgage
loan.
Garden Apartment
Real estate term for an apartment unit on the

ground floor or basement level.
Gas Lease
Similar to oil leases, a landowner may give

another party the right to drill for gas on that
landowner's property. If no gas is found, the
landowner receives a flat rent. If the lessee
discovers gas and begins extraction, the
landowner receives royalty payments, often in
addition to the flat rent. Sometimes, gas and oil
lease rights are combined. For more
information, see the "Subsurface Rights" article
General Agent
A type of agency relationship, often created by

a general power of attorney, that allows the
agent to bind the principal to contracts within
the specified scope of the agency. For
example, a property manager act on behalf of
the principal, within the specific scope of
managing the principal's property.
General Contractor
The contractor primarily responsible for

supervising a construction or improvement
project. The property owner or developer
works with the GC, who will then hire, manage
and pay subcontractors (as well as the GC's
own employees) to complete the project.
General Lien
A lien against both personal and real property

of a borrower. Compare to specific lien. For
more information, see the "Real Estate
Introduction" article in the "Real Estate In-
Depth" section.
General Listing
See Open Listing entry.
General Partner
The partner or partners in a general or limited

partnership who possess the right to participate
in the management of the partnership.
General Partnership
A form of partnership in which the general

partners possess the right to participate in the
management of the partnership. However,
general partners have the disadvantage of
unlimited liability for all of the partnership's
debts.
General Power of Attorney
A type of power of attorney relationship in

which the attorney or agent is charged with and
authorized to enter into contracts and
agreements on behalf of the principal within the
defined scope of the agency.
General Warranty Deed
A deed that provides the buyer (grantee) with

the greatest level of protection against potential
problems with the property's title through
specific seller guarantees in covenants, which
include seisin, against encumbrances , quiet
enjoyment, further assurance and warranty
forever. For more information, see the "All
About Deeds" article in the "Real Estate In-
Depth" section.
Geodetic Survey System
See the Rectangular Survey System entry.

Georgian
Traditional style of housing that emphasized

symmetry. The front door and chimneys are
normally centered and windows are evenly
spaced. When wings are attached, they are
typically identical. This traditional style has
been adapted to many contemporary styles.
German Lap Siding
See Drop Siding entry.
Ghetto
An area of a city populated predominantly by a

minority group, who are forced to occupy that
area because of social, legal, economic or
racial pressure from the majority.
Gift Deed
A type of deed used to convey title to property

as part of a gift. For more information, see the
"All About Deeds" article in the "Real Estate In-
Depth" section.
Gift Letter, Affidavit
A document from the gift-giver, which states

that there is no expressed or implied obligation
to repay the gift. If the buyer is obtaining a gift
for all or a portion of the down payment, closing
costs or reserve requirements, then the donor
must sign a gift letter confirming the gift status
of the provided funds. In addition, the donor
must often provide documentation that the
funds actually belong to the donor and is
transferred from the donor's account into the
applicant's possession.
Ginnie Mae
Popular name for the Government National

Mortgage Association.
Girder
Horizontal beams used to support joists or
flooring. Wooden girders are normally at least
4x4 beams. Metal girders are often I-beams.
Glazing
The process of placing glass in a window or

frame.
Good Faith Estimate (GFE)
The good faith estimate must be provided to the

applicant within three days of the application.
The GFE itemizes the costs and expenses that
the borrower will incur with the processing and
closing of the loan. A detailed discussion of the
GFE is available in the "About The Good Faith
Estimate" article in the "Applying for a Loan"
section.
Government Lot
With the rectangular survey system, areas

smaller than full quarter sections are
designated as government lots and are
numbered and placed in the fractional sections
along the northern and western boundaries of
the township. For more information, see the
"Surveys and Legal Description" article in the
Government National Mortgage

Association (GNMA)
Also known as "Ginnie Mae," this government

agency functions in the secondary market but
does not purchase mortgage loans; instead it
approves "loan poolers" and issues government
guarantees for certain FHA, VA or Farmers
Home Administration (FmHA) loans. Ginnie
Mae is similar to Freddie Mac and Fannie Mae,
except that Ginnie Mae concentrates on
government, non-conventional loans. For more
information, see the "Ginnie Mae" article in the
"Mortgage Industry" section.
Government Survey System

See the Rectangular Survey System entry.
Grace Period
The time between the due date and the past-

due date of a loan during which there is no late
charge. If a payment is still not received after
the grace period (usually 10-15 days), the
lender will assess a late charge on the overdue
amount. The borrower is technically in default
after the grace period expires.
Graduated Lease Payment
A type of variable lease arrangement whose

payments increase over the term at
predetermined rates. Compare with the index
lease. For more information, see the "All About
Leases" article in the "Real Estate In-Depth"
section.
Graduated Payment Adjustable

Rate Mortgage (GPARM,
GPAM)
A mortgage repayment plan that provides for

lower initial monthly payments, which increase
annually until the mortgage becomes a fully
amortized ARM loan. This is a variation of the
GPM loan.
Graduated Payment Mortgage

(GPM)
This payment plan offers lower monthly

payments during the first year(s), after which
the payments increase annually until reaching a
level that fully amortizes the loan within its
term. For more information, see the
"Graduated Payment Mortgage" article in the
Grandfather Clause
An exemption to a new ordinance or law for a

specific property or person. For example, new
laws may require specific zoning and building
code restrictions for a neighborhood. Existing
properties in that neighborhood will not have to
make the changes required to meet new codes;
however, those same properties may face
additional restrictions if they try to make any
later improvements. For more information, see
the "Zoning and Building Codes" article in the
Grant Deed
A type of deed similar to special warranty

deeds, in which the grantor limits the covenant
against encumbrances to claims incurred only
while the grantor owned the property. For more
information, see the "All About Deeds" article in
Grantee
With the typical deed, the buyer or recipient of

any conveyance of property is normally called
the grantee. Legal capacity and the grantee's
signature are not required; however, the
grantee must be alive when the deed is
delivered. For more information, see the "All
About Deeds" article in the "Real Estate In-
Depth" section.
Granting Clause
Also called words of conveyance, this clause is

part of most deeds. It identifies the type of
deed and type of ownership being conveyed, as
well as states the grantor's intent to convey title
to the grantee. For more information, see the
"All About Deeds" article in the "Real Estate In-
Depth" section.
Grantor
With the typical deed, the seller, current owner

or provider of any conveyance is normally
considered the grantor. Most states require
that deed grantors be legally competent and be
clearly and accurately identified in the deed.
For more information, see the "All About
Deeds" article in the "Real Estate In-Depth"
section.
Gravel Stop
The metal strip around the roof's edge.
Gravity Circulation System

(Heat)
A type of heating system that uses gravity to

distribute heat to the different parts of a
building. There are actually four common types
of gravity systems, all of which require a
separate air-conditioning system: gravity warm
air, pipeless warm air, gravity hot water and
steam heating.
Gravity Hot Water System
A type gravity heating system that uses hot

water to heat areas and rooms in a building.
The boiler pipes heated water to radiators and
then pipes the cooled water back to the boiler
for reheating. Radiators distribute heat through
convection. Hot-water heating systems are
simple to operate, but respond slowly to sudden
rises or drops in outdoor temperatures.
Gravity Warm Air System
An efficient type of gravity heating system that

is ideal for cottages and smaller homes. The
furnace is centrally placed below and between
the rooms to be heated, to minimize duct
lengths. Exploiting the principle that warm air
rises and cold air sinks, warm-air registers are
placed on the wall and cold-air return grills are
placed on the floor. The system will also
require a small fresh-air intake from outdoors
and a humidifier. Unfortunately, this system
requires much space for ducts and often
distributes heat unevenly.
Green Card
Common name for the permanent resident

alien registration card, issued by the
Immigration & Naturalization Service, to
immigrants who are given full resident status in
the U.S. Immigrants with green cards are
eventually allowed to apply for naturalization, to
become U.S. citizens..
Green Lumber
Construction term referring to lumber and wood

construction material with moisture content over
19%. Lumber used in residential and other
construction is graded according to moisture
content and structural quality as established by
the National Grade Rule. Compare with Dry
Lumber entry.
Gross Floor Area
The measurement of the total floor area in a

building, including core, common and vacant
spaces.
Gross Income
The total income for a given period of time,

before taxes and other deductions. When
qualifying an applicant for a residential loan, the
pre-tax and pre-deduction gross income
amount is used to determine the Debt-to-
Income ratio.
Gross Income Allowance
When residential rental income-producing

properties are involved, the gross income
allowance is the calculation of gross income for
qualification purposes. Most residential loans
allow 75% of the rental income from the subject
property's apartment unit to be added to the
applicant's gross income. For example, if you
are earning $3,000 per month and you wish to
buy a two-flat with rental income from one
rental unit (assuming you will live in the other
unit) of $800 per month, you will use a gross
monthly income of $3,600 ($3,000 plus 75% of
gross rental) for debt-to-income qualification
purposes. For more information, see the
"Analyzing Employment and Income" article in
the "Loan Process" section.
Gross Income Multiplier
A calculation rate used with the income

approach to estimating value, particularly for
commercial, industrial and larger residential
apartment properties. It is used instead of the
gross rent multiplier because such larger
facilities often generate revenue from other non-
rent incomes. For more information, see the
"Analyzing Appraisal Reports" article in the
"Loan Process" section.
Gross Lease
A lease agreement in which the tenant pays

one constant payment, with no additions for the
landlord's operating expenses. However, gross
leases--which are the most common type for
residential properties--does not include tenant
utilities, unless specifically stated in the lease.
For more information, see the "All About
Leases" article in the "Real Estate In-Depth"
section.
Gross Leasable Area
The sum measurement of all area available for

tenant rental. It is usually measured from the
center of border partitions and consists of all
space on which rental income can be
collected. In contrast to the usable area, gross
leasable area includes common areas,
hallways, exterior walls and entrances. For
more information, see the "All About Leases"
Gross Potential Income
The sum total of all projected rental income,

assuming no vacancy.
Gross Profit Ratio
A ratio that displays a rate of return

measurement for installment purchases. This
calculation is the gross profit from an
installment sale divided by the contract price.
For more information, see the "Real Estate
Investment Analysis Tools" article in the "Real
Gross Rent Multiplier (GRM)

The GRM is a factoring tool used by the
property appraiser to assess the market value
of a property, under the income valuation
approach. The multiplier is a rate based on the
sales price divided by the gross monthly rent of
comparable properties. This multiplier is then
applied to the market rent of the subject
property to estimate the value of that property.
For example, if an appraiser is analyzing a four-
flat and discovers that similar four-flats in the
area have market values that are 10.5 times
their market rents, the appraiser will use a GRM
of 105. Applied to the subject property, the
appraiser will multiply the subject property's
market rental income by 10.5 to estimate the
property's value via the income approach.
Commercial, industrial and larger residential
properties use the gross income multiplier
system. For more information, see the
"Analyzing Appraisal Reports" article in the
Gross Rental Income
The total rental revenue generated, prior to any

taxes, operating expenses or deductions. For
Gross Revenue
The total of all income being generated by an

income-producing property.
Ground Lease
A lease arrangement for raw land. Most are

long-term (40-90 years) net leases, allowing for
the lessee to recoup the investment costs of
improving the land and building upon it. For
Grout
Plaster-like material used to seal joints,

especially with tiles that need to be water-
resistant.
Growing Equity Mortgage
(GEM)
A loan in which the normal payment is

increased each year so that the amortization is
accelerated, thus paying off the mortgage in a
shorter period of time. For more information,
see the "Loan Programs" section.
Guardian's Deed
A type of deed used by a legally appointed

guardian to convey title to property owned by
the guardian's ward. For more information, see
the "All About Deeds" article in the "Real Estate
In-Depth" section.
Guide Meridian
Going north-to-south, guide meridians are used

with the rectangular survey system to
compensate for the curvature of the earth.
Every fourth principal meridian is a guide
meridian that is shorter than the standard
principal meridian. For more information, see
the "Surveys and Legal Description" article in
Gusset Plate
Construction term referring to metal or wood

plates used to connect the rafters, studs and
beams in a truss roof. Gusset plates offer
additional support, instead of simply nailing two
beams together. For example, gusset plates
are used in truss roofs at the corners where
rafters connect to each other or where rafters
connect to the lower chord.
Gutter
Construction term referring to the artificial

channel attached to bottom ends of sloping
roofs. Gutters prevent uncontrolled waterfalls
and potential damage to the building by
directing rainwater to downspouts. The term
gutter can also refer to the channel along the
edge of streets that direct water to storm drains.
Gypsum Board
A plasterboard with paper covering. See

Drywall entry.
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Real Estate Glossary helpful and informative.

Mortgage


Glossary—H
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Habendum Clause
An element of a deed that defines or limits the estate being conveyed by the grantor to the grantee. This must
correspond with the granting clause; if not, the granting clause takes precedence. For more information, see the
"All About Deeds" article in the "Real Estate In-Depth" section.
Hacienda
See Spanish Colonial entry.
Handyman Special
Real estate industry euphemism for properties that need significant rehab or improvement. They are usually
priced lower to factor in the needed work. The term is often a nice way of saying the property is currently a dump
but can be repaired to a habitable condition with increased value.
Hard Assets
A classification of assets referring to non-liquid assets, primarily real and personal properties. See liquid assets
for more information. For more information, see the "Analyzing Assets" article in the "Loan Process" section.
Hard Construction Cost
The cost of constructing a building shell with most of the covering material. This amount excludes much of the
mechanical equipment and interior finishes.
Hazard Insurance
More commonly known as the homeowners insurance, the hazard insurance on the subject property covers
physical damage due to accidents and acceptable hazards. Note that many hazard insurance policies require
separate coverage for events such as flood, earthquake or hurricane. For more information, see the "Hazard
Insurance" article in the "Mortgage Industry" section.
Header
The wide horizontal framing planks or beams used to frame a window, door or wall. They are used to support
the free ends of floor joists, studs or rafters, by transferring the roof and floor weight to the studs.
Hearth
The area around a fireplace, which basically extends the fireplace masonry floor. The hearth protects the floor
area around the fireplace from sparks and ashes.
Heat Pump
A developing method of heating and cooling, which is proving highly efficient. During the winter, heat pumps can
pump air or liquid through underground pipes; since the ground below the frost line retains a steady temperature,
the air or water is heated (relative to outside air) by the ground. During the summer, the ground acts to cool the
air and liquid running through the tubes.
Hectare
An area measurement equal to 107,637 square feet or 2.471 acres.
Heir
In the real estate industry, the heir is the individual who inherits interests or rights to a property. For more
information, see the "Title Transfers and Wills" article in the "Real Estate In-Depth" section.
High-Rise
The general definition of a high-rise structure is any building that contains seven or more stories. Buildings with
four to six stories are normally considered mid-rise structures. For more information, see the "Analyzing
Property Types" article in the "Loan Process" section.
Highest and Best Use
A real estate term that projects the best economic use with respect to what is legally and physically possible for
the property. For more information, see the "Analyzing Appraisal Reports" article in the "Loan Process" section.
Hipped Roof
A roof design that replaces the gables with roofing slopes at the ends. The hipped roof has the two basic slopes
dropping aside from the central ridge board. However, instead of gables, the hipped roof also has roof slopes at
the ends the roof--giving it four roof slopes with no gables.
Historic Structure
Any building or improvement that is officially recognized by a government agency or government-chartered body
as having historic significance. Properties that are officially designated historic usually face special improvement
restrictions but also often receive tax incentives.
Hold Harmless
The act of indemnifying a person or entity from liabilities that my be incurred from a specific issue. For more
information, see the "Title and title insurance " article in the "Real Estate In-Depth" section.
Hold Harmless Letter
Also called an indemnification affidavit, the hold harmless letter is a legal document in which one party assumes
from another party all liability for a subject issue. The person or entity issuing the hold harmless letter assumes
all obligations for liabilities that may arise from the specific issue. The person or entity receiving the hold
harmless guarantee is theoretically freed from all obligations for liabilities arising from the specific issue.
In the context of title company closings, a hold harmless letter is required when the current title report indicates
title blemishes—such as a lien that should already have been released— that were supposedly handled by the
previous title company’s closing. The previous title company would then issue a hold harmless letter exempting
the current title company from risk with regard to the specific issue. For more information, see the "Title and title
insurance " article in the "Real Estate In-Depth" section.
Hold-Back
Funds retained until certain events occur. For example, a lessee may negotiate a rent hold-back to ensure
landlord's completion of agreed fit-up. Once the improvements are completed, the tenant will release the funds
to the landlord. For more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Holder in Due Course
An individual or entity who acquires a bearer instrument and is eligible to keep it even though it may have been
stolen.
Holding Area
The temporary storage area of a property's loading and receiving docks, where deliveries to tenants are parked.
Holding Costs
See Carrying Costs entry.
Holdover Provision
See Broker Protection Clause entry.
Holdover Tenant, Holdover Tenancy

Real estate term for lessee or lease condition that retains interest in a property even after the lease agreement
has terminated. See also the Tenancy at Sufferance entry. For more information, see the "All About Leases"
Holographic Will
A will that is created by the testator in writing, but not witnessed. Many, but not all, states recognize holographic
wills as valid. For more information, see the "Title Transfers and Wills" article in the "Real Estate In-Depth"
section.
Home Equity Line of Credit (HELOC)
A mortgage loan similar to the home equity loan but provides a credit line instead of a lump-sum loan. The
borrower receives a check book—instead of a single check—and can make several disbursements against the
credit line. The HELOC is assessed interest charges based on the current loan amount. The HELOC acts
similar to credit cards, but its interest can be tax-deductible because it is considered a home mortgage loan. For
more information, see the "Home Equity Lines of Credit" article in the "Loan Programs" section.
Home Equity Loan
A junior mortgage refinance loan that is taken out against the equity that a homeowner has accrued on his or her
property. For example, if a person owns a $200,000 home with a mortgage of $110,000 (for an established
equity level of $90,000), that person can usually obtain a home equity loan for up to $90,000 or more. The home
equity loan will not touch or affect the existing first mortgage, and this home equity loan will have a separate
payment program. For more information, see the "Second Mortgages" and "125% LTV Second Mortgage"
articles in the "Loan Programs" section.
Home Warranty
A type of property insurance coverage that cover repairs or replacements for the electric and mechanical
systems of a home. Sellers and developers may take out such coverage to entice buyers. For more information,
see the "Hazard Insurance" article in the "Mortgage Industry" section.
Homeowners Association (HOA)
The collection of homeowners—and, when applicable, the project management team—of a condominium,
townhouse or planned unit development (PUD) community. The HOA is responsible for managing the common
areas and the community as a whole, and normally consists of all individual unit owners. For more information,
see the "Condominiums" article in the "Real Estate In-Depth" section.
Homeowners Association Budget
Projected itemization of operating income and expenditures for the homeowners association. This is a legal
requirement for all homeowners associations. For more information, see the "Condominiums" article in the "Real
Homeowners Association Dues
The assessments charged by the homeowner association. For more information, see the "Condominiums" article
Homeowners Association Declarations & By-laws
The rules and regulations promulgated by the homeowner association that will govern its structure. This is a
legal requirement for all homeowners associations. For more information, see the "Condominiums" article in the
Homestead Life Estates
A form of legal life estate practiced in certain states that protects a portion of value of the homeowner's principal
residence from certain debt judgments. Real estate taxes and mortgage obligations are typically exempted from
the homestead exemption, and most mortgage loans and contracts will require the homeowners to waive their
homestead rights. For more information, see the "Title and Estates in Real Property" article in the "Real Estate In-
Depth" section.
Homestead Exemption
There are two definitions for this real estate term. First, many states offer differing homestead exemptions,
which reserve and protect a portion of people’s homes from bankruptcies and major judgments. A second
definition of homestead exemption is a reduction in property tax assessments that many taxing authority offers to
homeowners. For more information, see the "Spousal and Co-ownership Rights" article in the "Real Estate In-
Depth" section.
Homestead Life Estate
A type of legal life estate recognized in some states that protects a portion of value of the homeowner's principal
residence from certain judgments for debt. States vary, but most exempt real estate taxes and mortgages from
such protection. For more information, see the "Title and Estates in Real Property" article in the "Real Estate In-
Depth" section.
Homestead, Waiver of
When a married person is financing a mortgage on his or her home as the sole borrower—which often happens
when the other person’s credit does not qualify—many lenders will require the non-borrowing spouse to sign a
waiver of homestead to avoid future ownership issues, especially in case of default. For more information, see
the "Spousal and Co-ownership Rights" article in the "Real Estate In-Depth" section.
Hopper Window
A type of window in which the sash is hinged at the bottom while the top swings into the room. Unfortunately,
this often interferes with drapes and blinds. It is best suited for basements. For more information about the parts
and styles of windows, see the Windows entry.
Horizontal Property Laws
See Condominium Acts entry.
Horizontal Sliding Window
A type of window whose sashes slide horizontally, as opposed to the vertical double-hung windows. For more
information about the parts and styles of windows, see the Windows entry.
Hot Water Tank & Heater
A system that heats and maintains a reserve of hot water for a building or area.
House Wrap
A building paper or flexible material placed over the external sheathing to provide additional protection and
insulation. The exterior panels or sidings are then nailed or screwed through the wrap.
Housing and Urban Development (HUD)
The federal cabinet-level department responsible for housing and urban concerns. For mortgage purposes, HUD
regulates the housing industry and operates the FHA. If you want more information, go straight to the source at
http://www.hud.gov/.
Housing Codes
Regulations established by local governments intended to ensure minimum safety and sanitation standards. For
more information, see the "Zoning and Building Codes" article in the "Real Estate In-Depth" section.
Housing Debt Ratio
The monthly housing debt divided by the monthly gross income. This ratio is often used by lenders to qualify
loan applicants. For more information, see the "Analyzing Employment & Income" article in the "Loan Process"
section.
Housing Expenses
The housing-related charges that the home owner must anticipate and pay. Total housing expenses normally
include the principal and interest payments on the mortgage loan, plus any homeowner's insurance, mortgage
insurance and property tax charges. See also PITI entry. For more information, see the "Monthly Payments "
article in the "Homebuyer Guide" section.
Housing Starts
A measure of building permits issued for new housing construction. Economists and investors review the
periodic publication of housing starts to forecast the pace of real estate development for the coming months.
HUD-1
The HUD-1 Settlement Statement is used for all residential transactions to provide a uniform method for
recording the specific settlement entries. It was developed by the Department of Housing and Urban
Development (HUD). For more information, see the "HUD Settlement Costs Guide" article (in the "Homebuyer
Guide" section) and the "Closings and Transactions" article (in the "Real Estate In-Depth" section).
Humidifier
A device to increase the moisture (water) content of the air in a space or building. Humidity affects heating
efficiency, because a little water can better conduct heat. For example, you can be cold in a temperature with 75-
degree Fahrenheit and 10% humidity, but feel warm in a 68-degree temperature with 40% humidity.
HVAC
Acronym for "heating, ventilation & air conditioning" used in the building industry.
Hybrid REIT
A real estate investment trust that invests in both areas allowed by law: real estate mortgages and ownership of
income-producing properties. For more information, see the "Real Estate Trusts" article in the "Real Estate In-
Depth" section.
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properties.

Glossary—I
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Impact Fee
A fee that many municipalities and counties assess on builders and developers who are adding improvements to
an area. The impact fee is meant to address the added cost of expanded services and infrastructure
improvements that any new construction may require. For more information, see the "Subdivision Development"
article in the "Real Estate Investing" section.
Implied Agency
A type of agency relationship created by the action, conduct or statements of the principal and agent.
Implied Contract
A legally recognized contract established by actions taken, even if the contract is not written or spoken.
Implied Warranty
A legally recognized warranty established by actions taken, even if the contract is not written or spoken. For
more information, see the "All About Deeds" article in the "Real Estate In-Depth" section.
Impound Account
A more formal term for the escrow account. For more information, see the "Escrow Accounts" article in the
"Homebuyer Guide" section.
Improvement
Any alterations to or development of raw land. Improvement to raw land includes subdivision, installation of
utilities, construction of buildings, landscaping and preparation for construction. For more information, see the
"Construction Loans" article in the "Loan Programs Library" section.
Improvement to Land
A specific group of publicly owned improvements that are meant to prepare raw land for further development.
These improvements include curbs, streets, lights, sewers and sidewalks.
In-Law Unit
A semi-separate unit in a single-family residence or two-unit property. These added units were meant to provide
separate living quarters for relatives, namely parents of the owners. These properties are often allowed
exemptions to zoning laws that restrict residential buildings to single-family homes and prohibit multi-unit
buildings.
Income
Money received from the investment of labor or capital. For standard mortgage purposes, the application must
demonstrate sufficient income to qualify for the projected loan payments. For more information about how
lenders assess income, see the "Analyzing Employment & Income" article in the "About Loan Processing"
section.
Income & Expense Statement
A summary of a company's or business' operating income and expenses for a given period. The employee can
then use this W-2 to complete his or her tax returns, as well as maintain documentation of employment and
income. For more information, see the "Analyzing Employment and Income" article in the "Loan Process"
section.
Income Approach to Property Value
The appraisal method is used to determine the value of a property, based on the revenue generated by the
property. The gross rent multiplier (GRM) is calculated, based on the gross rent and market value of comparable
rental properties. The gross rent from the subject property is then multiplied by the GRM to determine the
property's market value, via the income approach. For example, if an appraiser is analyzing a four-flat and
discovers that similar four-flats in the area have market values that are 10.5 times their market rents, the
appraiser will use a GRM of 105. Applied to the subject property, the appraiser will multiply the subject
property's market rental income by 10.5 to estimate the property's appraised value, via the income approach.
For more information, see the "Analyzing Appraisal Reports" article in the "About Loan Processing" section.
Income Property
Real estate property capable of producing rental revenue. Residential income property are any one-to-four unit,
purely residential properties that can be leased out for rental income. Commercial income property include office
complexes, commercial strip malls and apartment buildings. For more information, see the "Analyzing Property
Types" article in the "About Loan Processing" section.
Income Qualification
The analysis of an applicant's income to determine whether it is qualified, according to mortgage lender's
guidelines, for a particular loan program. The lender normally qualifies the applicant's income by determining the
debt-to-income (DTI) ratio and comparing that against the maximum ratios allowed for the particular loan
program. For more information about how lenders assess income, see the "Analyzing Employment & Income"
article in the "About Loan Processing" section.
Income Qualification Worksheet
The calculation worksheet used to determine whether applicants meet conforming debt-to-income ratio
guidelines. For more information about how lenders assess income, see the "Analyzing Employment & Income"
article in the "About Loan Processing" section.
Income Ratio
The percentage limits used to qualify the applicant's income, so as to determine whether the applicant can afford
the loan. See the Debt-to-Income Ratio entry. For more information about how lenders assess income, see the
"Analyzing Employment & Income" article in the "About Loan Processing" section.
Income Tax
A tax assessed by the government against individuals, based on that person's taxable income.
Incorporeal Interest
A non-possession right to real estate property. For more information, see the "Title and Estates in Real Property"
Incurable Depreciation
Defects to a property that cannot be corrected or is not financially practical to correct. Unlike curable
depreciation , incurable depreciation would entail diminishing returns, costs would exceed any projected increase
in value. For more information, see the "Basics of Property Management" article in the "Real Estate Investing"
section.
Indemnification Letter, Affidavit
See Hold Harmless Letter entry.
Indemnify
To agree to hold a person or party free of liability. The person issuing the indemnification guarantee accepts all
obligations for any liabilities that may arise from the agreed subject. For example, a refinance may discover a
problem with the title that should have been addressed by the purchasing title company. The lender or title
company for the refinance may require a "hold harmless" or indemnification letter from the original title insurer
before the refinance can be closed. For more information, see the "Title and title insurance " article in the "Real
Independent Contractor
A self-employed contractor, who provides services to a client on a contract or per project basis.
Index
For ARM loans, the index is the mechanism of economic measurements according to which ARM loan interest
rates are adjusted. The most common ARM indices are the Treasury Bills, Cost of Funds Index (COFI), London
InterBank Offered Rate (LIBOR) and Prime Rate. For more information, see the "ARM Loans" article in the
Note, title records are also often referenced through property indexes.
Indexed Lease
A type of variable lease arrangement whose rental rates periodically adjust, based on the movement of a defined
index. Many such index leases are based on the CPI or another industry standard index. Compare with
graduated leases. For more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Index Method
A method used to estimate construction, reproduction and replacement costs that uses an index measuring the
increase in construction costs for the subject's area. That index rate is then multiplied by the original cost of the
subject property. Other methods include the square foot, cubic foot, unit in place and quantity survey methods.
For more information, see the "Hazard Insurance" article in the "Mortgage Industry" section.
Indexed Rate
With ARM loans, the indexed rate is the interest rate calculated by adding the program's (constant, fixed) margin
to the (fluctuating) index. For more information, see the "ARM Loans" article in the "Loan Programs" section.
Inducement
Elements in a contract that are provided for the benefit of the buyer or tenant, in order to persuade that buyer or
tenant to sign the contract.
Industrial Development Bond
A bond instrument used to raise funds, which in turn are used to finance the development of an industrial facility.
This bond is issued by the local or state government, provides certain tax advantages and is backed by the
issuing government.
Industrial Park
An area usually designated for, consisting of or capable of hosting industrial facilities. The industrial park is
usually designed to provide the utilities and amenities required to support industrial operations. For more
information, see the "Investing in Industrial Properties" article in the "Real Estate Investing" section.
Industrial Property
Term used for commercial real estate directly involved in manufacturing, assembly or processing of goods and
commodities. These properties include steel mills, assembly plants and small welding shops. For more
information, see the "Investing in Industrial Properties" article in the "Real Estate Investing" section.
Infestation
Contamination of a property by pests. Although mice, rats and other wild animals are obnoxious and potentially
unhealthy pests, the most dangerous pests--in the eyes of the real estate industry--are those that severely
damage the home. The most dangerous pests are termites, carpenter ants and, to a lesser extent, powder post
beetles. Many mortgage lenders refuse to close a loan unless such infestation problems are completely
corrected.
Inflation
A persistent increase in price or a persistent decline in the purchasing power of money. Mortgage interest rates
are normally tied to current trends or forecasts of inflation. As inflation or fear of potential inflation increases,
interest rates also often rise. Inflation is measured and reported by the consumer price index (CPI) and producer
price index (PPI).
Inner City
An imprecise term generally referring to the older portions of a city, outside of the central business district. The
term is often used to indicate lower income areas of the city. For more information, see the "Rehab
Development" article in the "Real Estate Investing" section.
Inquiry (Credit)
A recorded request for a credit report. When an institution or other party orders a credit report on an applicant,
the consumer's permanent history will record an inquiry, which identifies the party making the inquiry. For more
information about how lenders assess income, see the "Analyzing Credit Reports" article in the "Loan Process"
section.
Inspection (Professional Property)
An investigation and analysis of a property by a qualified property inspector or engineer. Such inspections are
optional but highly recommended for homebuyers. For more information, see the "Property Inspection" article in
the "Homebuyer Guide" section.
Inspection Contingency
A common element of many residential sales contract that makes the agreement conditional upon the results of
specific inspections, such as for termites, septic systems, structural stability and mechanical systems. For more
information, see the "Real Estate Sale Contracts" article in the "Real Estate In-Depth" section.
Inspection Fee
The charge levied by the lender to send an inspector to the subject property. This fee is normally associated
with construction and rehab loans. The lender inspection is not the appraisal, nor is it the applicant-ordered
inspection. Instead, the lender’s inspection is commonly used to verify that the property is being completed
according to the plans presented to and approved by the lender for the mortgage financing. Remember that
construction loans are released in stages; the inspection fee usually covers the inspection that must be done as
each stage is completed—so as to release the funds for the next step. For more information, see the
"Construction Loans" article in the "Loan Programs" section.
Inspection Period
The limited amount of time specified by the purchase agreement for buyer inspection of the property. This
provision allows the buyer to requests amendments to the purchase agreement if serious defects are found by
the inspection. If compensation for or repair of the defects is not provided by the seller, the buyer may terminate
the agreement. For more information, see the "Real Estate Sale Contracts" article in the "Real Estate In-Depth"
section.
Installment Contract
An agreement between the buyer and the seller, which allows the buyer to purchase the property on installment.
The seller, in fact, becomes the lender for the buyer's purchase. However, the property remains in the seller's
name until the established price is fully paid. With an installment contract, the buyer is allowed to move in; the
buyer pays monthly payments. Most installment contracts are essentially balloon in structure, giving the buyer a
limited amount of time to eventually procure mortgage refinancing. For a more detailed discussion, see the
"Installment Contract Purchases" article in the "Creative Financing" section.
Installment Debt, Loan
A loan with a set starting balance that is paid off with constant periodic payments. Student, car and mortgage
loans are essentially installment loans, in that it begins with a set principal balance and are paid off with periodic
installment payments. By contrast, most credit cards are considered revolving accounts. For more information
about how lenders assess income, see the "Analyzing Credit Reports" article in the "Loan Processing" section.
Installment Sale
A sales transaction that arranges for the proceeds to be paid in installments, so as to minimize any capital gains
charges. Unlike the installment contract, the installment sale is a completed sales transaction with full transfer of
ownership rights. The disbursements to the seller are simply delayed for tax purposes. For a more detailed
discussion, see the "Installment Contract Purchases" article in the "Creative Financing" section.
Instrument
A legal document that establishes certain rights, obligations and interests for the individuals or entities involved in
the agreement.
Insulation
Protective material used in buildings to keep external heat or cold from entering, while also preventing internal
cold or heat from escaping the building. The four most common types of insulation are blanket, loose-fill, sheet
and reflective. All insulation are graded by their R-value.
Insurance
A legal agreement in which the insurer agrees to compensate the insured individual or entity for specifically
covered losses incurred by the insured party. The insurance coverage is provided in exchange for specified
premiums. For more information about how lenders assess income, see the "Hazard Insurance" article in the
Insured Loan
A loan insured either by the FHA, VA or by a private mortgage insurance (PMI) company. For more information
about how lenders assess income, see the "FHA and VA Loans" article in the "Loan Programs" section.
Inter Vivos Trust
See Living Trust entry.
Interest
The cost of using someone else's money. The interest is usually expressed as an annual interest rate, which is
then applied to the loan principal balance. For more information, see the "About Interest Rates" article in the
Interest-Only Balloon, Loan
A balloon loan in which only the interest is paid during the term; the payment schedule does NOT make any
arrangements for the reduction of the principal balance. However, the borrower is free to make additional
payments for the purpose of reducing the principal. At the end of the balloon term, the principal balance must be
paid. Many home equity lines of credit (HELOC) are interest-only loan programs. For more information about
how lenders assess income, see the "Balloon Loans" article in the "Loan Programs" section.
Interest Rate
The cost of using someone else's money, as expressed as a percentage relative to the amount of the loan
principal balance. For more information, see the "About Interest Rates" article in the "Mortgage Industry" section.
Interim Loan, Interim Financing
A short-term loan (often used in construction) made with the expectation of repayment from the proceeds of
another loan. For example, a construction loan is usually a short-term loan used to fund the actual construction
of the subject property. As soon as the construction is complete, the construction loan must be refinanced with a
standard long-term loan. For more information about how lenders assess income, see the "Construction Loans"
article in the "Loan Programs" section.
Interior Partitions
Any non-bearing wall or partition that enclose or subdivide the open spaces within a building.
Intermediary Theory
Also called modified lien theory, this system is used by some states, which combine both the title theory and lien
theory systems. In the intermediary system, the title remains with the mortgagor. However, if the mortgagor
defaults on the loan, the mortgagee may quickly take full possession. For more information, see the "Mortgage
Deed and Promissory Note" and "Title and title insurance " articles in the "Real Estate In-Depth" section.
Internal Rate of Return
The rate of return on the investment. The specific definition of the IRR is the discounted rate that produces a
zero value for the net present value. For more information about how lenders assess income, see the "Real
Internal Revenue Code
The federal laws that regulate income taxes.
Intestate
An individual who or the situation in which an individual dies without a valid will. For more information, see the
"Title Transfers and Wills" article in the "Real Estate In-Depth" section.
Inventory
Any property held by an individual or entity for future sale or use.
Inverse Condemnation
A legal remedy for property owners facing eminent domain proceedings. If the government exercises its eminent
domain powers and begins condemnation proceedings to take a piece of a landowner's property, that landowner
may force the government to take the entire property. For more information, see the "Eminent Domain" article in
Inverted Yield Curve
An occasional, but rare situation in which the yield curve (going from short-term to long-term) slopes downward--
rather than upward.
Investment Property
In the residential mortgage industry, an investment property is any real estate that is NOT occupied by the
borrower and is owned for the purpose of generating supplemental income. Note that the residential market
distinguishes between three types of properties: primary (owner-occupied), secondary (vacation) or investment
properties. For more information, see the "Analyzing Property Types" article in the "Loan Process" section.
Investment Tax Credit
A reduction in income tax based on the cost and life of certain purchased assets.
Investment Value of Equity
A discounted cash flow technique that values after-tax cash flow and after-tax equity reversion. For more
information about how lenders assess income, see the "Real Estate Investment Analysis Tools" article in the
Investor
Within the mortgage origination industry, the investor is the funding source of the lender's mortgage funds. If a
mortgage broker sells to or originates for a specific bank, then that institution is the investor for the mortgage
broker.
Investor Note Financing
The financing of investor promissory notes.
Involuntary Alienation
Legal term describing the transfer of title to property without the current owner's consent. Such involuntary
transfers typically occur through descent, eminent domain, lien foreclosure , escheat, adverse possession and
accession. For more information, see the "Transferring Title" and "Eminent Domain" articles in the "Real Estate
In-Depth" section.
Involuntary Lien
Any claim or lien legally recorded against a property without the previous consent of the owner. The most
common of such liens are for real estate taxes and judgments. Compare with voluntary lien. For more
information, see the "Real Estate Taxes and Special Assessments" article in the "Real Estate In-Depth" section.
Irrevocable Trust
A type of living trust that cannot be changed once they are created. Compare with revocable trusts. For more
information, see the "Real Estate Trusts" article in the "Real Estate In-Depth" section.
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Glossary—J
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Jalousie Window
See Louver Window entry.
Jambs
Construction term referring to the sides of the frame in which windows are installed. The head jamb is the top
part of the window frame, while side jambs are the side panels of the typical window frame. For more
Joint and Several Liability
Legal term applying full obligation to repay a debt on each of the multiple borrowers of the debt. Each of the
borrowers is fully liable for payment of the debt. Liability is NOT proportional to ownership interest. For more
information, see the "Mortgage Deed and Promissory Note" article in the "Real Estate In-Depth" section.
Joint Tenancy With Right of Survivorship
An ownership of property arrangement by two or more parties. If a joint tenant dies, his or her interest does not
necessarily pass on to an heir. Instead, the ownership of the property is shared by the remaining, surviving joint
tenants. In states where this is an acceptable form of ownership, this avoids probate problems. Compare with
Tenants in Common, Community Property or Tenants by Entirety. Note, however, that the co-owners have
divided ownership of the property and can sell such ownership shares; but such a sale would keep the joint
tenancy between the remaining original joint tenants. The new co-owner would have a tenants in common
relationship with the remaining original co-owners. For more information, see the "Spousal and Co-ownership
Rights" article in the "Real Estate In-Depth" section.
Joint Venture
An agreement between two or more parties to cooperate on a project. Unlike a partnership, the parties remain
separate--although they may have varying levels of responsibilities for portions of the project. Joint ventures are
usually intended for a limited duration and are dissolved once the project is complete.
Joist
Horizontal planks, usually 2x6 or 2x8 in size, that create a load-bearing frame for the floor and ceilings. Joists
are normally laid across the shortest house dimension. Joist spans that are more than 16 feet in length normally
use girders for additional support.
Judgment
A legal finding by a judge or court of law. A judgment can sometimes force garnishment of wages or assets to
satisfy the judgment debt. In terms of credit, judgments are unsecured liens filed against a person for non-
payment of debt. With most debts (installment loans, credit card balances, medical bills, etc.), if the consumer
fails to make payments, the lender will pursue the borrower with delinquency notices, default notices, collection
and, if the balance is large enough, a legal judgment. For more information, see the "Analyzing Credit Reports"
Judgment Affidavit
A legal form that identifies any and all judgments against the person or institution providing the affidavit. Many
closing agents will require a judgment affidavit from the borrower at the time of closing to ensure that all
potentially encumbering judgments are identified. For more information, see the "Closings and Transactions"
Judgment Lien
A claim on a person's property that arises from a court-ordered judgment against that person or entity. During
the judgment process, the court may issue a writ of attachment to prohibit transfer of property and a writ of
execution to seize the property.
Judicial foreclosure
Also called foreclosure by sale, this type of foreclosure uses the courts to take the title of the collateral property
away from the mortgagor. The two most common types of judicial foreclosures are judicial sales and strict
foreclosures. For more information, see the "Everything You Want To Know About Foreclosures" article in the
Judicial Sale
An involuntary sale of a property ordered by the court, usually after a judgment arising from a foreclosure. Unlike
a strict foreclosure , this process has the court order a sale of the property to the highest bidder. The proceeds
are used to satisfy the lien holders, with any remnants going to the mortgagor. For more information, see the
"Everything You Want To Know About Foreclosures" article in the "Real Estate In-Depth" section.
Jumbo Loan
A non-conforming loan with an amount higher than the maximum loan amounts accepted by FNMA or FHLMC.
As of 2001, the maximum loan amounts accepted by Fannie Mae and Freddie Mac are $275,00 for single-unit
homes and $528,700 for four-unit residential properties. For more information, see the "Non-Conforming Loans"
Junior Mortgage
Any mortgage claim whose lien is lower in priority than other mortgage liens. Home equity loans, second
mortgage and, when applicable, third mortgages are considered junior liens to the first mortgage. If the property
is ever sold, the proceeds must first satisfy tax and primary liens; the remaining surplus is then used to satisfy
junior mortgages. For more information, see the "Second Mortgage" article in the "Loan Programs" section.
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Glossary—K-L
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Kickboard
See Base Molding entry.
Kicker
Real estate term referring to additional interest or rent payments that may be required by a contract. For more
information, see the "Real Estate Sales Contract" article in the "Real Estate In-Depth" section.
Kiln Dried
Lumber seasoned in a temperature- and humidity-controlled oven to minimize shrinkage and warping.
L
Lally Column
A big steel pipe sometimes filled with concrete and used to support girders or beams.
Land
The surface of the earth that is not water. In the real estate industry, land encompasses the earth's surface and
natural entities permanently attached to that parcel of land, as well as the air space above and minerals and soil
below. For more information, see the "Real Estate Introduction" article in the "Real Estate In-Depth" section.
Land Banking
The investment tactic of purchasing land that will be held for future use or needs. For more information, see the
"Investing in Land Speculation" article in the "Real Estate Investing" section.
Land Contract
A more common term for an installment purchase agreement. For a more detailed discussion, see the
"Installment Contract Purchases" article in the "Creative Financing" section.
Land Lease
An arrangement by which land is leased. A buyer can purchase a building separately from the land upon which
that structure is located. The building is bought in the standard way, but the buyer can simply lease the land.
This lowers the overall price, and the seller lowers potential capital gains . For more information, see the "All
About Leases" article in the "Real Estate In-Depth" section.
Land Loan
Funds loaned for the purchase or refinance of raw land—without the improvements to be built or currently on that
property. For example, home buyers seeking to construct their own home will first purchase the land, then
proceed with trying to procure construction financing and contractors. For more information, see the
Land Packaging
The process of combining multiple parcels of property (usually raw or minimally developed) into one large parcel
for a specific use. For more information, see the "Investing in Land Speculation" article in the "Real Estate
Investing" section.
Land Sale Leaseback
An agreement in which the current owners of a land sells a parcel of property (usually raw or minimally
developed), but then leases that land from the new owner. For more information, see the "Sale-Leaseback
Investments" article in the "Real Estate Investing" section.
Land Trust
A type of trust in which the only asset is the real estate, and legal title to the property is held by the trustee. A
deed in trust is used to transfer real estate into the trust; and a trustee's deed is required to take the property out
of trust. Land trusts are typically for a fixed term, usually 20 years, but can be extended.
Land trusts provide privacy, because only the trustee's name is recorded. Because the beneficiary's interest in
the land trust is considered personal property, it also simplifies transfer of ownership, avoids transfer taxes, limits
personal liability and protects from encumbrances. For more information, see the "Real Estate Trusts" article in
Landlocked
A condition in which a parcel of property has no access to a public street, thoroughfare or right of way.
Landlord, Landlady
Term applied for owner of a rental property. As with many American real estate terms, this term comes from Old
English title for landowners. For more information, see the "All About Leases" article in the "Real Estate In-
Depth" section.
Lap Joint
A connection made by placing two pieces of material side by side and then nailed or glued together.
Lath
Thin, narrow strips of wood often used to set a base for slates, tiles or plastering.
Late Charge
Any fee added to an installment as a penalty for not meeting a payment deadline. Most residential loan lenders
will provide a 10- to 15-day grace period after the due date before a late charge is assessed. For more
Latent Defects
Any deficiencies that are currently not visible or existing, but will arise or appear in the future.
Lead
Soft metallic element found in rocks and soil that had been widely used in plumbing, paints and fuel until the
1980s. High concentration can damage the brain, nervous system and other organs. Many states require
sellers to disclose lead content to buyer prior to purchase.
Lead-Based Paint Hazard & Reduction Act
This federal legislation affecting pre-1978 residential properties requires owners to provide written disclosures to
lessees and buyers of the existence of lead-based paint. For more information, see the "Real Estate Sale
Contract" article in the "Real Estate In-Depth" section.
Lease, Lease Agreement
An agreement in which an individual or corporation may receive possession, or temporary ownership, of real
property for a specific period of time. Strictly speaking, when a property owner offers a lease, he or she is
agreeing to a voluntary alienation of the property for the specified period. A lease agreement transfers the right
of possession to the tenant, but the landlord retains reversion rights. For more information, see the "All About
Leases" and "Lease Elements and Requirements" articles in the "Real Estate In-Depth" section.
Lease with Purchase Option

A lease agreement that provides the renter with a limited right to buy a property, usually available within a
specified time frame with predefined conditions. For more information, see the "Lease With Purchase Option"
article or the sample "Sample Lease Purchase Option" clause in the "Creative Finance" section.
Leasehold, Leasehold Estate
A form of property ownership that provides for only temporary ownership. In contrast to freehold estates,
leasehold estates is of limited duration, have fewer property ownership rights and is usually created with a lease
agreement. There are four basic types of leasehold estates: estate for years, periodic estate, tenancy at will and
tenancy at sufferance. For more information, see the "All About Leases" article in the "Real Estate In-Depth"
section.
Leasehold Mortgage
A mortgage lien applied against a tenant's ownership interest in a property. For more information, see the "All
Leasehold Policy
A type of title insurance policy that assures renters that they have a valid lease from the owner. For more
information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Leasing Agent
The individual responsible for the marketing of rental space. For more information, see the "All About Leases"
Legal Description of Property
The precise survey description of the property used for recording exact property location and size. The legal title
to a property will use this legal description, which will fully distinguish the property from any other plot of land in
the nation, if not the world. Most descriptions employ a combination of at least two of the three types of
surveying systems: metes and bounds, rectangular survey system and plat of survey methods. For more
information, see the "Surveys and Legal Description" article in the "Real Estate In-Depth" section.
Legal Life Estate
One of two types of non-inheritable or life estates, this legal real estate term applies to life estates created by law
or legislation. There are three common forms—dower, curtesy and homestead estates--but not all states
recognize all three. For more information, see the "Title and Estates in Real Property" article in the "Real Estate
In-Depth" section.
Legal Name
The name used for official purposes to identify a person or entity.
Legal Notice
A formal, legally recognized announcement or notification that is given to another person or entity.
Legatee
An individual or entity who receives any property through a will. For more information, see the "Title Transfers
and Wills" article in the "Real Estate In-Depth" section.
Lender
The person or institution who provides money to a borrower for a limited period in exchange for full repayment of
the original principal loan balance plus loan costs. Mortgage documents often refer to the lender as the
mortgagee. For more information, see the "Mortgage Deed and Promissory Note" article in the "Real Estate In-
Depth" section.
Lender Subsidy
Any contributions made by the lender to cover any portion of the borrower's closing costs. Lenders are often
allowed to cover the borrower's closing costs. However, there are normally restrictions on the lender's subsidy.
For more information, see the No Closing Cost Options article in the "Creative Finance" section.
Lender's title insurance Policy
Also called a mortgagee's policy, a type of title insurance policy that protects lenders against both known and
latent title defects that could affect its ability to adequately secure its mortgage loan. It only covers the loan
amount. Unlike other title policies, the lender's policy is assignable and has no exceptions for claims that could
have been discovered with a physical inspection of the subject property. For more information, see the "Title and
title insurance " article in the "Real Estate In-Depth" section.
Lessee
In a lease arrangement, the party that rents and will occupy the property. For more information, see the "All
Lessor
In a lease agreement, the landowner or party leasing out the property to another party. For more information, see
the "All About Leases" article in the "Real Estate In-Depth" section.
Letter of Intent
A written expression of an individual's or entity's intention to enter into an agreement or perform an action. This
letter is usually non-binding and dependent on other conditions.
Level Payment Mortgage
A mortgage loan program that imposes the same payment amount on the borrower for the entire term of the
loan. The popular 30-year fixed-rate program is the most obvious example of a level payment mortgage program.
For more information, see the "Fixed-Rate Loans" article in the "Loan Programs" section.
Leverage
The capacity to borrow money against the property's equity; the larger the loan in relation to the equity, the
greater that the property is leveraged. For example, a $100,000 home with only $10,000 in mortgage liens is
considered lightly leveraged, while a similar $100,000 home with $95,000 in mortgage liens is considered heavily
leveraged. If that same property had $125,000 in mortgage liens, it would be considered over-leveraged.
Levy
The process of assessing a tax upon a person, property or entity. For more information, see the "Real Estate
Taxes and Special Assessments" article in the "Real Estate In-Depth" section.
Liabilty
The borrower's obligations to repay creditors or lenders. For more information, see the "Analyzing Liabilities"
Liability Insurance, Coverage
A form of insurance coverage for a property that reimburses the insured entity for claims arising from specified
physical damages to the property or injuries incurred by persons on or because of the property and the owner's
negligence. For more information, see the "Hazard Insurance" article in the "Mortgage Industry" section.
License
In the real estate industry, a license is a right to use a property for a defined period, usually for a specific
purpose. Licenses are normally non-transferrable. Unlike a lease, the license does not transfer any ownership
rights. For example, Gina may allow her brother Leo to use her home as collateral for his business loan. She
still completely owns the property and she won't sign the business loan note (except for the mortgage deed);
rather she simply permits her brother to use her property in a certain way. For more information, see the "All
Lien
A legal claim or attachment, filed on record, against a property. This lien is usually a security for the payment of
an obligation. If the collateral property is foreclosed and sold, the proceeds would first go toward fully satisfying
the first or priority lien debts, before attempting to repay any secondary liens. Liens can be specific or general,
voluntary or involuntary, and contractual, statuary or equitable. For more information, see the "Mortgage Deed
and Promissory Note" article in the "Real Estate In-Depth" section.
Lien Holder
Any person, government entity, lender, creditor or institution who has a recorded lien on a property.
Lien Theory
A system used by most states, which practice that a mortgage does not give ownership to the mortgagee
(lender). The mortgage only files a lien against the property, but the title remains with the mortgagor. If the
mortgagor defaults on the loan, the mortgagee must foreclose on the owner to take possession. However, the
defeasance clause reverts the title back to the mortgagor as soon as the loan is paid. Other states follow the title
theory and intermediary theory systems. For more information, see the "Mortgage Deed and Promissory Note"
Life Estate
An individual's or entity's freehold interest in a property, which will expire upon the death of the owner or another
specified person. See Conventional Life Estate entry. For more information, see the "Title and Estates in Real
Property" article in the "Real Estate In-Depth" section.
Life Tenant
An individual or entity who is permitted to occupy or use a property until the death of that individual or another
specified person. For more information, see the "Title and Estates in Real Property" article in the "Real Estate In-
Depth" section.
Like Property, Like-Kind Property
Properties that have the same nature or usage that are used in a property exchange. For more information, see
the Real Estate Exchange entry. For more information, see the "Avoiding Capital Gain Taxes With Exchanges"
article in the "Real Estate Investing" section.
Limited Documentation Loan
A limited documentation or “lite doc” loan accept alternative documentation for certain processing requirements.
For example, a limited documentation program would accept the average monthly deposits from bank
statements as documentation of income, in lieu of pay stubs normally required. For more information, see the
"Overview of Loan Processing" article in the "Loan Process" section.
Limited Liability
A type of liability that limits the investor's obligation to the amount invested by the investor.
Limited Liability Company (LLC)
A variation of a corporate business structure that provides the investor with the legal protection and organization
of a corporation, while offering some of the tax benefits of a partnership or subchapter-S corporation. LLC
owners are called members; they have limited liability and avoid the double taxation of corporations. LLCs are
ideal for small, closely held companies.
Limited Partners
Passive investors in a limited partnership. The liability obligation of limited partners is limited to the amount they
have invested.
Limited Partnership
A type of partnership that caps the partner's liability, but also limits the partner's control. A limited partnership
must have at least one general partner to manage the project. The partnership liability of limited partners are
only limited to his or her investment.
Limited Warranty Deed
A type of deed of conveyance that provides the grantee with a lesser degree of grantor assurances than the
General Warranty Deed. For more information, see the "All About Deeds" article in the "Real Estate In-Depth"
section.
Line of Credit
A financing option that provides a credit line instead of a lump-sum loan, from which the borrower may quickly
and randomly borrow. See the Home Equity Line of Credit entry. For more information, see the "Home Equity
Line of Credit" article in the "Loan Programs" section.
Lintel
The top piece above a door or window that supports the wall above the opening.
Liquid Asset
Cash, or any other assets that may be easily and quickly converted to cash. Stocks, bonds, certificates of
deposits and most securities are considered liquid assets because they can be quickly sold for cash. For more
information, see the "Analyzing Assets" article in the "Loan Process" section.
Liquidated Damages
Funds or moneys identified as compensation amount to be paid if one of the parties to a contract breaches
elements of the contract.
Liquidity
The ease and speed by which assets held in other forms can be converted into cash.
Lis Pendens
A legal term basically meaning that a suit may be pending. When real estate is involved, the plaintiff may record
a lis pendens to publicly warn all potential purchasers that the subject property is subject to a possible judgment.
For more information, see the "Marketable Title" article in the "Real Estate In-Depth" section.
List Price
The current asking price advertised in a property listing. For more information, see the "Selling Your Real Estate"
Listed Property
Properties sold through real estate agents are normally "listed" by seller's agent as for sale. Affiliated real estate
agencies will list their for-sale properties with a multiple listing service to broadly advertise their listings. For more
information, see the "Selling Your Real Estate" article in the "Real Estate In-Depth" section.
Listing Agent
A real estate agent who is responsible for selling a property. The seller's agent will list the property as "for sale"
within the office and with a local multiple listing service. For more information, see the "Selling Your Real Estate"
Listing Agreement
A contract between a seller and an agent, in which the agent is hired to find a ready, willing and able buyer for
the seller's property. For more information, see the "Selling Your Real Estate" article in the "Real Estate In-
Depth" section.
Littoral Rights
Legal concept concerning water rights for property owners whose land abuts a lake, ocean, sea or other non-
flowing bodies of water. Property ownership of land extends to the high-water mark at the water's edge. For
more information, see the "Real Estate Introduction" article in the "Real Estate In-Depth" section.
Living Trust
Sometimes called an Inter Vivos trust, a type of trust created by the owner of the subject property during the
lifetime of that owner. The two basic types of living trusts are the Irrevocable trust and the Revocable trust. The
chief advantages of the living trust are that they provide for automatic transfer of property upon death of the
owner while avoiding the cost and delay of probate. For more information, see the "Real Estate Trusts" article in
LLC
See Limited Liability Company entry.
Load Factor
Space in a rental building that does not produce rental income. Hallways, maintenance closets and lobby areas
are a load against the owner, since they don’t generate income—although the owner is still responsible for their
upkeep and maintenance. The load factor is often indicated as a percentage of the total rentable area of the
property. For more information, see the "Basics of Property Management" article in the "Real Estate Investing"
section.
Loan
The granting of the use of money, in return for the money's return along with interest. For more information, see
Loan Broker
A financing professional who arranges loans between clients and lenders. For more information, see Mortgage
Broker entry.
Loan Commitment
A written commitment from the lender that the application has been fully approved and that the loan transaction
may be closed. The commitment may include closing conditions and will have a set duration. For more
information, see the "Overview of Loan Processing" article in the "Loan Process" section.
Loan Constant
Any factor or multiplier that is used to compute the periodic interest or P&I payments on a loan.
Loan Officer
The lender's representative who is responsible for beginning and facilitating the loan application process.
Loan Poolers
Private institutions that purchase loans that will be securitized and sold to the secondary mortgage market, in
cooperation with Ginnie Mae.
Loan Processor
The lender's representative who is responsible for verifying and documenting the loan application data, as well
as assisting the loan officer and underwriter in facilitating the loan's closing. For more information, see the
"Overview of Loan Processing" article in the "Loan Process" section.
Loan-To-Value (LTV) Ratio
The ratio of the loan amount in relation to the appraised value of the property. For example, an $80,000 loan
($20,000 down payment) on a $100,000 property constitutes an 80% LTV. Most lenders express their exposure
for specific programs in terms of LTV limits. For example, most conforming lenders limit their exposure on the
purchases of single-family homes to 95% LTV, which means that the borrower must provide at least a 5% down
payment. For more information, see the "Loan-to-Value (LTV) ratios" article in the "Mortgage Industry" section.
Location
The site or placement of an entity. In real estate, location often refers to the relative advantages of one site,
because of any amenities, attractiveness and social factors associated with that site.
Location Note Endorsement
The guarantee issued by the title search company or attorney that verifies the true and precise location of the
property, in reference to the legal description, recorded survey and/or common street address. With refinances,
a location note endorsement can be used and is preferable to the much more expensive survey. For more
information, see the "Analyzing the Title Report" article in the "Loan Processing" section.
Lock (Loan)
A loan registration with a lender that instructs the lender to set aside a certain amount of money for the borrower,
at a specified interest rate. When the rate is locked, both the lender and the borrower are committed to closing
and disbursing the loan with that interest rate—within the lock period. For more information, see the "About
Interest Rates" article in the "Mortgage Industry" section.
Lock Period
The length of time for which the loan rate lock will remain in effect. Typically, the longer the lock period
requested, the higher the cost for the borrower in terms of interest rate or origination, discount or commitment
fees. For more information, see the "About Interest Rates" article in the "Mortgage Industry" section.
Loft
A building unit, usually an apartment, townhouse or condominium, in which interior walls are minimized to
provide a roomier, more open space. In most lofts, interior walls do not reach all the way to the ceiling. For more
information, see the "Analyzing Property Types" article in the "Loan Process" section.
Long-Term Capital Gain
An income tax designation referring to gains received from the sale of capital assets that have been held by the
property owner for an IRS- or industry-specified period of time. For more information, see the "All About Capital
Gains" article in the "Real Estate Investing" section.
Long-Term Debt, Liabilities
Liabilities that will take at least 10 months to repay. When qualifying an applicant's income, the lender will
consider the total long-term debt payments as a ratio against the applicant's gross income. Installment loans
normally have set monthly payments that are used for the income qualification ratios. Except for very low
balances, most revolving accounts are qualified based on the minimum required monthly payment at the time of
application. For more information, see the "Analyzing Liabilities" article in the "Loan Process" section.
Long-Term Debt Ratio
See Back-End Ratio entry.
Loose Fill Insulation
A type of insulation material commonly used to fill wall cavities and flat areas above ceilings in homes. As the
name implies, loose fill insulation normally consists of pebble-sized material that is blown unto and allowed to
settle in target areas. The most common types of loose fill material are fiberglass, rock wool, cellulose fiber,
vermiculite and perlite. For more information about types of insulation, see the Insulation entry.
Loss Assessment Insurance
Insurance against the policyholder being assessed by his or her homeowners association due to a loss suffered
by the homeowners association, which exceeds the association’s insurance limits. For more information, see the
"Condominiums" article in the "Real Estate In-Depth" section.
Lot and Block, Lot-Block-Tract Method
A method of property identification that is often used in urban and developed areas. See the Plat of Survey
System entry. For more information, see the "Surveys and Legal Description" article in the "Real Estate In-
Depth" section.
Louver Window
A type of window that consists of overlapping horizontal glass louvers (slats) that are opened and closed
together with a lever or crank. It can provide excellent weather protection and ventilation. Unfortunately, louver
windows may not always be able to provide a perfect seal. For more information about the parts and styles of
windows, see the Windows entry.
Low Emissivity Glass

Sometimes called low-E glass, this is a type of glass that allows certain wavelengths of light through it, while
reflecting other wavelengths. This has the effect of reducing the transfer of heat, allowing low-E glass to block
ultraviolet rays and summer heat, while trapping winter sunlight. For more information about the parts and styles
of windows, see the Windows entry.
Low-Rise
Any building containing up to three stories (not including the basement). For more information, see the
"Analyzing Property Types" article in the "Loan Process" section.
Lower Chord
Construction term referring to the beam that connects the bottom ends of rafters in a truss roof frame. With the
two sloping rafters, the horizontal lower chord creates a triangular frame used to support the roof. The lower
chord may be connected to the rafter with bolts or a gusset plate.
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Maintenance
The process of or actions required to repair or prevent normal wear and tear incurred by a property. For more
information, see the "Basics of Property Management" article in the "Real Estate Investing" section.
Maintenance Fee
Among property owner's associations, this fee is a charge to cover the cost of maintaining or operating a
property.
Mall
A mall may be an open plaza-like area, but is more often a term referring to an area connecting retail stores in a
retail center. For more information, see the "Investing in Retail Properties" article in the "Real Estate Investing"
section.
Management Contract
A formal agreement between a property owner and a management company. For more information, see the
"Basics of Property Management" article in the "Real Estate Investing" section.
Managing Partner
In a limited partnership, the partner who makes the decisions and bears the largest portion of the partnership's
risk.
Mansard Roof
A type of roof design that contains two slopes on each of the four sides. The mansard roof normally has no
gables and contains eight slopes in all. The top of the mansard roof often looks like an "X" as intersecting ridge
lines are set from corner to opposite corner. The intersection at the middle is the highest point. The upper
slopes normally do not have a steep incline. By contrast, the lower slopes on each side are so steep that they
are almost vertical.
Manufactured Home
A property primarily produced in a factory or similar manufacturing facility and subsequently assembled at the
home site. Most consumers identify manufactured homes as mobile home or trailer homes, but the
manufactured home industry is now more diverse. There are now basically four types of manufactured homes:
mobile, modular, panelized and pre-cut. For more information, see the "Analyzing Property Types" article in the
Map Book
See the Plat Book entry.
Margin (ARM)
Used with adjustable-rate mortgage (ARM) loans when calculating periodic interest rate adjustments. When the
ARM rate is adjusted, the margin is the additional constant rate added to the index rate to calculate the new ARM
rate. The margin is established and fixed at the beginning of the loan, in the promissory note. For example, a
conforming Treasury Bill ARM reaches its one-year anniversary. Its margin is 3.00, as established in the original
promissory note. At the time of the rate adjustment, the average T-Bill index rate has been calculated at
4.250%. The margin is added to the T-Bill index for a new rate of 7.250%; however, this is subject to the periodic
and lifetime caps applicable with the specific ARM program. For more information, see the "ARM Loan" article in
the "Loan Programs" section.
Margin Loan
Funds borrowed against a person's current deposits or investment balance. Financial institutions often allow
their individual investors to borrow against the value of their individual portfolios, up to a percentage of their
portfolio value--usually 50%. A drop in the stock market may lower the portfolio value, which would increase the
ratio of margin loan. It if exceeds the limit, "margin calls" are made and private investors must immediately pay
down their loan to bring it within limits.
Marginal Property
Any property capable of producing only very low economic return, or any property approaching full economic and
functional obsolescence. For more information, see the "Real Estate Investment Analysis Tools" article in the
Marginal Tax Rate
The income tax rate incurred by the last dollar of a person's or entity's income.
Market Allocation
A violation of federal antitrust laws in which competitors avoid or eliminate direct competition by agreeing to
divide the market into exclusive areas. For more information, see the "Real Estate Fraud" article in the "Real
Market Analysis
A review and study of the impact of economic (supply & demand) forces on an investment property. For more
information, see the "Real Estate Investment Analysis Tools" and "Creating a Budget: Marketing Plan" articles in
Market Approach
See Comparative Market Approach entry.
Market Rent
The rental rate for a subject property's rental units, based on the rents of units in comparable properties in the
same area. For more information, see the "Analyzing Appraisal Reports" article in the "Loan Process" section.
Market Research
The investigation and study conducted to determine the market conditions in an area or the impact of a certain
product in a market. For more information, see the "Real Estate Investment Analysis Tools" and "Creating a
Budget: Marketing Plan" articles in the "Real Estate Investing" section.
Market Risk
The probability of an investment's failure that may be caused by external market conditions. For more
information, see the "Real Estate Investment Analysis Tools" and "Creating a Budget: Marketing Plan" articles in
Market Value, Fair Market Value
The highest price that is the most probable point at which the willing, unrelated, competent and able buyer and
seller will freely agree. The appraisal attempts to calculate the estimated fair market value of the subject
property through recent market sales comparisons, cost-to-rebuild and, when applicable, income approaches.
For more information, see the "Analyzing Appraisal Reports" article in the "Loan Process" section.
Marketable Title
A title that contains no major defects that may prohibit the sale or transfer of the title. For more information, see
the "Marketable Title" article in the "Real Estate In-Depth" section.
Marketing Time
The amount of time required to sell an item. In the real estate industry, marketing time is normally applied to the
average time from the moment the property is listed for sale and the moment that a purchase contract is signed.
For more information, see the "Analyzing Appraisal Reports" article in the "Loan Process" section.
Master Deed
See Declaration of Condominium entry. For more information, see the "Condominiums" article in the "Real Estate
In-Depth" section.
Master Lease
A lease that allows the renter (master lessee) to relet the property to other renters. The master lessee is
responsible for management and marketing the properties. Typically, the owner or master lessor is guaranteed a
regular installment regardless of how well the master lessee is performing. The master lessee (renter) assumes
all of the risk; however, the owner (master lessor) receives much less than if he or she were to manage the
property directly. For more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Master Plan
The growth map created and maintained by a community to chart overall development plan for the community.
The master plan will include zoning restrictions and establish development priorities. For more information, see
the "Zoning and Building Codes" article in the "Real Estate In-Depth" section.
Mattress Money
A casual term used for funds or assets that are undocumented, as in money saved in a person's mattress or
hidden coffee can. Most conforming loan programs will not accept undocumented funds, when underwriting the
applicant for a mortgage loan. However, some nonconforming loans do accept undocumented funds through No
Documentation and No Asset Verification (NAV) programs. For more information, see the "Analyzing Assets"
Maturity
The date at which a loan's final payment is due. With a 30-year fixed-rate loan, the loan's maturity is the end of
the term (360th month); with a five-year balloon, the loan matures at the end of the fifth year. For more
information, see the "Mortgage Deeds and Promissory Notes" article in the "Real Estate In-Depth" section.
Mechanic's Lien
Also know as "mechanic's and materialmen's (M&M) lien," this is a claim for payment of services or materials
furnished. For example, when construction or rehab work is completed (or materials for such provided) but
unpaid, the contractors may place a lien against the property until the amount due is fully paid. For more
information, see the "Recording" article in the "Real Estate In-Depth" section.
Merchant's Association
An organization of retail merchants in a shopping center or district. Much like a chamber of commerce, the
members of a merchant's association promote the business success of its members.
Meridian
A circular line that passes through both global poles. The term is sometimes used in real estate surveys to
delineate a north-south line of reference. See also the Principal Meridian entry. For more information, see the
"Surveys and Legal Description" article in the "Real Estate In-Depth" section.
Metes
In the metes and bounds system of surveying, metes refer to the distance measurements used to describe the
boundaries of a parcel of property. For more information, see the "Surveys and Legal Description" article in the
Metes and bounds
One of the oldest established method of surveying property is the metes and bounds system. This system
describes the boundaries of properties through metes (distance) and bounds (direction) starting and eventually
ending at a point of beginning. However, this normally produces lengthy and complicated descriptions and POB
monuments can often be altered. Compare with Rectangular Survey System and Plat of Survey methods. For
more information, see the "Surveys and Legal Description" article in the "Real Estate In-Depth" section.
Millage
A property tax rate used to calculate a parcel's tax assessment. One mill is equal to 1/1000 of a dollar, or 1/10 of
one cent. For more information, see the "Real Estate Taxes and Special Assessments" article in the "Real
Mineral Rights
Property rights involving ownership and disposition of minerals and other subsurface natural resources. For more
information, see the "Subsurface Rights" article in the "Real Estate In-Depth" section.
Mini-Warehouse
A prevalent type of warehouse that provides smaller storage spaces for residential and commercial users.
MIP
See Mortgage Insurance Premium entry.
Mirror Image Offer
In the real estate market, any offer from a prospective offer that satisfies the terms of the listing contract. If the
seller rejects such an offer, the agent is often still entitled to a compensation. For more information, see the "Real
Estate Broker" article in the "Homebuyer Guide" section.
Mixed-Use Project
A planned development intended to include space for different types of real estate usage. For more information,
see the "Commercial Property Development" article in the "Real Estate Investing" section.
Mixed-use Property
A multiple-unit property which contains both residential and commercial units. Many older city buildings on major
thoroughfares have commercial storefronts on the first floor and residential apartments on the upper floors. For
more information, see the "Analyzing Property Types" article in the "Loan Process" section.
Mobile Home
Often called a trailer home, mobile homes are the most complete and least expensive type of manufactured
homes. Originally, mobile were trailers that could be pulled by a car or truck. Mobile homes today are no longer
so mobile. They are much larger and no longer designed for lengthy road travel; they are normally semi-
permanently anchored and connected to utilities. For more information, see the "Analyzing Property Types"
Mobile Home Park
A type of land subdivision that allots a property for mobile homes.
Model Unit
An initial unit in a property development that is intended to provide a representative view of the planned units
when completed. The model unit is a marketing tool used by developers to sell a non-completed unit to potential
buyers by offering a example of the final appearance of the finished product. For more information, see the
"Residential Property Development" article in the "Real Estate Investing" section.
Modification
Real estate terminology referring to an economic characteristic of real estate that changes to the land affects the
value of the property. For more information, see the "Analyzing Appraisal Reports" article in the "Loan Process"
section.
Modified Lien Theory
See Intermediary Theory entry.
Modular Home
A type of manufactured home structure that produces entire sections of the home in the factory. The single-room
or multi-room sections are then assembled at the site. Modular homes are normally at least twice the size of
comparable mobile homes and often resemble smaller ranch-style housing. For more information, see the
Molding
See Trim entry.
Monolithic Slab
A type of foundation used in some structures, in which the foundation slab and walls are poured as one cohesive
unit. This method is often used with garages and porches.
Month-to-Month Tenancy
A type of lease arrangement in which the tenant's interest in the leasehold property is renewed on a monthly
basis for a one-month term. Either the landlord or tenant may terminate the lease arrangement at the conclusion
of each month. For more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Monthly Payment
The amount due each period on a debt, whether installment or revolving. For mortgage purposes, this is the
sum amount of the projected principal, interest, taxes and insurance (PITI) paid each month on a mortgage loan.
For more information, see the "Housing Payments" article in the "Homebuyer Guide" section.
Mortgage
A conditional conveyance of property as security for a debt; to offer a property as a security for a loan. With a
mortgage loan, the borrower will still own the property; the mortgage merely gives the lender the right to
foreclose and obtain ownership if the borrower defaults on the loan. For more information, see the "Mortgage
Deeds and Promissory Notes" article in the "Real Estate In-Depth" section.
Mortgage Backed Securities (MBS)
Securities sold in the financial markets and collateralized by multi-million dollar blocks of mortgage loans. MBS
are the source for much of the funds for conforming loans. For more information, see the "Fannie Mae" article in
the "Mortgage Industry" section.
Mortgage Banker
A bank that concentrates primarily in originating mortgage loans that will probably be sold in the secondary
market. A mortgage banker may originate loans directly with borrowers or through brokers.
Mortgage Broker
An intermediary, between the borrower and a lender, responsible for arranging and packaging the loan
application. The broker is usually the person or agency who originates mortgage loans with the funds of other
correspondent lenders. Because mortgage brokers can and do work with an almost unlimited number of lending
institutions, they offer more loan program options to most borrowers.
Mortgage Commitment
See Loan Commitment entry.
Mortgage Contingency
The clause in the real estate purchase contract that sets a deadline for buyer procurement of a mortgage loan
commitment. The contingency date protects both the buyer and the seller. If the buyer is unable to obtain a
mortgage loan commitment by this date, the seller can cancel the loan or provide an extension. If the buyer
surpasses this contingency date without an extension and later fails to obtain a mortgage loan, then the seller
can sometimes retain the earnest money deposit. See also Contingency Date entry. For more information, see
the "Real Estate Sales Contract" article in the "Real Estate In-Depth" section.
Mortgage Correspondent
A person or entity who originates and services a loan.
Mortgage Deed, Note
A written description of the security for a promise to repay a debt. Separate and distinct from the promissory
note, the mortgage deed or note is the instrument that actually offers the subject property as collateral for the
loan. For more information, see the "Mortgage Deed and Promissory Note" article in the "Real Estate In-Depth"
section.
Mortgage Insurance
Mortgage insurance, both government or privately issued, protect the lender by guaranteeing a portion of the
loan amount against losses. For example, if a lender holds an $80,000 mortgage (with expenses) and sells a
foreclosure home for only $75,000, the mortgage insurance would reimburse the lender for that $5,000 short-fall.
FHA and VA loans are essentially mortgage insurance programs; conventional loans require private mortgage
insurance (PMI). With conforming loans, mortgage insurance is required whenever the LTV ratio exceeds 80%.
For more information, see the "Mortgage Insurance" article in the "Mortgage Industry" section.
Mortgage Insurance Premium (MIP)
The monthly premium paid by a borrower for mortgage insurance on FHA loans. Mortgage insurance is
generally required for mortgage loans with LTV ratios in excess of 80%. For more information, see the
"Mortgage Insurance" article in the "Mortgage Industry" section.
Mortgage Lien
A lien or encumbrance recorded against a property that is used to secure a mortgage loan obligation. For more
information, see the "Mortgage Deed and Promissory Note" and "Marketable Title" articles in the "Real Estate In-
Depth" section.
Mortgage Life Insurance
A form of credit life insurance that pays off the balance of the mortgage loan amount in the event of death or
incapacitation of the insured borrower.
Mortgage Loan
A type of financing secured by a real estate mortgage deed. With mortgage loans, the borrower normally still
owns the subject property. The mortgage deed offers the property as security and provides the lender with the
right to foreclose the property if the loan defaults. For more information, see the "Mortgage Deed and Promissory
Note" article in the "Real Estate In-Depth" section.
Mortgage REIT
One of two types of real estate investment trusts. The mortgage REIT invests in mortgage loans by lending
mortgage loans for target properties. For more information, see the "Real Estate Trusts" article in the "Real
Mortgage Release
A disclaimer granted by the lender releasing the borrower from any further liability on the mortgage. Once the
mortgage loan balance is fully repaid or satisfied, the lender issues a mortgage release to remove any liens from
the property. For more information, see the "Mortgage Deed and Promissory Note" article in the "Real Estate In-
Depth" section.
Mortgagee
The lender of money in a mortgage transaction. In the mortgage loan context, the lender accepts the collateral
property being offered by the mortgagor/borrower/mortgagor as security for the loan. For more information, see
Mortgagee Clause
The formal term for the escrow clause normally included in the insurance certificate. The mortgagee clause
identifies the lender. For more information, see the "Hazard Insurance" article in the "Mortgage Industry" section.
Mortgagor
The person or entity mortgaging property for consideration. In current terms, the mortgagor is the person
borrowing and receiving money from the lender in the mortgage transaction—and using personal property as
security or collateral for a loan. For more information, see the "Mortgage Deed and Promissory Note" article in
Mullion
The slender framing strips of material that divide the panes of a window.
Multi-Family Mortgage
Mortgage industry term for mortgage financing on any residential real estate property with five or more apartment
units. For more information, see the "Analyzing Property Types" article in the "Loan Process" section.
Multi-Unit Property
Strictly speaking, it is any property with two or more units. However, this terms is normally only used for
residential properties with five or more apartment units. For more information, see the "Analyzing Property
Types" article in the "Loan Process" section.
Multiple Exchange
The most common type of real estate exchanges involves more than two parties, since it is very difficult to find
two parties willing to swap properties directly. The Starker exchange is actually a variation of this approach. For
more information, see the "Tax-Free Real Estate Exchanges" article in the "Real Estate Investing" section.
Multiple Listing Service (MLS)
An MLS is a forum for sharing properties "listed" for sale among affiliated real estate brokers. Realtors and
agents often form local and regional boards, which are normally responsible for maintaining an MLS that allows
all affiliates to access information about current and recent listed properties. An MLS listing provides greater
exposure for sellers and the broker's listing. For more information, see the "Selling Your Real Estate" article in
Muntins
Construction term referring to the strips in a window sash that separate the individual window panes. For more
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Naked Title
Also called barely legal title, this is the type of title given to the trustee in a deed of trust. Instead of actual title,
the trustee does not receive the same rights as standard ownership. For more information, see the "Title and title
insurance " and the "Real Estate Trusts" articles in the "Real Estate In-Depth" section.
National Environmental Policy Act
A 1967 federal legislation that promoted efforts to reduce damage to the environment. Its most enduring legacy
is environmental impact statements it required for new projects. For more information, see the "Environmental
Issues" article in the "Real Estate In-Depth" section.
National Flood Insurance Program
Flood insurance assistance for property owners, created by Congress and managed by FEMA's Federal
Insurance Administration. Homeowners can obtain flood insurance coverage if their community participates in
NFIP flood control programs. In recent years, however, the federal government has curtailed flood insurance
assistance, so as to discourage development in flood-prone areas. For more information, see the "Hazard
Insurance" article in the "Mortgage Industry" section.
National Housing Act
A 1934 legislation that established the Federal Housing Administration (FHA). For more information, see the
"FHA and VA Loans" article in the "Loan Programs" section.
Negative Amortization
A situation in which the loan principal is actually increasing, instead of decreasing. This usually happens when
the payments are less than the amount of the interest due, so that the overdue interest becomes part of the
principal balance. Some ARM loans may incur negative amortization, because as caps are factored in, the
capped payment is insufficient to cover the interest due. Thus, the unpaid or deferred interest becomes
additional principal. For more information, see the "ARM Loans" article in the "Loan Programs" section.
Negative Cash Flow

With rental property, this situation occurs when rental income is not enough to cover operating and mortgage
expenses. If an applicant has negative rental cash flow from any property owned, that rent loss must be listed as
a long-term loss and included in the applicant’s debt-to-income (DTI) ratio. For more information, see the "Real
Negative Easement
A type of easement that prevents the owner from certain actions or uses. For example, one landowner may
obtain an easement barring his neighbor from building something so tall that it would block the sunlight.
Compare this to positive easement. For more information, see the "All About Easements" article in the "Real
Negative Net Worth
The financial situation wherein a person's total liabilities exceeds total assets. Persons with a heavy burden of
student and other unsecured loans often suffer from this dilemma. Lenders look unfavorably upon negative or
weak net worth; applicants should include additional properties in the asset section to offset liabilities.
Neighborhood
A primarily contiguous area, usually in urban or developed settings, whose occupants have established a
community of interactive relationships. For more information, see the "Analyzing Appraisal Reports article in the
Neighborhood Shopping Center
A small retail center or mall, usually anchored by a supermarket, pharmacy or department store. The typical size
for neighborhood shopping centers is about 100,000 square feet. For more information, see the "Investing in
Retail Properties" article in the "Real Estate Investing" section.
Net Income
Portion of gross income remaining after taxes and deductions. For consumers, it is essentially their take-home
pay. For income properties, it is gross income less operating expenses. For more information, see the "Real
Net Leasable Area
The total floor space that is actually leased to a tenant, per the lease agreement. For more information, see the
"All About Leases" article in the "Real Estate In-Depth" section.
Net Lease
A lease arrangement that assesses the tenant with a base rent plus an additional assessment for the tenant's
share of building operating expenses (CAM), insurance or real estate taxes. Net leases are either Single-Net,
Double-Net (NN) or Triple-Net (NNN), depending on the number of expenses (CAM, insurance or taxes) that the
lessee must pay. For more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Net Listing
A type of listing agreement in which the seller has indicated the amount he or she is seeking; the broker's
commission will be the difference between the sales price and that seller-indicated target. This is an illegal
format in many states, because of the potential for fraud. For more information, see the "Selling Your Real
Estate" article in the "Real Estate In-Depth" section.
Net Net Lease
See Double Net Lease entry.
Net Net Net Lease
See Triple Net Lease entry.
Net Operating Income
The income amount remaining after all operating expenses have been paid. For more information, see the "Real
Net Operating Income Multiplier
A measurement of a property investment's rate of return. This calculation is the net operating income divided by
the property's sale price. It is essentially the inverse of the overall capitalization rate. For more information, see
the "Real Estate Investment Analysis Tools" article in the "Real Estate Investing" section.
Net Present Value
The present value of an investment's projected income less the present value of the investment's projected
expenses. For more information, see the "Real Estate Investment Analysis Tools" article in the "Real Estate
Investing" section.
Net Rental Income
The portion of the gross rental income remaining after operating expenses and mortgage payments are paid. For
Net Worth
Total assets minus total liabilities. If liabilities exceed assets, the borrower would have a negative net worth,
which would jeopardize loan application qualifications. For more information, see the "Analyzing Assets" article
NNN
See Triple Net Lease entry.
No Asset Verification (NAV) Loan
A non-conforming loan program that requires no documentation of the qualifying asset's source. However, the
existence of the assets or funds in question must still be verified. For example, an applicant with mattress
money or undocumented funds may use this program. The applicant merely needs to show that the funds for the
down payment and closing exist; however, there is no need to document the source of the funds. For more
information, see the "No Documentation Programs" article in the "Loan Programs" section.
No Closing Cost Program
A loan program in which the borrower is not charged any closing costs. Most of these programs still charge
closing costs, but the borrower does not have to pay them out of pocket. Instead, the closing costs are financed
through the loan in one way or another. For more information, see the "No Closing Cost Options" article in the
"Creative Financing" section.
No Documentation (No Doc) Loan
The No Doc loan is usually a combination of the No Asset Verification (NAV) and No Income Verification (NIV)
loan programs. As with both programs, the source of the assets and the exact income amounts are not verified
or documented. Instead, the borrower merely documents and verifies the existence of the assets and duration of
the employment. For more information, see the "No Income Verification" and "No Documentation Programs"
articles in the "Loan Programs" section.
No Down Payment Program
A purchase loan programs in which the buyer avoids paying any down payment. This is sometimes called a
100% LTV loan. For more information, see the "No Down Payment Programs" article in the "Creative Financing"
section.
No Income Verification (NIV) Loan
A non-conforming loan program that requires no documentation of the borrower's income, thus allowing a
borrower to bypass the income-qualifying ratios. However, the duration and current status of the borrower's
employment or self-employment must be documented. For more information, see the "No Income Verification"
and "No Documentation Programs" articles in the "Loan Programs" section.
No Ratio Loan
This program is essentially a variation of the No Income Verification loan. Unlike the “stated income” program,
however, the applicant indicates no income amount in the application; the lender’s underwriter ignores all income
qualification questions. Such programs place the greatest underwriting weight on the applicant's credit and
lowered LTV. For more information, see the "No Income Verification" or "No Documentation Programs" articles
in the "Loan Programs" section.
No-Point Rate, Program
The interest rate level of a particular program at which the borrower pays no discount or origination points.
Non-conforming Loan
Conventional mortgages that are not eligible for sale to either the FNMA, GNMA or FHLMC. Nonconforming
loans (which are generally more expensive) are an alternative to the highly selective and restrictive conforming
loans acceptable to Freddie Mac and Fannie Mae. Unlike portfolio loan, however, nonconforming loans are still
sold on the secondary market—just not to Fannie Mae and Freddie Mac. For more information, see the
"Nonconforming Loans" article in the "Loan Programs" section.
Non-Conforming Lender
Lender offering nonconforming loan programs, which are not sold to the secondary market through Fannie Mae
or Freddie Mac. For more information, see the "Nonconforming Loans" article in the "Loan Programs" section.
Non-Conforming Usage
Property usage that does not meet current zoning regulations but are allowed to continue. Non-conforming
usage is normally allowed through grandfather clauses. However, there are still restrictions on such non-
conforming usage. Note that such non-conforming usage can be codified, expanded or permanently continued
only through a variance or zoning amendment. For more information, see the "Zoning and Building Codes" article
Non-Conventional Loan
Mortgage industry term for residential loans that are guaranteed by the government. Non-conventional programs
typically refer to FHA and VA loans. For more information, see the "FHA and VA Loans" article in the "Loan
Programs" section.
Non-Disturbance Clause
A provision in a mortgage deed that requires both the borrower and lender to continue any current lease
agreements in the event of a foreclosure. For more information, see the "All About Leases" and "Mortgage Deed
and Promissory Note" articles in the "Real Estate In-Depth" section.
Non-Judicial foreclosure
A type of foreclosure that does not involve the courts. Unlike judicial foreclosures, this process usually gives the
lender the title to the subject property (deed in lieu of foreclosure ) or the power to sell the property (power of
sale clause). For more information, see the "Everything You Want To Know About foreclosure " article in the
Non-Performing Loan
Loans that have become seriously delinquent or is in default or foreclosure are labeled non-performing loans.
For more information, see the "Servicing & Sale of Your Loans" article in the "Mortgage Industry" section.
Non-Recourse Loan
Sometimes called a dry mortgage, the non-recourse loan does not hold the borrower personally liable for the
loan obligation. Rather, the loan holds the property and the ownership entity created by the borrower--i.e.,
corporation, partnership, limited liability company, etc.--directly responsible. In the case of a default, if the
property and entity cannot adequately satisfy the sums due, the lender cannot pursue the borrowers personally.
For more information, see the "Mortgage Deed and Promissory Note" article in the "Real Estate In-Depth"
section.
Normal Wear and Tear
Physical depreciation to property that can be reasonably expected to occur through ordinary use or occupation.
For more information, see the "Basics of Property Management" article in the "Real Estate Investing" section.
Nosing Line
Construction term referring to an imaginary diagonal line running through the front edges of a series of stairway
steps. See Riser and Tread entry.
Notary Public
A person legally empowered to witness and certify the validity of documents and to take affidavits and
depositions. Mortgage deeds, promissory notes and other closing documents often need to be notarized. The
closing agent is normally a notary public. For more information, see the "Recording" and "Closings and
Transactions" articles in the "Real Estate In-Depth" section.
Note
An instrument that indicates a promise to pay a sum of money at a specified time. For more information, see the
"Mortgage Deed and Promissory Note" article in the "Real Estate In-Depth" section.
Note Rate
The official interest rate of a loan or promissory note. Buydown and GPM loans will often lower the interest rate
and payments in the initial years, before gradually increasing to the official note rate.
Notice of Default
A formal announcement delivered to a party informing or reminding that individual or entity that their loan
obligation is currently in default. For more information, see the "Mortgage Deed and Promissory Note" article in
Notice to Quit
A formal announcement by the tenant, delivered to the property owner or manager, that the tenant intends to
vacate the rental premises. For more information, see the "All About Leases" article in the "Real Estate In-Depth"
section.
Notorious Possession
Possession of a property that may not be formally recorded but is generally acknowledged. For more information,
see the "Title and Estates in Land" article in the "Real Estate In-Depth" section.
Novation
The process or act of replacing a contract with a new one, while still retaining the same two parties to the
contract.
Null and Void
A legal term applied to contractual agreements that is no longer enforceable.
Nuncupative Will
A will created verbally by a person near death. For more information, see the "Title Transfers and Wills" article in
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Obsolescence
In the residential mortgage world, this applies to properties or elements of a property that have lost their
utilitarian value. For more information, see the "Analyzing Appraisal Reports" article in the "Loan Process"
section.
Occupancy
The use of a property as a full-time residence by the borrower—as opposed to second home, rental or
investment property. For more information, see the "Basics of Property Management" article in the "Real Estate
Investing" section.
Occupancy Level
A calculation of the percentage of the property currently occupied by tenants. This measurement may be of the
number of occupied units divided by the total number of leasable units. However, the most common method for
commercial properties is the square footage amount currently leased by tenants divided by the total leasable
area amount. For more information, see the "Basics of Property Management" article in the "Real Estate
Investing" section.
Occupancy Statement
A statement of intent to occupy a property as primary residence, that is required for owner-occupied loan
programs. Most conforming loan programs are geared for owner-occupied properties; investment properties
have higher rates, fees and down payment requirements. For more information, see the "Overview of the
Application Packet" article in the "Applying for a Loan" section.
Off-Site Improvement
Any development or construction of land surrounding or affecting the site of the subject property.
Offer to Purchase
A preliminary agreement, secured by the payment of earnest money, between a buyer and seller as an offer to
purchase real estate. An offer to purchase, or binder, secures the right to purchase real estate upon agreed
terms for a limited period of time. If the buyer changes his mind or is unable to purchase, the earnest money is
forfeited unless the binder expressly provides that it is to be refunded. For more information, see the "Real
Estate Sales Contract" article in the "Real Estate In-Depth" section.
Office of the Comptroller of the Currency (OCC)
Federal office responsible for regulating nationally chartered banks.
Office of Thrift Supervision
An office of the U.S. Treasury department, which is responsible for regulating the S&L industry.
Oil Lease
Similar to gas leases, a landowner may give another party the right to drill for oil on that landowner's property. If
no oil is found, the landowner receives a flat rent. If the lessee discovers oil and begins extraction, the
landowner receives royalty payments, often in addition to the flat rent. Sometimes, the oil and gas lease rights
are combined. For more information, see the "Subsurface Rights" article in the "Real Estate In-Depth" section.
One-and-a-Half-Story Home
See Cape Cod entry.
One-Story Home
See Ranch entry.
Open-End Mortgage
A mortgage that allows additional money (secured by the same collateral) to be advanced by the lender. Credit
lines are sometimes considered open-end mortgages. For more information, see the "Home Equity Lines of
Credit" article in the "Loan Programs" section.
Open House
A marketing method used in the residential real estate industry that invites prospective buyers to visit the
property at the same time. Open houses make efficient use of the seller's time, as well as create a more
competitive atmosphere between potential buyers. For more information, see the "Selling Your Real Estate"
Open Listing
Also called a simple listing or general listing, non-exclusive agreement between the seller and real estate agent
that requires the seller to pay commission only if the listing agent is able to bring the buyer to the seller. If the
seller finds a buyer through another agent or with no help from the listing agent, the seller will NOT have to pay
any commissions to the original listing agent. For more information, see the "Selling Your Real Estate" article in
Open Mortgage
A mortgage loan obligation whose term has matured but which has not been completely settled as required. The
term has expired with amount overdue and subject to foreclosure. For more information, see the "Mortgage
Deed and Promissory Note" article in the "Real Estate In-Depth" section.
Operating Expense Ratio
A calculation indicating how much of the gross income must be earmarked for operating expenses. This ratio is
the total operating expense for a period divided by the total effective gross income for that same period. For
Operating Expenses
The costs required to maintain the operations of an investment. For more information, see the "Real Estate
Investment Analysis Tools" article in the "Real Estate Investing" section.
Operating Lease
A subleasing arrangement, by which a lessee (tenant) leases the property to a sub-lessee who actually occupies
the leased premises. For more information, see the "All About Leases" article in the "Real Estate In-Depth"
section.
Operating Leverage
A financial method in which a small increase in the gross income results in a larger percentage increase in the
net operating income. For more information, see the "Real Estate Investment Analysis Tools" article in the "Real
Operating Statement
A financial statement that displays the income and expenses for an investment property for a specified period.
For more information, see the "Creating a Business Plan: Financial Statements" article in the "Real Estate
Investing" section.
Opinion Letter
A written analysis and judgment from an attorney pertaining to the probable tax and legal consequences of an
investment or action.
Opinion of Title
A formal analysis and certification, usually provided by an attorney or title company representative, that confirms
the validity of a title to a property. For more information, see the "Marketable Title " and "Title and title insurance "
OPM
Other people's money. An investment term referring to the process of making investments with the use of
borrowed funds.
Option to Purchase
The right to purchase or lease a property at a certain price for a certain period of time. For example, a lease
agreement with a purchase options provides the prospective buyer with a limited option to eventually purchase
the property. Any financing that the buyer obtains (after a seasoning period) often will be considered a refinance,
so that down payment is not always necessary. For more information, see the "Buying Real Estate With Option
Contracts" articles in the "Creative Financing" section.
Option Price
The cost that an optionee must pay to obtain an option. Note that this is not the price required when exercising
the option. For more information, see the "Buying Real Estate With Option Contracts" articles in the "Creative
Financing" section.
Oral Contract
A legally binding verbal agreement.
Ordinary Income
According to the IRS, the term ordinary income applies to any income that is taxed at regular rates--as opposed
to capital gain income.. Ordinary income is typically classified into active, passive and portfolio income. For more
information, see the "Investment Property Tax Advantages: Deducting Losses" article in the "Real Estate
Investing" section.
Ordinary Life Estate
One of two types of conventional life estates, the ordinary version is based on the life of the tenant. When the
tenant dies, his or her ownership passes to a remainder interest or reversionary interest. For more information,
see the "Title and Estate in Real Property" article in the "Real Estate In-Depth" section.
Ordinary Loss
An income tax term that applies to any losses that may be deducted from ordinary income. For more information,
see the "Investment Property Tax Advantages: Deducting Losses" article in the "Real Estate Investing" section.
Organizational Fee
The compensation that a general partner receives for services relating to the creation or development of a
syndicate.
Origination
The initial loan application, processing and underwriting stages of the primary mortgage market.
Origination Fee
The charge for services performed by the company handling the initial loan application and processing. See also
the Finance Fee entry. For more information about loan closing costs, see the "About the Good Faith Estimate"
article in the "Applying for a Loan" section.
Originator
The person or company responsible for originating a loan.
Outrigger
A beam or plank parallel to the ridge board that connects an exposed fascia rafter with interior rafters. With
overhanging roofs, the overhanging rafter is attached by the outrigger to non-overhanging rafters.
Outstanding Loan Balance
The dollar amount currently remaining due (normally overdue) on a loan obligation.
Over-Improvement
Any improvements that are excessive in cost or size in relation to the value of the land and its surroundings. For
example, if a given area only contains homes selling for $100,000 and a home owner decides to cover his house
in gold worth much more than the average market value, that home owner has essentially over-improved his
property. For more information, see the "Residential Property Development" article in the "Real Estate Investing"
section.
Overage Lease
A lease arrangement that collects additional charges from the tenant, based on a percentage of sales that a
tenant generates above a specified sales base. Shopping malls will sometimes use this arrangement as an
incentive for the mall director to pursue optimum traffic to the center. For more information, see the "All About
Leases" article in the "Real Estate In-Depth" section.
Overall Capitalization Rate

A measure of an investment property's income producing strength. This calculation is the net operating income
divided by the sales price or total cost of the investment. For more information, see the "Real Estate Investment
Analysis Tools" article in the "Real Estate Investing" section.
Overall Rate of Return
Similar to the overall capitalization rate, the overall rate of return is the net operating income divided by the
purchase price of the property. For more information, see the "Real Estate Investment Analysis Tools" article in
Overtime Income
Compensation for time worked in excess of regular work period. Most mortgage lenders allow applicants to use
the overtime income as part of their income qualification. However, overtime income is considered unstable. So
the qualifying amount is the average monthly over the past two years (24 months).
Owner-Occupied
Residential properties that the borrower occupies as a primary residence. Loans for owner-occupied properties
normally enjoy better terms and pricing than do properties for second homes and investment properties.
Owner's title insurance Policy
A type of title insurance policy that protects the property owner against both known and latent title defects. It
only covers the amount paid for the property and often has exceptions for claims that could have been
discovered with a physical inspection of the subject property. For more information, see the "Title and title
insurance " article in the "Real Estate In-Depth" section.
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P&I
Common name for the monthly or periodic principal and interest payment.
Package Mortgage
A mortgage pledge that includes both real and personal property. For more information, see the "Mortgage Deed
and Promissory Note" article in the "Real Estate In-Depth" section.
Panel (Door)
The decorative pieces between the stiles and rails of a door. Panels are integral parts of the popular panel door
style. For more information about the parts and types of doors, see the Door entry.
Panel Door
A traditional type of door found in most residences. Panel doors consist of stiles, rails and panels. For more
information about the parts and types of doors, see the Door entry.
Panelized Housing
A type of manufactured homes, in which wall units are produced at a factory and assembled at the final site.
These walls normally come complete with electrical wiring and plumbing requirements and are fitted together like
puzzle pieces at the site. Unlike mobile and most modular homes, panelized housing are standard types of
housing with full foundations. The panelized design allows developers to set a building in less than a week. For
Parcel
A piece of property. In most cases, a parcel refers to a specific area that is recorded with one property
identification number.
Partial Release
The removal of a mortgage lien from a specific portion of the total collateral amount. In large housing
developments, for example, the lender of the development loan has a lien on the entire project. However, as
each new home or unit is purchased, the lender releases its lien on that specific unit. The lender keeps its liens
on all of the other units or parcels. For more information, see the "Mortgage Deed and Promissory Note" article in
Partial Taking
A condemnation action--undertaken through the government's or utility's power of eminent domain--that takes
only a portion of the entire property from the current owner. For more information, see the "Eminent Domain"
Participation Certificates (PC)
Securities that are collateralized by multi-million dollar blocks of geographically diverse single-family loans and
offered by Freddie Mac (FHLMC). For more information, see the "Freddie Mac" article in the "Mortgage Industry"
section.
Participation Loan
A loan funded by more than one lender. This is sometimes called syndicated loans and is common with large
commercial projects, wherein a bank does not want to hold full exposure. For more information, see the "Basics
of Commercial Finance" article in the "Commercial Finance" section.
Particleboard
A board sheet consisting of wood scraps that have been grounded, glued and molded into a panel. Inexpensive
and heavy, it is popular for interior use. However, it does not resist water very well so it is not suitable for
exterior use.
Partition Right
See Right of Partition entry.
Partition Wall
A non-load-bearing wall that separates rooms.
Partnership
A form of business, property or company ownership, in which two or more individuals share ownership and
control of the business' activities. A partnership provides some protection for the individual against business
losses; however, it does not provide the same level of protection as does a corporation.
Party Walls
Townhouses are normally built right to each other. Often, individual townhouse units share one separating wall.
Such walls are considered party walls. For more information, see the "PUDs and Townhouses" article in the
Pass-Through
Expenses incurred by a property owner or manager that are charged to the tenant, per the lease agreement. In
Triple Net leases, for example, the tenant is assessed for the tenant's share of the property's taxes, utilities,
insurance, maintenance and operating expenses. For more information, see the "All About Leases" article in the
"Real Estate In-Depth" section, as well as the "Basics of Property Management" article in the "Real Estate
Investing" section.
Passive Income
Revenue or income from investments in which the individual investor does not actively or materially participate.
Limited partnerships and real estate investments are considered passive. Passive income losses cannot be
used against active income. Real estate losses are always considered passive income losses; but they may be
deducted against active income if the individual actively participated in at least the management decisions and
personal active income is less than $150,000. Contrast this with active income and portfolio income, which are
other forms of taxable ordinary income. For more information, see the "Investment Property Tax Advantages:
Deducting Losses" article in the "Real Estate Investing" section.
Passive Investor
An individual or entity who invests in a project but does not participate in the active management or operations of
that investment. For more information, see the "Investment Property Tax Advantages: Deducting Losses" article
Pay Stubs
Attachments to an employee's paycheck that summarize the gross earnings, deductions and net earnings for the
pay period. Most pay stubs also summarize the year-to-date earnings and deductions.
Payback Method
Any calculation measurement that produces a multiplier used in real estate investment analysis.
Payment Cap
A limit on the amount that an ARM loan's monthly payment may increase or decrease during an interest rate
adjustment. Although the ARM's interest rate may increase, the actual increase to the monthly payment will be
limited to the maximum set by the payment cap. Unfortunately, many payment caps incur negative amortization.
For more information, see the "ARM Loans" article in the "Loan Programs" section.
Payoff Statement
The lender invoice indicating the amount required to pay off the balance of a loan or debt obligation. Mortgage
loans are usually paid off in the course of a refinance or when the property securing the loan is sold. For more
information, see the "Refinance Loans" article in the "Loan Programs" section.
Per Diem
Latin phrase meaning "for each day." With mortgage loans, per diem is normally used with payoff statements to
indicate the daily interest rate charge.
Percentage Lease
A lease arrangement used with many commercial retail properties, in which the lessee's rent is based on the
gross business revenue that the lessee generates through the leased premises. Such an arrangement would
require continuous and full financial disclosure by the tenant of the tenant's business activities. This may be
either a gross lease or net lease arrangement, but there is usually a minimum rent amount and a recapture
clause allowing the lessor to reclaim the property if minimum sales are not met. For more information, see the
"All About Leases" article in the "Real Estate In-Depth" section.
Percolation
The porousness of an area allowing drainage of water into the ground. This affects septic tank and wetland
requirements, which may increase a homeowner’s expenses.
Perfecting the Title
See Clear Title entry.
Performance Bond
A guarantee that contracted work will be completed as agreed. Contractors may be required to provide a
performance bond before beginning work. If the contractor is unable to complete the work as agreed, the bond
insurer will provide funds to obtain another contractor who will complete the construction. For more information,
see the "Construction Loan" article in the "Loan Programs" section.
Perimeter Space
The defined area located along the outer borders of a property.
Period (ARM)
The length of time between rate and/or payment adjustments for adjustable-rate mortgage (ARM) loans. For
example, a one-year ARM adjust rates and payments every twelve months. For more information, see the "ARM
Loans" article in the "Loan Programs" section.
Periodic Cap
With most ARM loans, interest rate adjustments from one period to the next period are normally limited by the
periodic cap. For more information, see the "ARM Loans" article in the "Loan Programs" section.
Periodic Estate
A type of leasehold estate that does not describe a specific expiration date. The lease is automatically renewed
each time the periodic rent is paid and received. The lessee may leave at any time; while the lessor may
terminate the lease with a proper notice (one week for weekly periods; one month for monthly periods; and 3 to 6
months for a year-to-year period). For more information, see the "All About Leases" article in the "Real Estate In-
Depth" section.
Permanent Financing
Similar to an end loan, permanent financing refers to a long-term mortgage loan that is normally used to
refinance or replace a short-term construction loan. For more information, see the "Construction Loan" article in
the "Loan Programs" section.
Personal Guarantee
A guarantee provided by an individual as endorsement for a debt. In cases of default, the personal guarantee
makes the debt a personal liability and allows the lender to pursue the individual for settlement of the obligation.
Compare with Non-Recourse Loan entry. For more information, see the "Mortgage Deed and Promissory Note"
Personal Loan
A type of financing that normally has no collateral. Often called signature or unsecured loans, personal loans
provide the borrower with funds with no collateral requirement. Credit cards can be considered types of personal
financing because they do not require collateral. Personal loans typically have higher rates and require better
credit, because of the higher risks involved. For more information, see the "Analyzing Liabilities" and "Analyzing
Credit Reports" articles in the "Loan Process" section.
Personal Property
Any possession of value that is not real estate.
Personalty
All assets and properties that are not permanently attached to the land. See Fixture and chattel property entries.
For more information, see the "All About Fixtures" article in the "Real Estate In-Depth" section.
Pest Inspection
An inspection of a property that may be infested or property that is in an area with risks of infestation. Some loan
programs automatically require a pest inspection.
Physical Depreciation, Physical Deterioration
The property's decrease in value and usefulness caused by age, normal wear and tear, negligence or natural
influences. Such deterioration may be curable or incurable. For more information, see the "Analyzing Appraisal
Reports" article in the "Loan Process" section.
Physical Life
The period of time that a structure or property remains sound and capable of fulfilling its intended use. For more
information, see the "Analyzing Appraisal Reports" article in the "Loan Process" section.
Piggyback Loan
There are two definitions for piggybacks. Many use it to refer to construction-permanent loans, while most
lenders use it to refer to financing that closes two simultaneous loans on the same propert. For more information,
see the "Second Mortgage Loans" and "Construction Loan" articles in the "Loan Programs" section.
Pilaster
Column supports, often used with foundation walls.
Pipeless Furnace System
A type of gravity heating system used for smaller houses with low heating requirements. Heated air is distributed
through floor registers which also have separate cooled air intake grills attached to the same register.
Installation for these systems are cheap, but they do not distribute heat evenly.
PITI (Principal, Interest, Taxes, Insurance)
Acronym used to identify the projected housing payment components of mortgage loan principal and interest,
(real estate) taxes and all insurance. For more information, see the "Housing Payments" article in the "Mortgage
Industry" section.
Plank and Beam Roof
A style of roof framing that provides a wider expanse of space beneath the roof. The ridge beam is supported at
either ends by posts. Instead of rafters, sloping transverse beams connect to the side of the ridge beam on one
end and to a load-bearing post--usually along the external wall--on the other end of the transverse beam. Roof
planks are then attached parallel to the ridge beam and perpendicular to the transverse beam.
For wider structures additional longitudinal beams, supported by posts, may be added between the ridge beam
and the walls to provide additional support. With such structures, the transverse beams are often eliminated.
Instead, the roof planks are attached perpendicular to the longitudinal beams.
Planned Unit Development (PUD)
A comprehensive land development plan, used primarily in the planning and construction of residential areas,
that provides for shared properties or obligations. Townhouses or subdivisions in unincorporated areas may be
developed as PUDs and have homeowners associations to maintain those responsibilities within the project
confines, such as snow removal, road repair and greenbelt maintenance. For more information, see the "PUDs
and Townhouses" article in the "Real Estate In-Depth" section.
Planning Department
Local municipal or county authority responsible for management and overview of development within the town,
city or county boundaries. For more information, see the "Zoning and Building Codes" article in the "Real Estate
In-Depth" section.
Plasterboard
See Drywall entry.
Plat
The actual drawing of one or more parcels of land, with a focus on the division, subdivision or part of the
subdivided property. See also the survey entry. For more information, see the "Surveys and Legal Description"
Plat Act
Laws used by some states that specify the smallest parcel of land that can be subdivided and sold. For more
information, see the "Surveys and Legal Description" article in the "Real Estate In-Depth" section.
Plat Book
A public record, usually maintained by the local county government, that contains the maps of property parcels,
streets and subdivisions. Sometimes called the map book, the plat book contains plat maps and is central to the
Plat of Survey system. For more information, see the "Surveys and Legal Description" article in the "Real Estate
In-Depth" section.
Plat Map
The recorded survey used in the Plat of Survey system, which describes property with recorded lots, blocks and
tracts--and which become part of the legal description. This also indicates public streets, lot sizes and utility
easements. For more information, see the "Surveys and Legal Description" article in the "Real Estate In-Depth"
section.
Plat Method
See the Plat of Survey System entry.
Plat of Survey System
Sometimes called the Recorded Plat or Lot-Block-Tract method, this system is one of the three common
methods of surveying property. This system is used in urban areas and relies on surveyors' plat maps that have
been recorded with the county and placed in the plat book. Compare with Rectangular Survey System and
Metes & Bounds method. For more information, see the "Surveys and Legal Description" article in the "Real
Platform Frame
Sometimes called a western frame, the platform frame is a variation of the balloon frame method of structure
frame construction. It is now the most common method used for one- and two-story homes. With platform
frames, only one floor is built at a time, and each floor serves as a platform for the next story. Unlike standard
balloon frames, platform framing uses shorter and less expensive studs--and the platform barrier also offers
somewhat better fire protection. It is also an easier method, as wall studs are normally nailed to upper and lower
plates; the pre-fab frame is then raised into place and anchored to the sill.
Pledged Account Mortgage (PAM)
A mortgage plan in which the borrower deposits a portion of the down payment in an escrow account, in
exchange for initially lower monthly payments. Each month, the lender withdraws money from the escrow to
supplement the borrower's payment. For more information, see the "Loan Programs" section.
Plot Plan
A schematic or plat that displays the intended or current use for a parcel of land. For more information, see the
Plottage
A principal of value used in appraisals, wherein adjacent lots are merged to produce a land value that is higher
than the sum of the values of the individual lots. For more information, see the "Analyzing Appraisal Reports"
Plywood
A popular building material consisting of panels glued together in criss-cross pattern. Some may have a lumber
core. Plywood is normally graded A through D, depending on quality. CDX plywood is a C-grade and D-grade
board with an external glue.
Point of Beginning (POB)

A monument or marker used to establish boundaries in a metes and bounds method of surveying. The
boundaries are described by beginning and ending at the point of beginning. For more information, see the
Point
A unit of measure for charges on loans; one point is 1 percent of the loan amount. For example, if the borrower
is assessed a 2.00-point discount fee on a $150,000 loan, that borrower must pay $3,000 ($150,000 x 2.00%) as
the discount fee. For more information, see the "About the Good Faith Estimate" article in the "Applying for a
Loan" section.
Police Powers
Legal terminology referring to one of the four basic government powers, from which the government's right to
regulate private property arises. Enabling legislation by state governments allow local governments (county and
city) to exercise certain police powers. For more information, see the "Real Estate Introduction" article in the
Portfolio Income
Taxable ordinary income that arises from interest, capital gains , royalties, stock dividends and annuity income.
Compare this with active and passive income. For more information, see the "Investment Property Tax
Advantages: Deducting Losses" article in the "Real Estate Investing" section.
Portfolio Loan
Mortgage loans that are not directed to the secondary mortgage market or are intentionally kept by the lending
institution are called portfolio loans. Lenders usually tailor their portfolio loans with more lenient guidelines (in
certain aspects) than conforming loans sold to Fannie Mae (FNMA) and Freddie Mac (FHLMC). For more
information, see the "History of the Mortgage Industry" article in the "Mortgage Industry" section.
Positive Easement
A type of easement that allows a landowner to use another persons property. For example, the owner of a
landlocked property can get an easement to traverse a neighbor's property to get in or out. Compare this to
negative easement. For more information, see the "All About Easements" article in the "Real Estate In-Depth"
section.
Possession
Legal term referring to the right of a property owner to occupy property. In a lease arrangement, the property
owner's right becomes a constructive possession by right of title. For more information, see the "All About
Post and Beam Frame

A variation of the balloon frame and platform frame, which offers wider open spans within the building. Just as
with platform framing, the walls studs only extend from floor to floor, instead of going all the way to the top of the
building. The larger posts are used to provide concentrated load bearing in certain areas to allow wider rooms.
Beams are attached to the posts to either support the floor above or the roof.
Powder Post Beetle
A wood-damaging insect that bores small round holes into wood. For more information, see the Infestation entry.
Power of Attorney
An agency relationship by which a principal authorizes an agent or representative to act as the principal's
attorney or duly authorized representative. The three common types of power of attorney relationships are the
unlimited, general and specific power of attorney relationships.
Power of Sale Clause
A provision in the mortgage deed that allows the lender to sell the property upon the borrower's default on his or
her obligation, without a foreclosure suit. This is common with deeds of trust or in title theory states. The lender
simply delivers and records a notice of default, and then sells the property at auction. If the selling price is
insufficient, the lender may further sue for a deficiency judgment. Similar to the deed in lieu of foreclosure , this
is a form of non-judicial foreclosure . For more information, see the "Mortgage Deed and Promissory Note" and
"Everything You Need to Know About Foreclosures" articles in the "Real Estate In-Depth" section.
Pre-Cut Housing
A type of manufactured home construction, in which the building material are delivered to the home site pre-cut
and ready to assemble. The pre-cut style eliminates or reduces the need for extensive custom cutting and
adjustments at the construction site. Unlike the panelized home type, the pre-cut house normally does not pre-
assemble room sections at the factory. For more information, see the "Analyzing Property Types" article in the
Pre-lease
To obtain a conditional lease commitment prior completion of the improvements and issuance of proper
certificates of occupancy. For more information, see the "Commercial Property Development" article in the "Real
Preliminary Approval, Pre-Approval
The term used to describe the preliminary “underwriting” review and acceptance of the applicant’s credit, income
and employment qualification. For more information, see the Preapprove Mortgage article. To obtain an actual
preapproval, see the Apply for Preapproval form.
Preliminary Cost Estimate
The initial "ballpark figure" projection of improvement costs for a planned project
Glossary—Q/R
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Quadraplex
A residential property containing four apartment units within one structure.
Qualified Fee
See the Fee Simple Defeasible entry.
Qualifying Income
The applicant's and property income used to calculate the borrower's ability to repay a loan. Lenders apply limits
and restrictions on what type of income can be used, and how they can be calculated. For more information, see
the "Analyzing Employment & Income" article in the "Loan Process" section.
Qualifying Rate
The interest rate used to calculate the borrower's monthly payment qualification. With ARM loans, which usually
have low teaser rates, the interest rate used for income-qualification is usually 2.00 percentage points higher
than the low start rate. For more information, see the "ARM Loans" article in the "Loan Programs" section.
Quantity Survey Method
A method used to estimate construction, reproduction and replacement costs that compiles an itemization of the
materials required to replace the current improvements with detailed estimates of the current costs for those
materials and required installation and building costs. Other methods include the square foot, cubic foot, unit in
place and index methods. For more information, see the "Surveys and Legal Description" article in the "Real
Queen Anne
A popular variation of the traditional Victorian style of housing. The Queen Anne is considered a late Victorian
style and is identifiable by its symmetrical design and the use of a mix of materials, patterns, shapes and colors.
Victorian homes are more decorative than most American housing, and its decorative details come from many
architectural styles, including Gothic, Renaissance, Romanesque and Colonial American.
Quiet Enjoyment
A legal term used with titles and leases--but with different applications. In most leases, the property owner
promises to provide the tenant with the right to use the property in peace and without undue disturbance. With
title conveyances, see the Covenant of Quiet Enjoyment entry. For more information, see the "All About Leases"
Quiet Title Suit
A suit to remove a defect, cloud or questionable claim against the title to the property. For more information, see
the "Marketable Title" and "Title and title insurance " articles in the "Real Estate In-Depth" section.
Quitclaim Deed
A type of deed used to convey property from a grantor to a grantee. Quitclaim deeds provide little or no
guarantees to the grantee; they are normally used to cure minor or technical defects in the title. For more
information, see the "All About Deeds" article in the "Real Estate In-Depth" section.
R-Value, R-Rating
A measurement of the effectiveness of an insulation material, based on the material's resistance to heat flow.
Insulation with higher R-values are better able to prevent heat loss and heat gain. Typically, minimum R-Values
for walls are 11, for ceilings are 9 and for floors over crawl spaces 13. However, colder climates may require R-
19 for walls, R-33 for ceilings and R-22 for floors.
Radon
An invisible gas with no odor produced naturally by the decay of uranium. It enters homes through minuscule
cracks. Unfortunately, improved insulation technology has caused radon to be trapped in homes. The U.S.
Surgeon General announced that radon is the second-leading cause of lung cancer, after smoking. Fortunately,
radon now can be quickly detected and professionally prevented.
Rafter
With most buildings, the rafter is the skeleton base of the roof. These planks are normally cut with notched ends
to fit the tops of the wall plate of the highest floor. The other ends are then angled to lean against a central board
called a ridge board. To provide more support, the paired rafters are connected with collar beams or created
with a truss assembly.
Rail (Door)
Construction term referring to the wide horizontal strip at the top, bottom and often middle of the door face. The
rail and stile essentially frame the panels of the popular panel door. For more information about the parts and
types of doors, see the Door entry.
Rail (Window)
The outer parts of the window sash. The rail is not the track on which sliding windows glide. The rails are part of
the sash, not the window frame. For more information about the parts and styles of windows, see the Windows
entry.
Raised Ranch
See Bi-Level entry.
Rake
The part of a gable roof that hangs over the gable end.
Ranch
Sometimes called a "one-story house," this contemporary style of houses limits the structure to one level, with an
optional basement. The elimination of stairs and a second level makes maintenance easier--as well as making
basic living easier for senior citizens. The ranch style normally has a larger footprint than multi-story residences,
so as to offer sufficient living space. This increases the required foundation, so actual construction costs will
often be the same as for a two-story home.
Range
A real estate surveying term used with the rectangular survey system, ranges refer to the columns of land
between range lines. Ranges are typically numbered east or west of principal meridians. Ranges are normally
used in conjunction with base lines, range lines, principal meridians, township lines, townships and sections. For
more information, see the "Surveys and Legal Description" article in the "Real Estate In-Depth" section.
Range Line
A real estate surveying term used with the rectangular survey system, range lines refer to identified lines running
north-to-south across the nation, from which specific parcels of property are measured. Range lines are six
miles apart, which create columns called ranges. Townships are created from the intersection of range lines and
township lines. Range lines are normally used in conjunction with base lines, principal meridians, township lines,
townships and sections. For more information, see the "Surveys and Legal Description" article in the "Real
Rate & Term Refinance
A refinance that repays the principal balance of an existing loan, plus (optional) the closing costs, but does not
provide extra cash to the borrower. The new loan normally will have a different interest rate or term than the
original. For more information, see the "Refinance Loans" articles in the "Loan Programs" section.
Rate Lock
A loan registration with a lender that instructs the lender to set aside a certain amount of money for the borrower,
at a specified interest rate. When the rate is locked, both the lender and the borrower are committed to closing
and disbursing the loan with that interest rate—within the lock period. For more information, see the "About
Interest Rates" article in the "Mortgage Industry" section.
Rate of Return
A percentage measurement of revenue generated by an investment for an investor. This rate divides the
revenue received by the amount of the initial investment and is usually provided for a specific period. For
example, an investor buys a stock for $100 and receives $5 in dividends during the first year. That investment
generated a preliminary rate of return of 5%. For more information, see the "Real Estate Investment Analysis
Tools" article in the "Real Estate Investing" section.
Rate Sheet
The listing of interest rates for different loan programs, published by each lender. For more information, see the
"About Interest Rates" article in the "Mortgage Industry" section.
Raw Land
Land that is not improved or developed. For more information, see the "Real Estate Introduction" article in the
Real Assets
Real estate or real property owned by individual or corporation. For more information, see the "Real Estate
Introduction" article in the "Real Estate In-Depth" section.
Real Estate
The term real estate includes land and its minerals and resources, as well as any artificial improvements affixed
permanently to the property. For more information, see the "Real Estate Introduction" article in the "Real Estate
In-Depth" section.
Real Estate Agent
Any person or property who acts as a representative and marketing agent for a property owner, for the purpose
of selling a real estate property. For more information about real estate agents, see the Shop with Realtors
article (in the Home Buyer Guide section) or the "Selling Your Real Estate" article (in the "Real Estate In-Depth"
section).
Real Estate Attorney
A lawyer or attorney who specializes in real estate. Although not required, attorneys are highly recommended for
purchase transactions. They will review the purchase contract, monitor the processing and guide the buyer
through the closing. For more information, see the "Real Estate Attorneys" article in the "Homebuyer Guide"
section.
Real Estate Broker
A real estate agent who has been certified by the state or local regulating agency to operate a brokerage office.
Only brokers can receive commission from brokered real estate sales; real estate salespeople working for the
broker are designated agents and receive their compensation from the broker. For more information, see the
"Selling Your Real Estate" article in the "Real Estate In-Depth" section.
Real Estate Exchange
A tax-free or tax-deferred exchange of similar properties, permitted under Section 1031 of the Internal Revenue
Code. As there is no sale, no capital gains are assessed unless one of the parties receives boot--or cash
consideration--in addition to the property received in the exchange. The capital gains taxes are essentially
deferred until the new owner sells the property for cash or like consideration. The most common types are
multiple exchanges or Starker exchanges. For more information, see the "All About Capital Gains: Tax-Free
Exchanges" article in the "Real Estate Investing" section.
Real Estate Investment Trust
A REIT is a trust that invests in real estate or real estate mortgage loans. It enjoys several tax advantages over
investments in a standard real estate corporation. However, REITs are required to regularly disburse 95% of
their profits to their investors. See also the Equity REIT and Mortgage REIT entries. For more information, see
the "Real Estate Trusts" article in the "Real Estate In-Depth" section.
Real Estate Mortgage Investment Conduit (REMIC)
A type of security established by the Tax Reform Act of 1986, which allowed REMICs to issue investor-grade
securities backed by a pool of mortgages. Similar to mortgage-backed securities, REMICs offered multiple
classes of investment options: residual interest holders were paid as underlying loans were paid off; regular
interest holders were paid on a fixed or variable rate.
Real Estate Owned (REO) Properties
Lenders who have obtained properties through foreclosure or default action often label these as REO properties.
For more information, see the "Everything You Want To Know About Foreclosures" article in the "Real Estate In-
Depth" section.
Real Estate Settlement Procedures Act (RESPA)
Federal law applicable for residential property closings that requires lenders to disclose all known or estimated
settlement costs for new loans, as well as provide borrower with specified disclosures regarding the loan terms,
features and costs. RESPA is not applicable with all-cash, installment or assumption purchases.
In addition, RESPA prohibits kickbacks between lenders and service providers, limits the reserve buffer for
escrow accounts, prohibit lenders from charging a fee to prepare a settlement statement and requiring lenders to
provide the settlement statement at least one day prior to closing. For more information, see the "Regulatory
Requirements" article in the "Mortgage Industry" section.
Real Estate Tax
Often called property tax, real estate taxes are government assessments on real estate property. With mortgage
financing, the local, county or state tax assessment on real estate property is considered part of the monthly
housing obligation. For more information, see the "Real Estate Taxes and Special Assessments" article in the
Real Property
A legal concept referring to the property rights involved with ownership of real estate. Real estate includes the
land and all improvements (natural or artificial) permanently attached; while property refers to the bundle of rights
involved with ownership. For more information, see the "Real Estate Introduction" article in the "Real Estate In-
Depth" section.
Realized Gain
A term in real estate exchanges referring to a gain that one party has received. However, this gain is not
necessarily subject to taxes. Compare with Recognized Gain entry. For more information, see the "All About
Capital Gains: Tax-Free Exchanges" article in the "Real Estate Investing" section.
Realtor
This title is restricted to specific real estate brokers or agents who are members of the National Association of
Realtors, or one of its affiliated boards. See also the Real Estate Agent entry. For more information, see the
"Selling Your Real Estate" article in the "Real Estate In-Depth" section.
Recapture
The amount of gain charged by the IRS on the sale of depreciable property taken by the excess depreciation
taken over the straight line depreciation . For more information, see the "Investment Property Tax Advantages:
Deducting Depreciation" article in the "Real Estate Investing" section.
Recapture Clause
A provision in a contract allowing the individual or entity who grants an interest or right to take back that such
interests or rights under certain conditions.
Recertification Letter
A statement from the appraiser confirming the current validity of an old appraisal report. Recertifications are
often required by lenders when the appraisal report being submitted is more than three months old. The
appraiser is required to review current data and confirm that the former valuation is still applicable. For more
information, see the "Analyzing Apraisal Reports" article in the "Loan Process" section.
Recognized Gain
A term in real estate exchanges referring to the taxable portion of any gain that one party has received in the
course of the exchange. Compare with Realized Gain entry. For more information, see the "All About Capital
Gains: Tax-Free Exchanges" article in the "Real Estate Investing" section.
Reconciliation of Value
Most appraisal reports normally calculate at least two or three value estimates, using different approaches. The
three most common approaches to calculating value are comparison, income and (depreciated) cost. The official
appraised value, however, is based on a reconciliation of the separate valuation approaches. For more
information, see the "Analyzing Apraisal Reports" article in the "Loan Process" section.
Reconstruction
In the real estate development and construction arena, reconstruction is a combination of repair and replacement
of existing elements. Compare with the Repair, Renovation or Alteration entries. For more information, see the
"Rehab Development" article in the "Real Estate Investing" section.
Recording
Filing a legal instrument in the public records of the county. The title company is normally responsible for
recording the new title and mortgage deeds from each purchase or refinance closing. For more information, see
the "Recording" article in the "Real Estate In-Depth" section.
Recording Fee
Charges levied by the local government or recording office, for the purpose of recording a deed, mortgage note
or other legal documents. For more information, see the "Recording" article in the "Real Estate In-Depth" section.
Records Office, Recorder of Deeds
The governmental department or office responsible for maintaining or updating real estate and other records.
This recorder is usually a county level office. The records office is most important for the real estate and
mortgage industry, as they make all real estate and mortgage transactions official. For more information, see the
"Recording" article in the "Real Estate In-Depth" section.
Recourse Loan
Unlike the non-recourse loan, this type of obligation does make the borrower personally liable for the debt,
especially in cases of default. For more information, see the "Mortgage Deed and Promissory Note" article in the
Recreational Property
Real estate term referring to either properties developed for primarily recreational amenities or homesites
offering recreational amenities. This category would include campgrounds, RV parks or homesites that offer
access to fishing, boating, skiing, etc. Compare with Entertainment Property entry. For more information, see the
"Commercial Property Development " article in the "Real Estate Investing" section.
Rectangular Survey System
Sometimes called the government survey or geodetic survey system, the rectangular survey system is one of the
three most common methods for surveying property. The rectangular survey method is often used in
combination with either the Metes & Bounds or Plat of Survey methods. The rectangular survey describes
property location as fractions of sections, which are part of townships, and provide distance measurements from
principal meridians, base lines and range lines. Because of the curvature of the earth, correction lines and guide
meridians are used to compensate. A typical legal description using this system includes the (1) portion of the
section, (2) section number, (3) township row, (4) range column and (5) name or number of the principal
merdian. For more information, see the "Surveys and Legal Description" article in the "Real Estate In-Depth"
section.
Recycling (Property)
Real estate term referring to the process of redeveloping an old structure or improvement to a different usage
that effectively extends its useful life. For more information, see the "Rehab Development" article in the "Real
Red Herring
A proposed investment prospectus that has not been approved by applicable government regulators.
Redemption Period
With tax sales and foreclosures, homeowners often have the option to redeem their home by paying off the tax
balance or foreclosure amount. To exercise this option and keep their home, borrowers must pay off any
required balance during the redemption period. See also the Right of Redemption entry. For more information,
see the "Everything You Want To Know About Foreclosures" article in the "Real Estate In-Depth" section.
Redlining
The unethical and fraudulent practice of refusing to provide loans, insurance coverage or financial services to the
residents of a particular area--without considering the qualifications of individual applicants. For more
information, see the "Real Estate Fraud" article in the "Real Estate In-Depth" section.
Referee's Deed
A type of deed that may be used to convey title to property in a foreclosure sale. For more information, see the
"Everything You Want To Know About Foreclosures" and "All About Deeds" articles in the "Real Estate In-Depth"
section.
Refinance
Loan obtained to repay an existing loan or to place an additional mortgage lien on property currently owned by
the borrower. For example, if a borrower owns a $200,000 property with absolutely no mortgage liens on it, that
borrower can obtain a cash-out refinance to liquidate some of the equity. For more information, see the
"Refinance Loans" article in the "Loan Programs" section.
Reflective Insulation
A type of insulation that usually consists of metal foil combined in layers, with insulating air spaces in between.
This is most commonly used for roofs, walls and floors above vented or unheated spaces. For more information
about types of insulation, see the Insulation entry.
Regional Shopping Center
Often called malls and supermalls, regional shopping centers are the largest category of retail shopping centers.
They usually contain multiple anchors and typically include about 100 or more smaller retail shops. Regional
centers normally offer more than 400,000 square feet of space. For more information, see the "Investing in Retail
Properties" article in the "Real Estate Investing" section.
Register
A grill-covered opening or device through which cooled or heated air is projected into a room.
Regression
A principal of value used in appraisals, wherein the value of a superior property is decreased by being next to or
near poorer properties. The opposite is progression. For more information, see the "Analyzing Apraisal Reports"
Regulation D
The SEC regulation that describes the necessary conditions for a private placement exemption.
Regulation Z
See Truth-in-Lending Act entry.

Rehab, Rehabilitation
Improvements performed to existing structures. All or a substantial portion of the current building's basic
structure will remain. Rehabs can range from simple redecoration of internal structures to major redesign. For
more information, see the "Rehab Development" article in the "Real Estate Investing" section.
Rehabilitation Tax Credit
A federal tax credit available to developers who rehab commercial, non-residential buildings that were
constructed prior to 1939. For more information, see the "Rehab Development" article in the "Real Estate
Investing" section.
REIT
See the Real Estate Investment Trust entry.
Rejection Letter, Denial Letter
The formal disclosure to the applicant of the lender's denial of the loan application and the reasons for rejection.
For more information, see the "Overview of Loan Processing" article in the "Loan Process" section.
Release Clause
The formal element in the mortgage that releases the mortgage lien after all payments to satisfy the debt
obligation have been made. For more information, see the "Mortgage Deeds and Promissory Notes" article in the
Release Deed
A type of deed used by lenders to release their claims against a property that is in a deed of trust. For more
information, see the "Mortgage Deeds and Promissory Notes" and "All About Deeds" articles in the "Real Estate
In-Depth" section.
Release of Lien
Legal document issued by a lien holder upon satisfaction of debt to remove its lien against a property. Also
called satisfaction of mortgage, this legal document must be recorded—usually at the mortgagor’s cost—to
officially remove the lien from the title.For more information, see the "Mortgage Deeds and Promissory Notes"
and "All About Deeds" articles in the "Real Estate In-Depth" section.
Reliction
Gradual subsiding or withdrawal of water that expands a parcel of property. Reliction is not the same as
accretion that adds land to a parcel of property but not necessarily space. For more information, see the
"Environmental Issues" article in the "Real Estate In-Depth" section.
Relocation Clause
A provision in a lease agreement that gives the property owner or manager the right to relocate the tenant to
another, comparable site. For more information, see the All About Leases" article in the "Real Estate In-Depth"
section.
Remainder Interest
Legal real estate term referring to third parties receiving title to fee simple defeasible estates that have ended.
When a fee simple defeasible estate ends, the title passes to a reversion interest (to the original grantor or that
grantor's heir) or to an identified third party. For more information, see the "Title and Estates in Real Property"
Rendering
An illustration created by a graphic artist to provide a three-dimensional image of the proposed improvements or
development.
Renegotiate
The process or attempt to legally revise the terms of a contract or agreement. Unless the agreement specifically
leaves open the renegotiation of certain elements, the other party will commonly have the right to approve or
decline a request to renegotiate. For more information, see the "Real Estate Sales Contract" article in the "Real
Renegotiated Rate Mortgage (RRM)
See Adjustable Rate Mortgage Loan entry.
Renewal Option
A provision in a lease agreement, allowing the tenant to renew the lease agreement, within certain terms. For
more information, see the All About Leases" article in the "Real Estate In-Depth" section.
Renovation
In the real estate development and construction arena, renovation involves replacing current elements of the
building with new materials or elements that serve the same purpose. Compare with the Repair, Alteration or
Reconstruction entries. For more information, see the "Rehab Development" article in the "Real Estate Investing"
section.
Rent
The consideration received from a lessee (tenant), as set forth in the lease agreement, for the lease rights to a
property. For more information, see the All About Leases" article in the "Real Estate In-Depth" section.
Rent Control
A form of government-imposed price control on rental rates. Such regulations normally limit the amount of rent
that a tenant may be charged or restrict any increases in rental rates that a property owner may impose. For
more information, see the "Basics of Property Management" article in the "Real Estate Investing" section.
Rent Loss Insurance
The insurance coverage commonly required for many revenue properties to cover the potential loss of rental
income expected for periods of vacancy that may be incurred because of an accident. For more information, see
the "Hazard Insurance" article in the "Mortgage Industry" section.
Rent Roll
A financial statement listing the tenants in a subject property and identifying their unit number, lease terms and
rent. For more information, see the "Basics of Property Management" article in the "Real Estate Investing"
section. We have also provided a sample (PDF) copy of a rent roll.
Rent Schedule
A display of the rental rates being charged for the different units or unit types in a rental property. For more
Rent-Up Period
The amount of time required to completely lease the available units or space in a property after construction has
been completed. For more information, see the "Basics of Property Management" article in the "Real Estate
Investing" section.
Rentable Area
See Net Leasable Area entry.
Rental Concessions
Concessions made by the property owner or manager in order to induce a prospective lessee to sign a lease
agreement. For more information, see the "Basics of Property Management" article in the "Real Estate Investing"
section.
Repair
Corrective work to a property that returns it to its former functional condition, without extending its useful life. For
Replacement Cost Approach
Also called the cost approach, this is a method used by appraisers to estimate the value of a property, based on
the cost to produce a similar property. This approach begins with the current cost of the land and the
improvements, but then depreciates that estimate according to the age and condition of the subject property.
The elements of the replacement approach use one of the following methods to estimate unit costs: square foot,
cubic foot, unit in place, quantity survey and index. Contrast this with the reproduction cost approach. For more
information, see the "Analyzing Apraisal Reports" article (in the "Loan Process" section) and the "Hazard
Insurance" article (in the "Mortgage Industry" section).
Reproduction Cost Approach
A method used in appraising property value that seeks to duplicate the improvements as exactly as originally
constructed. No depreciation adjustments for age or condition. The elements of the reproduction approach use
one of the following methods to estimate unit costs: square foot, cubic foot, unit in place, quantity survey and
index. Compare with replacement cost approach. For more information, see the "Analyzing Apraisal Reports"
article (in the "Loan Process" section) and the "Hazard Insurance" article (in the "Mortgage Industry" section).
Resale Proceeds
The net profit that a person receives from the sale of a property, after paying off all liens and closing costs. For
more information, see the "Closings and Transactions" article in the "Real Estate In-Depth" section.
Rescission
The act of withdrawing an agreement. Federal regulations provide homeowners who are refinancing their
residence to have three full business days during which they can rescind any refinance or equity mortgage loan.
Rescission, Three-day Right of
After a residential loan is approved and closed, the borrower has three business days during which time the loan
may be rescinded. If the borrower does change his or her mind and rejects the loan, the borrower may still be
liable for certain origination costs. The rescission period is applicable for mortgage refinances on owner-
occupied residential properties. However, there are NO rescission period required for purchase transactions or
refinances on investment properties. For more information, see the "Refinance Loan" article in the "Loan
Programs" section.
Reserve Requirement
Funds that borrowers must have prior to closing to demonstrate that they have the ability to make monthly
payments. Mortgage lenders often require loan applicants to demonstrate that they have sufficient funds for the
down payment, closing costs, prepaid expenses, escrow deposits and reserve requirements. The reserve
requirement is usually two months of PITI payments for homebuyers. It does not have to be paid to the lender;
the borrower just has to show that he or she has the funds. For more information, see the "Escrow Accounts"
article in the "Homebuyer Guide" section.
Resident Manager
A property manager of a multi-unit residential property, who occupies one of the units in the complex. For more
Residential Loan
For conforming purposes, mortgage loans for 1-4 unit, purely residential properties. For more information, see
the "Conforming Loan Programs" article in the "Loan Programs" section.
Residential Property
Property that is used for residential purposes. In the mortgage lending industry, residential property are limited
to one-to-four unit properties, of which all units are used for residential purposes. For more information, see the
Resources Conservation & Recovery Act
A 1976 federal legislation defining hazardous substances and regulating their transfer, storage and handling. A
1984 amendment expanded the EPA's regulatory role to underground storage tanks (UST). For more
information, see the "Environmental Issues" article in the "Real Estate In-Depth" section.
RESPA
See Real Estate Settlement Procedures Act entry.
Restrictive Covenant
Private restrictions 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. For more information, see the "All About Deeds" and "Marketable Title" articles in the
Resyndication
Interests or shares in a partnership that have been resold to new investors.
Retail Property
Real estate providing operating space for businesses to sell goods and services directly to customers. They
typically include shopping centers, strip centers, shopping malls and standalone stores, For more information,
see the "Investing in Retail Properties" article in the "Real Estate Investing" section.
Retainage
Any funds that have been set aside per the construction contract until the contractor has completed contractual
obligations. For more information, see the "Construction Loans" article in the "Loan Programs" section.
Return of Capital
The return of the original investor's capital contribution, not directly taxable. For more information, see the "Real
Return on Equity
The percentage expression of the amount that is returned to the investor on his or her original investment. For
Revenue Sharing
The process of distributing any profit or tax benefits among the investors in a partnership.
Reverse Annuity Mortgage (RAM), Reverse Mortgage
A type of mortgage designed to use the equity value of a home as collateral for installment payments to the
borrower, usually so as to supplement an elderly borrower's living expenses. With a Reverse mortgage, the
homeowner actually receives payments from the lender. The loan is recouped when the borrower dies and the
property is sold or inherited by someone who can make the payments. Note that the home cannot be foreclosed
as long as the borrower is alive and occupying the subject property. For more information, see the "Reverse
Mortgages" article in the "Loan Programs" section.
Reverse Leverage
Investment term referring to a situation in which the interest rate on the property's debt servicing outpaces the
owner's financial benefits from the property.
Reversion, Reversion Interest
Legal real estate term referring to the transfer of a property's title back to the grantor (or grantor's heir) when a
fee simple defeasible estate terminates. When such estates end, the title can pass to such a reversion interest
or to a third party remainder interest. For more information, see the "Title and Estates in Real Property" article in
Revocable Trust
A type of living trust in which the original owner can be both the trustor and beneficiary and can retain the control
and benefits of the trust property. For more information, see the "Real Estate Trusts" article in the "Real Estate In-
Depth" section.
Revolving Debt, Loan
Liabilities, such as major credit cards, that do not require immediate full payment of billings or have pre-
established debt and payment balances. For more information, see the "Analyzing Liabilities" article in the "Loan
Process" section.
Rider
An addition to a contract, deed, note or covenant that amends or clarifies the original terms indicated on the
document.
Ridge Board
A beam that forms the uppermost spine of the roof. Rafters are attached to the ridge board, while the other end
is usually notched to fit to the uppermost external walls.
Right of First Refusal
Elements of lease, cooperative and condominium agreements that offer the holder the right to purchase or
possess the subject property. With leases, the right of first refusal would allow the tenant to get the first chance
to buy the property or lease additional space if the landlord seeks to sell or lease the property. With
condominiums and cooperatives, the association or co-op may have the right to buy the property before the
seller officially puts it on the market. For more information, see the "All About Leases" or "Condominiums"
Right of Partition
A remedy available to co-owners in a joint tenancy or tenancy in common, allowing any co-owner to sue for
dissolution of the co-ownership arrangement and distribution of the assets. For more information, see the
"Spousal and Co-ownership Rights" article in the "Real Estate In-Depth" section.
Right of Redemption
The right of a distressed borrower to recover property that has been transferred from their ownership, usually
during a foreclosure process. To exercise this right, the borrower will have to pay off the debt obligation. Most
property owners will have both an equitable right of redemption before the tax sale or foreclosure auction and a
statutory right after the sale. For more information, see the "Everything You Want To Know About Foreclosures"
Right of Survivorship
Legal real estate term referring to the right of surviving co-owners to receive the ownership interest in the subject
property of the co-owner who dies--instead of to the deceased's heirs. For more information, see the Joint
Tenancy entry. For more information, see the "Spousal and Co-ownership Rights" article in the "Real Estate In-
Depth" section.
Right of Way
Often called an easement, the right of way is a privilege to pass through the property of another owner. For more
Riparian Rights
Legal concept concerning water rights for property owners whose land abuts a brook, stream, river or other
flowing bodies of water. The extent of ownership depends on the navigability of the water. With navigable rivers
and canals, property ownership only extends to the high-water mark at the water's edge. With non-navigable
bodies of water, property ownership extends to the middle of the water stream. For more information, see the
"Real Estate Introduction" article in the "Real Estate In-Depth" section.
Riser (Stair)
Construction term referring to the vertical height of a stairway step from tread to tread. Both the riser and tread
are supported by the stringer.
Risk
The possibility that an investment will fail to produce a positive return.
Risk Return Relationship
Financial investment concept that posits high returns come primarily from high risk investments, and vice versa.
For more information, see the "Real Estate Investment Analysis Tools" article in the "Real Estate Investing"
section.
Rod
A measurement of distance equal to about 16.5 feet or 5.5 yards. For more information, see the "Surveys and
Legal Description" article in the "Real Estate In-Depth" section.
Rollover Mortgage
A mortgage loan program that structures periodic adjustments to its interest rate. For more information, see the
"ARM Loans " article in the "Loan Programs" section.
Rollover Option
A provision sometimes included in purchase options that allow the potential buyer to renew the option for a
specified period, after paying specified amount. For more information, see the "Buying Real Estate with Option
Contracts" article in the "Creative Financing" section.
Roof
The external top cover of a structure. There are many types of roofs now used in construction. The most
common residential styles are the flat, gable, gambrel, hipped and mansard roofs. In addition, the frame used to
support the roof affects the availability of usable space underneath the roof. Typical roof framing styles are
conventional, plank-and-beam, sloped joist and truss frames.
Rough Plumbing
A term used to describe the installation of pipes and drains through walls, usually during the building process.
Roughed-in plumbing is followed by finish plumbing, during which a plumber connects fixtures to the pipes and
drains.
Routine Maintenance
Regularly and frequently occurring maintenance, such as painting, cleaning and minor repairs. Compare with
preventive and corrective maintenance. For more information, see the "Basics of Property Management" article
Royalty Payments
With oil or gas leases, the landowner receives royalty payments from drillers who have either oil leases or gas
leases. The royalty payments are normally based on the amount of oil or gas extracted. For more information,
see the "Subsurface Rights" article in the "Real Estate In-Depth" section.
Run (Stair)
Construction term referring to the horizontal length of a stairway. Compare with Riser and Tread entries.
Rural
A label applied to locations outside of metropolitan (urban and suburban) areas. Such areas usually have few
developments and are often primarily agricultural, wilderness or non-developed public land. For more
information, see the "Real Estate Introduction" article in the "Real Estate In-Depth" section.
Rural Housing Service (RHS) Loan
RHS loans are the offshoot of the former FmHA programs, which sought to help housing in agricultural and rural
areas of the country.
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Sale Leaseback
A real estate investment arrangement in which the current owner simultaneously sells a property but then leases
it back from the buyer. This guarantees the new owner with a rental stream, making it a more attractive
investment for the buyer; for the seller, leasing the property offers liquidity and several operating tax advantages.
For more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Sales Contract
An agreement by which property rights are transferred from one party to another. For more information, see the
"Real Estate Sales Contract" article in the "Real Estate In-Depth" section.
Salvage Value
In the real estate market, a property's salvage value is its final sale value, once it has exhausted its useful life.
For example, the salvage value for a residence that has completely burned down is probably only the land on
which the embers smolder. For more information, see the "Analyzing Appraisal Reports" article in the "Loan
Process" section.
Sandwich Lease
In a subletting situation, the original lease between the lessor (landlord) and the initial lessee (tenant) is
sometimes called a sandwich lease. Legally, that lease is held by the initial tenant. Thus, that tenant's lease
rights are sandwiched between the lease rights of the subtenant and the ownership rights of the landlord. For
more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Sash
Construction term referring to the part of the window that actually contains the glass panes. Sashes can be
either movable or fixed. For more information about the parts and styles of windows, see the Windows entry.
Satisfaction of Mortgage
The verification instrument issued by the lender to indicate that the mortgage debt has been fully paid. In
contrast, a deed of trust uses a release deed. This legal document must be recorded—usually at the
mortgagor’s cost—to officially remove the lien from the title. For more information, see the "Mortgage Deeds and
Promissory Notes" article in the "Real Estate In-Depth" section.
Save Harmless
Similar to a hold harmless provision, to save harmless is a legal term referring to the process of indemnifying
another person. In this way, the party issuing the save harmless guarantee assumes all obligations for liabilities
that may arise from a specific issue. For more information, see the "Title and title insurance " article in the "Real
Savings and Loan Association (S&L)
A banking institution that solicits deposits from member customers and then lends (primarily real estate funds) to
both its members and the wider community.
SBA Loan
A loan guaranteed by the Small Business Administration. These are business loans that are designed to assist
small businesses with their capital, mortgage, expansion or start-up needs.
Scavenger
Trash-collection service.
Scheduled Gross Income
The projected total rental revenue expected if all rental units in a property were occupied by tenants. This figure
does not take into account possible rent concessions and vacancy factors. For more information, see the "Basics
of Property Management" article in the "Real Estate Investing" section.
Schematic Design
A structural diagram of the proposed project, which takes into account all client requirements, regulatory
standards, zoning and the proposed construction budget and program.
Screen Door
A type of door found in many residential properties that acts to keep out insects while providing additional
ventilation to the house. Screen doors are normally placed on the outside of the regular exterior doors. Unless
the homeowner has a combination door, screen doors are normally replaced by storm doors during inclement
seasons. For more information about the parts and types of doors, see the Door entry.
Seasoning Requirement-Funds
Conforming guidelines demand that any funds used to satisfy down payment, closing cost and reserve
requirements must come from the borrower's own resources. On a practical level, funds must be "seasoned" in
the applicant's possession for at least two to three months. This typically entails two to three months of bank
statements or other documentation demonstrating that funds have been in the applicant's possession. Note,
however, that recent wages and salaries are often acceptable as sources for unseasoned funds. For more
information, see the "Analyzing Assets" article in the "Loan Process" section.
Seasoning Requirement-Mortgage
With conforming loans, rate-and-term (No cash-out) refinances have instated seasoning guidelines on the
second and other junior mortgages. If the refinance will be paying off a second mortgage with a rate-and-term
refinance, that second mortgage must be at least 12 months old. Otherwise, the borrower must use a cash-out
loan. What is the difference? Rate-and-term refinances allow LTVs in excess of 90%, while cash-out refinances
are normally limited to 75% LTV (80% for certain homes). For more information, see the "Refinance Loans"
Seasoning Requirement-Property
All conforming loan programs and most non-conforming programs have set seasoning requirements on the
appraised property value when refinancing. Remember that the loan is limited by the LTV, which with a
refinance is normally calculated against the appraised value. For example, an 80% LTV refinance on a property
appraised at $100,000 is an $80,000 loan amount. However, in the first twelve months after a purchase, the LTV
must be calculated against the lower of the purchase price or the appraised value. Thus, if the borrower has
purchased the property for half of its true market value, that equity is essentially unattainable (with conforming
loans) during the first twelve months. For more information, see the "Refinance Loans" article in the "Loan
Programs" section.
Second Home, Secondary Residence
A residence, such as a summer cabin, ski condominium or weekend house, that is suitable for year-round
occupancy but is only occupied by the borrower for a portion of the year. For more information, see the
Secondary Financing
In the mortgage market, secondary financing applies to any junior mortgage loans. For more information, see
the "Second Mortgages" article in the "Loan Programs" section.
Secondary Market
The market in which agencies (such as Fannie Mae or Freddie Mac) or large institutional investors purchase or
sell existing loans. Agencies often resell these loans in huge blocks as mortgage-backed securities, thus
replenishing the supply of funds available to lenders and borrowers. For more information, see the "History of the
Mortgage Industry" article in the "Morgage Industry" section.
Second Mortgage
The more common term for junior mortgage loans, which are recorded behind the first mortgage lien. For more
information, see the "Second Mortgages" article in the "Loan Programs" section.
Section
A real estate surveying term used with the rectangular survey system, sections refer to the one (1) square mile
(640-acre) divisions of property within a township. Each township contains 36 sections, with section #16
reserved for school usage. Sections are normally used in conjunction with base lines, range lines, principal
meridians, township lines and townships. With most survey descriptions, parcels are typically described as
fractions within a section. The 36 sections of each township are numbered with #1 beginning at the northeast
corner, proceeding westward to #6 at the northwest section; however, section #7 is immediately south of #6 and
the numbering continues eastward with #12 immediately below #1. Section #31 is at the southwest corner, and
section #36 is at the southeast corner. For more information, see the "Surveys and Legal Description" article in
Section 1031 Exchange
See Real Estate Exchange entry.
Secured Credit Card
A type of credit card that requires the borrower to maintain a security deposit account with the creditor. The
account is the collateral for the credit provided. These credit cards are primarily for consumers with no credit or
damaged credit, who are unable to obtain standard (unsecured) credit cards. For more information, see the
"Analyzing Liabilities" article in the "Loan Process" section.
Secured Debt
Any liability or obligation that is secured by some type of collateral. Compare this with unsecured debts. For
more information, see the "Analyzing Liabilities" article in the "Loan Process" section.
Securities
A common term for shares or stocks in a business. This term usually refers to the ownership of those stocks or
shares, which in turn represent ownership interests in the company or collateral issuing those securities. For
more information, see the "Analyzing Assets" article in the "Loan Process" section.
Securities and Exchange Commission (SEC)
The government agency responsible for regulating the securities market. Because of the mortgage market's
interconnection with the financial and securities markets, the SEC also oversees much of the secondary
mortgage market. For more information, see the History of the Mortgage Industry article. You may also wish to
check out the SEC's website at http://www.sec.gov/.
Securitize
Mortgage industry jargon for the process of converting loans into uniform publicly traded financial securities.
This is essentially what agencies such as Fannie Mae and Freddie Mac do to make more funds available for the
home buyer market. See also the mortgage-backed securities entry. For more information, see the "History of
the Mortgage Industry" article in the "Morgage Industry" section.
Security
The collateral deposited or pledged to secure the payment of a debt. With mortgage loans, the security would be
the property being mortgaged. For more information, see the Mortgages versus Loans article in the "Mortgage
Industry" section.
Security Deposit
A typical consideration item for most rental and lease agreements. With most lease agreements, the tenant is
required to submit a security deposit with the landlord to cover any damage beyond normal wear and tear that
may occur to the property. For more information, see the "All About Leases" article in the "Real Estate In-Depth"
section.
Security Instrument
A legal document used to identify the collateral or security for a debt. A mortgage deed is the most obvious
security instrument in the real estate market. For more information, see the Mortgages versus Loans article in
the "Mortgage Industry" section.
Security Interest
Any interest in a collateral property. For example, mortgage lenders maintain a security interest in the subject
property while the loan remains unpaid. For more information, see the "Mortgage Deeds and Promissory Notes"
Seed Money
Funds required to initiate any investment.
Seisin
A legal real estate term referring to the contractual description of the type of ownership interest being conveyed
and the assurance that the seller or grantor has the legal authority to convey the title to a property. It is a
common element in general warranty and limited warranty deeds. For more information, see the "All About
Deeds" article in the "Real Estate In-Depth" section.
Self-Amortizing Mortgage
Any mortgage loan whose regular P&I payments will eventually pay off its original principal balance by the end of
the term. Most non-balloon residential loans are self-amortizing: at the end of the term--when all scheduled
payments have been made--the loan is completely paid off. By contrast, at the end of the typical balloon term, a
large principal balance still remains. For more information, see the "Loan Programs" section.
Self-Employment
Any form of employment, where the person works for one's self or for a company owned by that same person.
Also, a 25% or more ownership of any business is often considered by most lenders to be self-employment. For
more information, see the "Analyzing Employment and Income" article in the "Loan Process" section.
Seller-Held Loan
A mortgage loan, usually subordinate to a primary loan, that the borrower-buyer owes to the property seller. The
seller-held loan is sometimes used to help a marginal borrower qualify for a purchase mortgage loan. For
example, it is feasible for a buyer to purchase a home with an 80% LTV conforming first mortgage loan, along
with a 10% LTV second mortgage owed to the seller—the remaining 10% would then be the down payment.
This is another form of creative financing. For more information, see the "Buying Real Estate with Seller
Financing" article in the "Creative Financing" section.
Seller Subsidy
With purchase transactions, the seller will sometimes pay the buyer's closing costs. This is normally referred to
as seller subsidy. For more information, see the "No Closing Cost Options" article in the "Creative Financing"
section.
Seller's Market
Current economic condition in which demand is typically higher than supply. Marketing time tend to be brief, and
sellers are finding an abundance of potential buyers. For more information, see the "Selling Your Real Estate"
Sensitivity Analysis
A systematic review of effects of different variables and assumptions on projected cash flow, revenues,
expenses and profits. For example, a sensitivity analysis would examine the effect of different dramatically
increased utility prices, lower occupancy rates and higher bad debt allocations on the investment property's
financial statement. For more information, see the "Real Estate Investment Analysis Tools" article in the "Real
Separation Maintenance
Income provided from one spouse to another, during a period of legal separation. Income from alimony, child
support and separate maintenance are acceptable qualifying income for mortgage loans. However, applicants
must show that (1) they have been receiving that income and (2) that income will continue for at least three more
years. For more information, see the "Analyzing Employment and Income" article in the "Loan Process" section.
Septic Tank
A common method for sewage disposal in locations without sewer access. The tank allows sewage to settle,
which converts part of content into gas and sludge, while the remainder leeches into the ground.
Service Fee
In the mortgage industry, lender origination fees are sometimes called service fees. For more information, see
the "About the Good Faith Estimate" article in the "Applying for a Loan" section.
Service Entrance
Electrical term referring to the point in the house or building at which electrical power is brought in from the
electric company.
Service Panel
The main distribution point for all electrical power brought into a house or a large zone in a commercial property.
Homes typically have one of two types of service panels: a fuse panel or a circuit-breaker panel. Individual fuses
and circuit breakers are rated according to the amperes they can carry, which should match the capacity of the
wires in the circuit. When electric flow exceeds that amp level, the fuse will melt or the circuit breaker will trip. If
the wiring capacity is lower than the fuse or circuit-breaker, too much electricity could be forced through those
wires, causing damage to the circuit or the fixtures.
Servicer
Any lender or related institution responsible for servicing a mortgage loan, which normally entails collection of
monthly payments. For more information, see the "Servicing & Sale of Your Loan" article in the "Mortgage
Industry" section.
Servicing
The management of an existing loan agreement. This usually includes collecting mortgage payments, securing
escrow funds and disbursing all necessary funds. Note that although conforming loans may be sold to Fannie
Mae or Freddie Mac, the servicing of those loans remain with the originating lender. However, that originating
lender may and often do sell those servicing rights to other lenders. Such transfers are common and legal, and
the applicant will receive several disclosure of this fact and its probability. For more information, see the
"Servicing & Sale of Your Loan" article in the "Mortgage Industry" section.
Servicing Rights
The right to collect payments on a loan. Servicing a loan is a separate position than being the lender. The
company with the servicing rights collects the payment and takes a servicing fee from the payment--but the rest
of the collected funds are forwarded to the current lender or investor. For more information, see the "Servicing &
Sale of Your Loan" article in the "Mortgage Industry" section.
Servient Tenement
With an appurtenant easement, the property over which the easement will run. For example, lot A is landlocked
and has an easement right through lot B; lot A has a dominant tenement, while lot B has a servient tenement.
For more information, see the "All About Easements" article in the "Real Estate In-Depth" section.
Setbacks
Zoning requirements that require property construction and improvements to maintain open space from its outer
boundaries. Cities regularly have setback regulations that provide for pedestrian throughway, easements and
aesthetics. For more information, see the "Zoning and Building Codes" article in the "Real Estate In-Depth"
section.
Settlement
See Closing entry.
Settlement Agent
See Closing Agent entry.
Settlement Cost
The expenses normally faced by either the buyer or seller in the process of closing a purchase or refinance.
Settlement costs normally include the prepaid expenses and one-time closing costs. For more information, see
the "HUD Settlement Costs Guide" article (in the "Homebuyer Guide" section) and the "Closings and
Transactions" article (in the "Real Estate In-Depth" section).
Settlement Fee
Cost to cover the closing services provided by the closing agent and title company. The settlement fee is
separate from the closing costs, as the settlement fee is only assessed by the party responsible for the closing.
For more information about the title company's settlement fee, see the "HUD Settlement Costs Guide" article (in
the "Homebuyer Guide" section) and the "Closings and Transactions" article (in the "Real Estate In-Depth"
section).
Settlement Procedures
The steps taken to finalize the funding of a loan agreement and completion of the property transfer. The
settlement or closing normally requires review and acknowledgment of dozens of disclosures and legal
documents—all of which are notarized and legally recorded by the closing agent. For more information, see the
"Closings and Transactions" article in the "Real Estate In-Depth" section.
Settlement Statement
Often called a HUD-1 Settlement Statement, this form is used for all residential transactions to provide a uniform
method for recording the specific settlement entries. It was developed by the Department of Housing and Urban
Development (HUD). For more information, see the "HUD Settlement Costs Guide" article (in the "Homebuyer
Guide" section) and the "Closings and Transactions" article (in the "Real Estate In-Depth" section).
Severalty
A form of property ownership that is essentially the same as sole or individual ownership of property. For more
Severance
Real estate terminology referring to the act of converting real estate property into personal property. For
example, by digging up a decorative fountain, that real property is converted into personal property. The
opposite of severance is attachment. For more information, see the "All About Fixtures" article in the "Real
SFR
Single-family residence, such as a single condominium unit, townhouse unit or home with no additional
apartments. For more information, see the "Analyzing Property Types" article in the "Loan Process" section.
Shakes
A thicker, rougher type of shingle exterior covering.
Shared Appreciation Mortgage (SAM)
A mortgage repayment plan in which the lender offers a reduced interest rate in exchange for a share of any
property appreciation. For more information, see the "Loan Programs" section.
Shared Equity Mortgage
A mortgage repayment plan in which the lender holds a claim or lien on a portion of the equity that the property
will accrue through appreciation. This shared equity lien is separate from the standard mortgage lien. For more
information, see the "Loan Programs" section.
Sheathing
The exterior base of the house, upon which the outer walls or sidings are attached. This is usually made of
wood, although additional materials are now often used to increase effectiveness.
Shed Roof
Similar to a flat roof, but with a steeper incline.
Sheet Insulation
A type of insulation in the form of a rigid board or mold. It is most commonly used as wall sheathing for cavity fill,
rigid roof insulation and perimeter slab insulation. For more information about types of insulation, see the
Insulation entry.
Sheetrock
A trademark name for a brand of drywall boards.
Sheriff Sale
The court-ordered auction of property to satisfy judgments against the property. When a property is foreclosed
because of tax delinquency or legal judgment, for example, the court will order an auction of the property to pay
off the judgment amount. For more information, see the "Everything You Want to Know About Foreclosures"
Sheriff's Deed
A type of deed used to convey to a purchaser the title to property sold by the court, usually to satisfy a judgment.
For more information, see the "All About Deeds" and Everything You Want to Know About Foreclosures" articles
Shim
A thin, tapered strip of wood used for leveling or tightening stairs or other building elements.
Shingle
A form of exterior roof and wall covering used in many residences. Shingles are normally thin, oblong strips of
covering material--usually wood, slate or asphalt--in irregular widths. The shingles are arranged in overlapping
rows to provide weather protection and decorative flourish to homes.
Shoe Trim
Construction term referring to thin decorative strips of trim placed against the bottom of base molding. For more
information about the different types of trim or molding, see the Trim entry.
Shop Drawing
Construction diagrams and sketches provided by contractors and subcontractors about elements required by
construction plans and agreements.
Shopping Center
A cohesive group of normally separate retail shops, stores and merchants. For more information, see the
"Investing in Retail Properties" article in the "Real Estate Investing" section.
Shopping Mall
A type of shopping center that provides continuous internal connections or walkways between the different
merchants, shops and stores. For more information, see the "Investing in Retail Properties" article in the "Real
Short-Term Capital Gain
For income tax purposes, any capital gains that were sold before satisfying the time requirement for long-term
capital gain classification. For more information, see the "All About Capital Gains" article in the "Real Estate
Investing" section.
Short-Term Loan
In the residential mortgage industry, it is any loan that matures in 20 years or less. Thus, 10-year fixed-rate
loans and most balloon loans are considered short-term. For more information, see the "Analyzing Liabilities"
Sign Restriction Clause
The provision in most lease agreements that control, limit or prohibit the signage that the tenant may wish to post
on the property. For more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Signature Loan
An informal term for an unsecured loan. The only collateral or guarantee for such loans is the borrower's
signature. For more information, see the "Analyzing Liabilities" article in the "Loan Process" section.
Sill
Window construction term referring to the bottom of the window frame, into which the window is actually
installed. With the head jamb and side jambs, the sill forms the window frame. For more information about the
parts and styles of windows, see the Windows entry.
Sill Plate
Double boards--usually sized 2x8--laid flat and bolted to the top of the foundation walls. The building's frame is
built atop the sill plate.
Simple Interest
Non-amortized calculation of the interest charge on a loan. Simple interest is solely computed against the
principle balance. For more information, see the "About Interest Rates" article in the "Mortgage Industry" section.
Simple Listing
See Open Listing entry.
Single-Family Mortgage
A mortgage on property that may be legally occupied by only one family.
Sinking Fund
An account established by an investor for the purpose of appreciating--through compound interest--a target level
at a future date. A college fund is considered by some a sinking fund: a large amount is initially deposited into
the account when the child is young. By the time the child is ready to start college, compound interest should
have increased that account to higher levels so as to help pay for the child's college education.
Site
A term with several usage meanings, but which essentially refers to a plot of land.
Site Plan
This variation of the standard plat displays the building lines of a subject property. It should also display the
parcel’s boundaries, as well as any encroachments and easement to or from the subject property.
Situs
Real estate terminology referring to people's preference for certain areas. For more information, see the "Selling
Your Real Estate" article in the "Real Estate In-Depth" section.
Skylight
A type of window that is normally attached to a roof and allows light and heat into the room. Skylights can
provide five times as much heat as a standard window of the same size. Unfortunately, skylights can bring in too
much heat in warmer climates while letting too much heat escape in colder climates--unless proper insulation or
ventilation is attached. For more information about the parts and styles of windows, see the Windows entry.
Slab
The flat, horizontal section of a foundation, on which a structure is built. The slab, usually at least 4" thick, is
placed directly on the earth or on a gravel base. In southern U.S., exposed slab foundations that are basically
concrete decks are used with many ranch, mobile, modular and single-story homes. The slab itself becomes the
subfloor.
Sleeper
Strip of wood placed over a concrete floor to which finished wood is attached.
Sliding Door
A type of door in which the panels slide on tracks, much like sliding windows. Sliding glass doors are common
features of many homes as a doorway between the patio and family room areas. For more information about the
parts and types of doors, see the Door entry.
Sloped Joist Roof
A type of roof framing, in which the ridge board is supported by a central load-bearing wall. Instead of rafters,
sloped joists are connected to the ridge board on one end and the load-bearing--usually external--wall on the
other end of the joist. This style, like the plank-and-beam frame allows for a more open expanse beneath the
roof.
Slum
Catch-phrase description applied to urban areas and specific properties suffering from severe neglect,
deterioration and deferred maintenance.
Slumlord
Derogatory term applied to real estate investors of deteriorating properties or investors who fail to make
necessary reinvestments into the property required to forestall deterioration and obsolescence.
Social Obsolescence
A decrease in a property's current value that is caused by social changes and conditions that may be affecting
the property and its area. For example, a well-maintained property may still lose value if its neighborhood
experiences severe deterioration and neglect. For more information, see the "Real Estate Investment Analysis
Tools" article in the "Real Estate Investing" section.
Soffit
The visible underside of structural elements such as staircases, cornices, beams, overhangs and eaves. Many
homeowners and builders use aluminum and vinyl soffits to protect the roof overhangs from moisture and decay.
Soft Dollars
Expended funds that do not serve to improve the investor's equity position. For example, if the investor uses and
pays commission to a buyer's broker, that commission may be considered soft dollar. Paying that commission
will not improve the investor's equity position in the property just purchased.
Solar Collector
The primary device used by active solar heating system to harness the sun's rays. Water or air is forced through
the collector's series of pipes. The heated air or water is then stored in a heavily insulated tank until needed.
Sole Plate
The horizontal beam or plank, upon which studs are attached.
Sole Proprietorship
A form of business ownership in which there is only one owner. For tax and legal purposes, the sole proprietor
form of ownership also transfers all legal liabilities and tax benefits to the owner. For more information, compare
with Partnership and Corporation entries.
Source of funds
A funding analysis that investigates the true origin of the funds that the buyer or borrower is using. For example,
conforming residential lenders require full documentation of the source of funds, including two months of bank
statements and explanations for any large deposits. Underwriters perform this review to ensure that the
borrower's funds are legitimate and do not come from unallowed sources--such as hidden loans, which increase
the borrower's debt load. For more information, see the "Analyzing Assets" article in the "Loan Process" section.
Space Analysis
A study of interior space needs to determine space requirements and plan layout.
Space Heating Systems
A localized form of heating that provides heat for a specific area or room, as compared to a central heating
system. Typical space heaters include circulatory, unit, floor and resistance heaters.
Space Planning
The process of creating and implementing a layout design that best fulfills an occupant's production needs.
Spanish Colonial
A traditional style of housing that is sometimes called Mexican or Southwestern Hacienda style. The basic style
usually features red tile roof, consisting of semi-spherical overlapping tiles. The wall is traditionally adobe, but is
now often stucco or painted concrete block. This style also often contains oval top windows and doors, as well
as wrought-iron decorations.
Special Agent
A representative in an agency relationship who is authorized to act on behalf of the principal in a specific
transaction.
Special Assessment
An additional real estate tax assessed toward a portion of the entire taxable community by a local tax authority
for a special project. Special assessments are normally used to cover specific improvements, such as street
improvements, commercial development or the creation of special amenities (such as zoos and museums) that is
meant to benefit only a portion of the community. For more information, see the "Real Estate Taxes and Special
Assessments" article in the "Real Estate In-Depth" section.
Special Lien
Any lien that is applied to only specific parcels or types of properties.
Special Purpose Building
Any structure or improvement that is designed primarily or solely for the operating needs of its occupant. For
example, stand-alone restaurants, movie theaters, gymnasiums and parking garages are normally considered
special purpose buildings. For more information, see the "Analyzing Property Types" article in the "Loan
Process" section.
Special Warranty Deed
Sometimes called a limited warranty deed, this deed does not provide the grantee with the same guarantees as
a general warranty deed. The special warranty deed usually only provides a covenant of seisin and a covenant
against encumbrances limited to encumbrances occurring after the grantor originally acquired the title. This type
of deed is commonly used by agents of the owner, such as executors. For more information, see the "All About
Deeds" article in the "Real Estate In-Depth" section.
Specific Lien
A claim against a specific property, rather than all of a person's properties. Real estate taxes and mortgage
loans, for example, are typically specific liens. Compare with general liens. For more information, see the "Real
Estate Introduction" article in the "Real Estate In-Depth" section.
Specific Performance
Legal term referring to an action required by an agreement or any action that initiates the performance of a
contract. For more information, see the "Real Estate Sales Contract" article in the "Real Estate In-Depth" section.
Specific Power of Attorney
A type of power of attorney relationship in which the attorney or agent is charged with and authorized to act on
behalf of the principal for a specific transaction, contract or event.
Specifications
Detailed instructions regarding the manner, material, design and schedule of work to be done by the contractor
or subcontractors.
Specified Funds
Any funds whose list of target properties to be purchased has already been defined.
Speculation
Investment tactic that seeks to resell properties for a quick profit. Speculators tend to prefer holding properties
for short-term periods and target areas that show potential for rapid value appreciation. For more information,
see the "Investing in Land Speculation" article in the "Real Estate Investing" section.
Speculative Building
Real estate investment practice of starting construction or development, without any lease or purchase
commitments. For more information, see the "Investing in Land Speculation" article in the "Real Estate Investing"
section.
Split Entry
See Bi-Level entry.
Split-Level
Contemporary style of residential housing that offers a versatile use of space and design. The typical split level
looks much like a two-story, but actually has three or four separate levels. The key element of the split level is
that it contains at least one level that is a half-flight difference from the adjoining levels. For example, the bottom
level may be a below-grade basement; a half-flight above the basement (but the side not above it) is the extra
level, which may be the garage or a family room; directly above the basement and a half-flight up and beside that
split-level space is additional living space; a fourth floor, in the split level area, may be used for bedrooms.For
Spot Survey
A type of survey that indicates the location of improvements, along with the lot lines. A quick review can then
reveal any encroachments. For more information, see the "Surveys and Legal Description" article in the "Real
Square Foot Method
The most common method used to estimate construction, reproduction and replacement costs uses the square
footage costs of similar properties and multiplies that rate by the area of the subject property. Other methods
include the cubic foot, unit in place, quantity survey and index methods. For more information, see the "Analyzing
Appraisal Reports" article in the "Loan Process" section.
Square Footage Price
A method for comparative pricing that bases the property's total cost on its size. This is the standard method
used for commercial properties. For more information, see the "Analyzing Appraisal Reports" article in the "Loan
Process" section.
Squatters Rights
A legal right, with varying conditions, in many jurisdictions that allow individuals to obtain a legal easement to a
property. If a squatter is permitted to occupy for the proscribed statutory period a real estate property to which
he or she has no legal claim, that squatter can file for and receive an easement for that parcel of property.
Squatters often must be forcibly evicted with court order and supervision to protect the current owner's full
ownership. For more information, see the "Title and Estates in Real Property" article in the "Real Estate In-
Depth" section.
Stack Pipe
A vertical pipe that receives drain and waste lines from fixtures and delivers them to the building drain. The
upper portion of the stack pipe often protrudes through the roof to vent waste gasses.
Stack Vent
Pipes attached to the stack pipe--as well as the stack pipe itself--that vents waste gases, while brining in outside
air pressure to push water down the drain pipes.
Standard Parallel Line
See Correction Line entry.
Standby Fee
The charge that a lender assesses a borrower for a standby loan commitment.
Standby Loan
A loan approved for a client, but not yet closed and disbursed. The formal closing of the standby loan is normally
conditional on specific events or actions. The standby loan is often nothing more than a loan commitment.
Standard Tenant Improvement Allowance
The amount that a landlord will expend in making improvements for a tenant. This allowance is not charged to
the tenant. Rather, it is what the landlord or property manager believes is economically feasible to absorb. For
Starker Exchange
A type of tax-deferred real estate exchange with a delayed term. This option gives the seller more time to find a
like-kind property. For a Starker exchange, the proceeds from the sale of a property must go into an trust
company escrow that the seller must not control. The seller then has 45 days to find and 180 days to purchase a
like-kind property, which is then bought with the escrowed funds. For more information, see the "All About
Capital Gains: Tax-Free Exchanges" article in the "Real Estate Investing" section.
Start Rate
The beginning interest rate of a mortgage loan. With ARM loans, it is the interest rate for the first period, as the
ARM rate will adjust in subsequent periods. With 2-1 buydown loan, for example, the starting rate is two (2)
percentage points lower than the note rate. The start rate is usually lower than current market rates, in order to
help the applicant qualify for a larger loan amount. For more information, see the "ARM Loans" article in the
Stated Income Loan
This program is essentially a variation of the No Income Verification loan. With the stated income loan, the
applicant merely states an income, and the lender will accept (or ignore) it as the qualification income. Such
programs place the greatest underwriting weight on the applicant's credit and lowered LTV. Also see the No
Income Verification and No Documentation Loan entries. For more information, see the "No Income Verification
Loans" article in the "Loan Programs" section.
Statuary Lien
Any lien created by law.
Statute of Frauds
The state laws that require real estate agreements to be in writing in order to be enforceable in law. For more
information, see the "Real Estate Sales Contract" article in the "Real Estate In-Depth" section.
Statutory Right of Redemption
Many states have laws that give a borrower a limited period after both tax sale and judicial foreclosure to pay off
the debt and reclaim the mortgage property. This period is often called the statutory redemption period. Prior to
the foreclosure sale of the home, the property owner can exercise his or her equitable right of redemption. For
more information, see the "Everything You Want To Know About Foreclosures" article in the "Real Estate In-
Depth" section.
Steam
Water boiled to 212 degrees Fahrenheit, the temperature at which water turns to steam--but does not yet
evaporate.
Steam Heating System
A type of gravity heating system that distributes heat to radiators with steam, instead of hot water. It is a noisy,
but efficient system for smaller buildings that are not continuously occupied.
Steering
The unethical and fraudulent real estate practice of directing prospective homebuyers and renters away from
particular areas, so as to maintain that area's homogeneity. This is considered an illegal attempt to promote
segregation. For more information, see the "Real Estate Fraud" article in the "Real Estate In-Depth" section.
Stepped-Up Basis
A change in the adjusted tax basis that a property may use with certain transactions. For more information, see
the "All About Capital Gains" article in the "Real Estate Investing" section.
Stick-Built
Any structural improvement that uses a wooden frame. These are normally limited to low-rise residential and
small commercial buildings, as they do not offer the structural strength of steel and similar metal frames.
Stigmatized Property
Properties that have become less attractive or marketable by being the scene of a crime, suicide, undesirable
event or any non-physical defect. For more information, see the "Selling Your Real Estate" article in the "Real
Stile (Door)
Construction term referring to the solid, wide vertical strips normally found on the sides of the door face, as well
as sometimes down the center of the door face. The stile and rail frame the panels on the popular panel door
style. For more information about the parts and types of doors, see the Door entry.
Stipulations
The terms, provisions, conditions, assumptions and clauses of an agreement.
Stop Molding
A type of trim-work placed between the door casing and the door or between the window casing and the window
sash.
Stop Clause
A provision in some lease agreements that place a limit on the amount of operating expenses that a property
owner or manager must absorb. Any amounts above that level become the tenant's obligation. For more
information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Storm Door
A type of door used in many homes to protect the regular exterior door during winter and rainy seasons, as well
as to reduce heat loss through the prime door during the winter. Storm doors are usually made of aluminum or
light metal frame and placed outside of the exterior door. For more information about the parts and types of
doors, see the Door entry.
Straight Lease
See Gross Lease entry.
Straight Line Depreciation
The method of depreciation permitted by the IRS. The annual depreciation is a constant equal to the total
depreciable basis divided by its depreciable life, as determined by the IRS published tables. For more
information, see the "Investment Property Tax Advantages: Depreciation Deductions" article in the "Real Estate
Investing" section.
Strata Title Act
See Condominium Act entry.
Straw Man
Informal name for a person or entity who purchases property for another person or entity. The straw man buys
the property from the seller and then immediately resells the property to real buyer. The straw man tactic is often
used to keep the real buyer's identity private, although it can also be used to arrange a two-part sale in a no
down payment program. For more information, see the "Creative Investment Guide: No Down Payment
Programs" article in the "Real Estate Investing" section.
Strict foreclosure
A type of judicial foreclosure , in which the court does not sell the property. Instead, the court gives title to the
lender and ends the debt. However, this process also eliminates all redemption rights, deficiency judgments and
any surplus compensation to the borrower. This is not commonly used. For more information, see the
"Everything You Want To Know About Foreclosures" article in the "Real Estate In-Depth" section.
Stringer
Construction term referring to the diagonal stairway frame, which is cut to receive risers and treads.
Strip Center
Usually a smaller version of the neighborhood shopping center, the strip center format arranges the retail units in
a line of relatively narrower buildings. It is often called a strip mall. For more information, see the "Investing in
Retail Properties" article in the "Real Estate Investing" section.
Structure
Informal term for any constructed improvements to land. It can be anything from a small shed or cabin to an
apartment building or skyscraper.
Stucco
A type of textured wall covering that has proven to be a durable exterior siding for homes and buildings. It is
usually applied in three coats, with the finish paint included in the final covering. Stucco is a concrete and lime
mixture that creates a light pebbled look to the wall. It is sometimes difficult to apply and can crack if applied
incorrectly.
Stud
Vertical wall framing members, traditionally made of 2x4 lengths of wood.
Subchapter-S Corporation
Often called an S-corp, this form of business entity is a combination of the general corporation and a
partnership. Stockholders enjoy the limited liability of a limited partnership but avoid the double taxation of a
corporation. However, S-corps are limited to 75 or fewer shareholders. For more information, see the "Creative
Real Estate Investment Guide: Preparatory Steps" article in the "Real Estate Investing" section.
Subcontractor
The provider of specialized construction or improvement services. The subs usually answer to a general
contractor, who supervises and directs the entire project. Typical subcontractors include plumbers, drywallers,
masons and painters.
Subdivision
The act of legally separating a parcel of property from the other parcels or larger division in a defined
community. A developer, for example, may purchase a farm that was legally considered one big parcel and
subdivide it into smaller parcels. Subdividing requires local approval and several legal filings. The name
"subdivision" is also often applied to the finished product of the subdividing process. For more information, see
the "Subdivision Development" article in the "Real Estate Investing" section.
Subflooring
An under-layment or base for the finish flooring material. This usually consists of plywood panels attached to the
floor joists. The subflooring also acts to stabilize the joists.
Subject to Condition Precedent
A legal real estate term applying to fee simple defeasible estates, this identifies the conditions that must be met
for the estate to continue. Once the approved usage ceases, the estate would terminate, at which time the title
would then transfer to a reversion interest or remainder interest. For example, a philanthropist grantor may give
some land in a fee simple defeasible estate to a charity as long as it is used for charitable purposes. If that
charity tried to do non-charity work, their estate would end. For more information, see the "Title and Estates in
Real Property" article in the "Real Estate In-Depth" section.
Subject to Condition Subsequent
A legal real estate term applying to fee simple defeasible estates, this identifies the prohibited uses that would
trigger the end of the estate, at which time the title would then transfer to a reversion interest or remainder
interest. For example, a grantor may give his nephew his mansion with a fee simple defeasible subject to
condition subsequent that he never marries; if his nephew does marry, the estate would end. For more
Sublease
The secondary lease in which a tenant leases out the property to another tenant. The original lease between the
tenant (lessee) and the landlord remains. However, the original tenant's lease rights are now transferred to the
sublessee. Most landlords wisely place limitations on subletting of their rental property. For more information,
Subordinate Financing, Loan
Any mortgage loan that is inferior in liens to the first mortgage. Subordinate loans are second or junior
mortgages. For more information, see the "Second Mortgages" article in the "Loan Programs" section.
Subordinated Ground Lease
A ground lease format in which the owner (lessor) of the land agrees to subordinate his or her recorded interests
behind other claimants. For example, a subordinated ground lease would place the lessor's claim behind any
liens imposed by construction, development and mortgage loan lenders. For more information, see the "All About
Subordination
To make one claim (or lien) inferior to that of another claim (or lien). Remember that liens are recorded and
normally honored in chronological order. However, if a borrower refinances only the primary mortgage but not
the junior mortgage on a property, the junior mortgage must be subordinated to the new refinance loan. The
second mortgage lien lender must sign a subordination agreement prior to the closing, allowing the new first
mortgage loan to accept primary lien. For more information, see the "Mortgage Deeds and Promissory Notes"
Subordination Clause
The provision in a mortgage deed that regulates the possible subordination of the mortgage to another mortgage
lien. The subordination clause of first mortgage loans prohibits its subordination to other private obligation liens.
Second mortgage loans normally allow subordination, with the case-by-case approval of the lender's underwriter.
For more information, see the "Mortgage Deeds and Promissory Notes" article (in the "Real Estate In-Depth"
section) and the "Second Mortgages" article (in the "Loan Programs" section).
Sub-Prime Loan
Non-conforming loans that cannot be sold to the A-paper secondary mortgage market are considered sub-prime
loans. Such loans are normally used for borrowers, properties or situations that cannot qualify for conforming
programs. For more information, see the "Non-conforming Loans" article in the "Loan Programs" section.
Subrogation
Similar to a transfer of rights, subrogation is a legal term referring to the replacement of one individual or entity
with another in the context of specific rights, interests or obligations. Through subrogation, insurance companies
receive the policy holder's right to defend against a claim. For more information, see the "Transferring Title" and
"Spousal and Co-ownership Rights" articles in the "Real Estate In-Depth" section.
Subscription
A real estate legal term referring to a binding agreement to purchase an interest in a syndicated security.
Substitution Clause
In construction agreements, the substitution clause identifies those construction material that may be substituted,
within the restrictions specified by the property owner, agent or developer. For more information, see the
Subsurface Rights
Legal real estate term referring to property rights involved with the natural subsurface elements of real estate.
Subsurface rights include mineral rights, and subsurface rights can be separated from other real estate property
rights. For example, a landowner may allow oil leases, gas leases or sale of mineral rights. For more
information, see the "Subsurface Rights" article in the "Real Estate In-Depth" section.
Suburb, Suburban
Municipalities and developed areas surrounding a city. Isolated non-developed and unincorporated areas are
normally considered rural. For more information, see the "Analyzing Appraisal Reports" article in the "Loan
Process" section.
Suit for Rent
A legal remedy available to landlords who have lessees in default or delinquency, for the purpose of recovering
past-due rent. For more information, see the "All About Leases" article in the "Real Estate In-Depth" section.
Sump Pump
A tool to pump water out of or through sump drainage wells.
Super Regional Center
An even bigger version of the regional shopping center, the super regional normally contains a minimum of
750,000 square feet of retail space and at least three or more anchors. For more information, see the "Investing
in Retail Properties" article in the "Real Estate Investing" section.
Superfund Amendment & Reauthorization Act (SARA)
A 1986 federal legislation amending the CERCLA legislation of 1980, which established the EPA's mandate with
regard to hazardous or Superfund sites. SARA defined stringent clean-up standards. It also expanded the
scope of liability for recovering clean-up costs, but created immunity standards for certain landowners. For more
Superfund Site
A property deemed to contain hazardous pollutants by the EPA and requiring clean-up. Unlike brown fields,
Superfund sites normally do not allow any further activities on the site until clean-up is completed. For more
Supply and Demand
Economic principle describing the basically three-part relationship between the supply, demand and price of
certain goods. A high-supply and low-demand market will create lower prices (deflation). A low-supply and high-
demand market will create higher prices (inflation). A subsidiary concept of the law of supply and demand is that
the market tends to adjust itself toward equilibrium. For more information, see the "Real Estate Investment
Analysis Tools" article in the "Real Estate Investing" section.
Surety
A guarantee on the performance of an individual or entity. For example, a surety bond provides an insured
guarantee that a service provider will perform the contracted work covered by the surety. If not, the surety
company will reimburse the insured's client for losses. For more information, see the "Hazard Insurance" article
in the "Mortgage Industry" section.
Survey
The examination of land by a registered surveyor, so as to determine the property's exact geographic location
and size. A new survey is required with each (purchase or refinance) loan application—although a less
expensive location note endorsement from the title company is acceptable during refinances. There are three
basic methods for conducting a survey: the metes and bounds method, the rectangular survey system and the
plat of survey method. A spot survey will indicate the building lines, while the more detailed topographical survey
provide a more three-dimensional description of the property. For more information, see the "Surveys and legal
Description" article in the "Real Estate In-Depth" section.
Survey Sketch
A survey that illustrates the location and dimensions of a parcel of land. Compare with the Spot Survey entry.
For more information, see the "Surveys and legal Description" article in the "Real Estate In-Depth" section.
Survivorship, Right of
An element of property title ownership that affects how assets are handled when a co-owner is deceased. When
there is a right of survivorship on a property ownership, if one co-owner dies, the ownership share of that
deceased co-owner is given to the surviving co-owner(s). This option applies to the ownership form normally
referred to as “joint ownership with right of survivorship.” For more information, see the "Spousal and Co-
ownership Rights" article in the "Real Estate In-Depth" section.
Sweat Equity
An ownership interest in property earned by the performance of manual labor on that property. For more
information, see the "Rehab Development" article in the "Real Estate Investing" section.
Swing Loan
Short-term loan used to qualify for a mortgage loan on a new home while awaiting for a current mortgage
property to be sold. For more information, see the "Purchase Mortgage Loans" article in the "Loan Programs"
section.
Syndicate
A legal association created to make real estate investments. The syndicate can be a partnership, joint venture or
similar association. However, syndicates are normally created for a specific investment property or project.
Syndication
A group of individuals or companies who join together to pursue a limited investment purpose. It is also the act
of obtaining mortgage financing for one project from a group of institutions. Many commercial lenders will
syndicate with other institutions when financing a large commercial project, so as to avoid absorbing the entire
risk exposure for the loan.
In the real estate industry, syndications are often limited partnerships formed to operate a real estate
investment. The general managing partner is the syndicator.
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Glossary—T
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Tacking
A promise to make a loan at a future time; this usually refers to higher-cost, shorter-term, back-up commitments
used as a support for construction financing until a suitable permanent loan can be secured. Tacking may also
refer to the joining of two time periods, such as when possession periods may be combined to satisfy an
easement requirement. For more information, see the "Construction Loans" article in the "Loan Programs"
section.
Takeout Loan
A promise to make a loan at a future time; this usually refers to higher-cost, shorter-term, back-up commitments
used as a support for construction financing until a suitable permanent loan can be secured. For more
information, see the "Construction Loans" article in the "Loan Programs" section.
Taking
A legal term referring to the government's seizing of private property through its right of eminent domain. For
more information, see the "Eminent Domain" article in the "Real Estate In-Depth" section.
Tar and Gravel Roof
Often called a built-up roof, this type of covering is used primarily on flat and low-pitched roofs. It normally
consists of alternating layers of roofing felt and hot tar, with a final sprinkling of fine gravel, which prevents the
sun from melting the tar.
Tax Basis
The net book value of a property. To determine the tax basis value, capital improvements made are added to
the original purchase price. Any depreciation taken is then subtracted from that amount. When the property is
sold, the capital gains tax is calculated as the new sales price minus the tax basis. For more information, see the
"All About Capital Gains" article in the "Real Estate Investing" section.
Tax Certificate
Taxing authorities will often sell unpaid real estate taxes in the form of tax certificates. If the tax certificate is not
paid within the proscribed redemption period, the buyer-owner of the tax certificate will have the right to foreclose
on the property. For more information, see the "Buying Tax Sale Properties" article in the "Creative Financing"
section.
Tax Deductibility, Deductible
The type of expenses that can be used to reduce a person's or entity's taxable income. For example,
homeowners can deduct the interest they pay on their home mortgage loan against their taxable income. For
more information, see the "Investment Property Tax Advantages: Deducting Losses & Depreciation" article (in
the "Real Estate Investing" section) and the "Homebuyer Deductions" article in the "Homebuyer Guide" section.
Tax Deed
A type of deed that may be used to convey title for property sold for delinquent taxes. For more information, see
the "All About Deeds" and "Everything You Want To Know About Foreclosures" articles in the "Real Estate In-
Depth" section.
Tax Deferred Exchange
See Real Estate Exchange entry.
Tax Deferred Income
The act of delaying the payment of taxes on certain income until a later date. For example, certain retirement
accounts allow the individual to delay income tax payments on some of the amounts deposited into such
accounts. This has the effect of lowering the person's current taxable income. For more information, see the "All
About Capital Gains: Tax-Free Exchanges" article in the "Real Estate Investing" section.
Tax foreclosure
The sale--usually through public auction--of properties that have not paid delinquent property taxes. Most local
taxing authorities assure themselves of property tax revenue by selling delinquent property taxes to investors.
These investors or the taxing authority can then exercise their rights to foreclose on the property. However,
property owners may be able to rescue their homes by exercising their equitable or statutory rights of
redemption. For more information, see the "Buying Tax Sale Properties" article in the "Creative Financing"
section.
Tax Increment Financing (TIF) District
A tool used by local and state governments to focus additional investment dollars for a target area. When an
area is designated a TIF district, the local taxing authority will determine the tax revenue that the target area
currently generates for the city, county, state and other entities. Any future tax income above that annual level
that is generated from that area during the life of the TIF designation will stay in that area. That anticipated
additional tax revenue can be used to improve local infrastructure, finance investments or reimburse investors.
Note that tax rates are not increased, the increased revenue will come from the added business that investments
will bring to that area. For more information, see the "Real Estate Taxes and Special Assessments" article in the
Tax Map
A diagram published by most local government property taxing authorities that indicates the type and
classification of those properties subject to tax assessments. For more information, see the "Real Estate Taxes
and Special Assessments" article in the "Real Estate In-Depth" section.
Tax Rate (Real Estate)
The rate applies to a property's assessed value to determine its tax bill. For more information, see the "Real
Estate Taxes and Special Assessments" article in the "Real Estate In-Depth" section.
Tax Return
The form used to report income tax payment calculation. Most lenders will require copies of tax returns to
document income for qualification purposes. The employee can then use this W-2 to complete his or her tax
returns, as well as maintain documentation of employment and income. For more information, see the "Analyzing
Employment and Income" article in the "Loan Process" section.
Tax Sale
See the Tax foreclosure entry.
Tax Service Agency
When an escrow account is present, the tax service agency or department will assist the lender in payment of
real estate taxes. When no escrow is maintained, the tax service agency or department will often monitor the
borrower's payment of real estate taxes. For more information, see the "Escrow Accounts" article in the
"Homebuyer Guide" section.
Tax Service Fee
The charge levied by the lender to hire a tax service agency or to compensate its own tax service department.
For more information, see the "Escrow Accounts" article in the "Homebuyer Guide" section.
Tax Shelter
Investments or maneuvers that can produce opportunities to lower income or capital gains taxes. Changes to
the tax codes have severely hampered most tax shelters. Previously, paper losses from real estate investments
could be used to offset taxable personal income. No longer. The IRS now distinguishes between passive and
active income: losses from passive income such as most real estate investments can only be offset against other
passive income. Passive income losses cannot be offset against active income. For more information, see the
"Investment Property Tax Advantages: Deducting Losses and Depreciation" article in the "Real Estate Investing"
section.
Taxable Income
The amount of a person's or entity's income that may be taxed by the IRS. This calculation of taxable income
begins with the gross income, but then subtracts all allowable deductions. For more information, see the
"Investment Property Tax Advantages: Deducting Losses and Depreciation" article in the "Real Estate Investing"
section.
Teaser Rate
The low starting interest rates offered by many ARM and Temporary Buy-down loan programs. For more
information, see the "ARM Loans" and "Buy-Down Programs" article in the "Loan Programs" section.
Tenancy at Sufferance
Legal term referring to the type of leasehold estate created when a lease has terminated or expired, but the
lessee continues to occupy the leased premises. This is not considered trespassing, because the original entry
was legal. If the lessor decides to accept a rent payment, this becomes a periodic estate. For more information,
see the "All About Leases" and "Title and Estates in Real Property" articles in the "Real Estate In-Depth" section.
Tenancy at Will
Legal term referring to a license to use or occupy a property, subject to the will of the property owner. This type
of leasehold estate can be terminated by either party, with adequate notice. It is automatically terminated upon
sale of property or the death or insanity of either lessor or lessee. For more information, see the "All About
Leases" and "Title and Estates in Real Property" articles in the "Real Estate In-Depth" section.
Tenancy by Entirety
Similar to Joint Tenancy with Rights of Survivorship, this form of ownership is only available to married couples
and considers the husband and wife as one legal entity. If one dies, the surviving spouse receives full ownership
of the property; the interests of the deceased does not go to any other heir unless both owners die. This form
also provides an added legal protection: the property can only be sold to satisfy a judgment if both spouses
signed the obligation. If, for example, only the wife signed a mortgage that went into default, the property cannot
be sold--unless the husband also signed the mortgage note or a waiver of his rights. This form does not allow for
a right of partition, any dissolution must be by mutual agreement or court order. For more information, see the
"All About Leases" and "Title and Estates in Real Property" articles in the
Glossary—U-V
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UFMIP
See Upfront Mortgage Insurance Premium entry.
Underground Storage Tanks (UST)
Tanks used to store fuel and other chemicals are now a major concern for the EPA. To prevent dangerous
leakage and leeching of hazardous substances, USTs must be certified and meet strict maintenance
requirements. For more information, see the "Environmental Issues" article in the "Real Estate In-Depth" section.
Underlayment
The top layer of plywood, often used above the subflooring and to which the finished floor, tiles or carpeting is
attached.
Underwriter
The person or company responsible for analyzing and approving a mortgage loan application. The underwriter
decides whether a loan application is worth the risk. For more information, see the "Overview of Loan
Processing" article in the "Loan Process" section.
Underwriting
The stage of the lending process during which the elements of a loan application are analyzed so as to
determine approval or rejection of file. For more information, see the "Overview of Loan Processing" article in the
Underwriting Fee
A closing cost charged by mortgage lenders to underwrite a loan for approval. It is normally not charged unless
the loan is approved. For more information, see the "About the Good Faith Estimate" article in the "Applying for a
Loan" section.
Undivided Interest
Legal term referring to a type of property ownership in which two or more parties share ownership in the entire
property--and not for a specific portion. The co-owners may own different percentages of the entire property. For
more information, see the "Spousal and Co-Ownership Rights" article in the "Real Estate In-Depth" section.
Unencumbered Property
Any property with a free and clear title. For more information, see the "Marketable Title" article in the "Real
Uniform Partnership Act
A model act adopted by many states, which governs the types, structure, rights, requirements and limitations of
partnerships. Properties held in the partnership's name are considered tenancy in partnership. For more
information, see the "Spousal and Co-ownership Rights" article in the "Real Estate In-Depth" section.
Uniform Residential Loan Application (URLA) 1003
The standard four-page application form required for all residential mortgage loan applications, sometimes
referred to as the 1003 form. A more detailed review of different elements of the URLA 1003 is available in the
"Completing The Uniform Residential Loan Application" article.
Unilateral Contract
An agreement in which one party's obligations are contingent upon a second party's performance. However, the
second party has no obligation to perform and faces no penalty for non-performance.
Unimproved Property
See the Raw Land entry.
Unincorporated Area
Any parcels of land that is not part of legal municipal boundaries. These areas are governed by the county's
zoning board, which are usually more lenient than municipal zoning boards. For more information, see the
U.S. Coast Guard & Geodetic Survey Datum
A datum used by many U.S. surveyors to measure elevations, this datum is set for the mean sea level in New
York City harbor. For more information, see the "Surveys and Legal Description" article in the "Real Estate In-
Depth" section.
Unit Deed
A legal instrument used to convey the title to a condominium unit, as well as its common elements. For more
information, see the "Condominiums" article in the "Real Estate In-Depth" section.
Unit In Place Method
A method used to estimate construction, reproduction and replacement costs that is based on the construction
cost of individual building components. Other methods include the square foot, cubic foot, quantity survey and
index methods.
Unit
A real estate term for apartments or each single-family portion of a property or structure. For more information,
see the "Analyzing Property Types" article in the "Loan Process" section.
Universal Agency
An agency relationship in which the agent represents the principal in all matters that can be legally designated to
others. An unlimited power of attorney is most often used to create this type of agency.
Unleveraged Property
Any property that does not have a debt obligation or mortgage lien attached to it. For more information, see the
"Mortgage Deeds and Promissory Notes" article in the "Real Estate In-Depth" section.
Unleveraged Program
A type of limited partnership whose real estate investments are focused primarily on properties with specific debt
obligations at less than 50% of the value of each property.
Unlimited Power of Attorney
A type of power of attorney relationship in which the attorney-agent is charged with and authorized to conduct all
of the principal's legal, financial and related affairs. Unlike the general and specific variations, the unlimited
power of attorney allows the agent to act for the principal in all matters.
Unrealized Gain
Real estate term referring to potential profit that a property owner fails to exploit. Unrealized gain specifically
occurs when the sales price is below the market value of the property. For example, a distressed or relocating
property owner may be will to sell a property for less than its market value in exchange for an immediate sale.
For more information, see the "All About Capital Gains" article in the "Real Estate Investing" section.
Unsecured Loan
Loan made without any pledge of collateral or security. For example, personal (signature) loans, student loans
and credit card debts are essentially unsecured liabilities, as there is nothing for the creditor to repossess in case
of default. For more information, see the "Analyzing Liabilities" article in the "Loan Process" section.
Upfront Mortgage Insurance Premium (UFMIP)
A one-time mortgage insurance premium charged on FHA loans. This fee is usually equal to 1.75% of the loan
amount and is added to the loan balance. If the borrower should eventually refinance the FHA loan with a
conventional loan, this premium is refunded to the borrower on a prorated basis. In addition to this one-time
upfront fee, FHA loans also assess a monthly mortgage insurance premium. For more information, see the
"Mortgage Insurance" article in the "Mortgage Industry" section.
Urban
The urban label normally applies to both major cities and their suburbs. However, strictly speaking, the real
estate and mortgage industry prefer to use the urban label on areas within the boundaries of major cities. For
more information, see the "Analyzing Appraisal Reports" article in the "Loan Process" section.
Usable Area
A property measurement used in commercial real estate, especially with rental properties. The usable area
measurement subtracts unusable areas (such as bathrooms, staircases, utilities, mechanical equipment, walls,
columns, easements and encumbrances ) from the total square footage. For more information, see the
"Commercial Property Development" article in the "Real Estate Investing" section.
Use Clause
A provision in a lease agreement specifying the allowed usage for the leased premises. For more information,
Useful Life
An appraisal term referring to a projection of the number of years that a property will still be able to perform its
intended purpose. For more information, see the "Analyzing Appraisal Reports" article in the "Loan Process"
section.
UST
See Underground Storage Tank entry.
Usury
In technical terms, usury is when the lender charges interest rates in excess of the caps set by state usury laws.
For more information, see the "Interest Rates" article in the "Mortgage Industry" section.
Utilities
The basic services and products essential to the operation of a production property. This term is normally
applied to electric, gas, sewer, telephone and water services.
Utility Easement
An easement to or through a property that is established to provide utilities for the specific property or the larger
community. For more information, see the "All About Easements" article in the "Real Estate In-Depth" section.
V
VA Funding Fee
A one-time charge assessed at closing to the borrower on VA loans. This fee is usually between 1.25% to
2.25% of the loan amount, depending on the down payment amount; this fee is usually rolled into the loan
amount. For more information, see the "FHA and VA Loans" article in the "Loan Programs" section.
VA Loan
See Veterans Administration Loan entry.
Vacancy Factor
The percentage level of unoccupied units in a rental property. The vacancy factor is the inverse of the
occupancy rate. It is usually expressed as a projected vacancy factor or a current vacancy rate. For more
Vacant Land
See Raw Land entry.
Value
The monetary worth of a property, asset, product or service. The value is normally interpreted as the amount at
which the market would pay for the product at a given time.
Vapor Barrier
A sheathing material used to prevent moisture, water and vapors from penetrating into a structure. Most
foundations are set on a gravel base with a waterproof vapor barrier between the foundation slab and the
ground.
Variable Expenses
As opposed to fixed expenses, real estate variable expenses are those operating costs that tend to fluctuate
according to the occupancy level. For more information, see the "Analyzing Liabilities" article in the "Loan
Process" section.
Variable Lease
A type of lease arrangement that provides for future rent adjustments. There are two types of variable leases:
graduated and index. For more information, see the "All About Leases" article in the "Real Estate In-Depth"
section.
Variable Rate Mortgage (VRM)
One of the original terms for adjustable rate mortgage (ARM) loans. For more information, see the "ARM Loans"
Variance
An exception to zoning codes and ordinances. This does not change the zoning laws. If a property owner
wishes to make improvements or changes to his or her property that do not follow local zoning requirements, that
property owner must first obtain a zoning variance from the zoning authority. For example, if a developer wishes
to convert a current warehouse zoned manufacturing into a residential condominium project, that developer must
first obtain a variance. For more information, see the "Zoning and Building Codes" article in the "Real Estate In-
Depth" section.
Vendee's Lien
A lien placed against a property by a former buyer. If purchase transaction fails to consummate because the
seller does not deliver the title, the buyer (vendee) may file a lien against the property to prohibit its sale or
recover damages. For more information, see the "Real Estate Sales Contracts" article in the "Real Estate In-
Depth" section.
Vendor's Lien
A lien placed against a property by a seller, particularly if the full purchase price has not been received. For more
information, see the "Real Estate Sales Contracts" article in the "Real Estate In-Depth" section.
Verification of Deposit (VOD)
Form used by the lender to verify the contents and records of a loan applicant's accounts with a depository
institution. This is required for all loan application files. For more information, see the "Analyzing Assets" article
Verification of Employment (VOE)
Form used by the lender to verify the status, income and stability of applicant's employment. This is required for
all loan application files. For more information, see the "Analyzing Employment and Income" article in the "Loan
Process" section.
Verification of Loan (VOL)
Form used by the lender to verify the contents and records of a loan applicant's current loan account. This is
required only if the borrower has an outstanding loan that is not listed in the credit report. For more information,
see the "Analyzing Liabilities" article in the "Loan Process" section.
Verification of Mortgage (VOM)
The form used by the lender to verify the mortgage account of an applicant. The VOM is necessary only if the
mortgage account is not reflected in the credit report. For more information, see the "Analyzing Liabilities" article
Verification of Rent (VOR)
The form used by the lender to verify the rent-payment record of first-time home buyers. For more information,
see the
Glossary—W-X-Y-Z
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W-2
The official IRS-designated form that employers must use to report the employee's income for the year.
Employers must provide the employee with a copy of the W-2 form submitted to the IRS. The employee can
then use this W-2 to complete his or her tax returns, as well as maintain documentation of employment and
income. For more information, see the "Analyzing Employment and Income" article in the "Loan Process"
section.
Waferboard
Wood panels composed of wooden flakes that have been glued together under high pressure. It tends to swell
when exposed to moisture, but can still be used for roof decking and wall sheathing in select circumstances.
Wages, wage-earner
In the mortgage underwriting arena, the term wages apply to income compensation that is based on an hourly
calculation. Wage-earners, as opposed to salary-earners, are paid for each hour worked and receive additional
compensation for overtime. For more information, see the "Analyzing Employment and Income" article in the
Wainscot
A facing or paneling on the walls of a room. The term is also used to describe the lower part of a wall when it is
made of a different material from the upper portion of the wall. The trim that separates the wainscot from the
upper portion of the wall is the chair rail. For more information about the different types of trim or molding, see
the Trim entry.
Walkthrough
See Final Walkthrough entry.
Wall Plate
A horizontal beam attached to the top of frame studs.
Warehousing (Loans)
The process by which a warehouse mortgage lender originates loans in the primary mortgage market, with the
intention of selling those loans to the secondary mortgage market when a minimum volume is achieved. The
business model of such lenders is focused on originating loans, not servicing them. Warehouse lenders usually
have forward commitments with investors in the secondary market to provide those investors with qualified loans.
For more information, see the "History of the Mortgage Industry" article in the "Mortgage Industry" section.
Warehouse
Property used for storage of inventory and personal property.
Warranty
A promise offered by one party to another in a legal agreement. See also Home Warranty entry.
Warranty Deed
A method of legally conveying property, in which the buyer receives assurances and guarantees from the seller
regarding the validity of the title being transferred. For more information, see the "All About Deeds" article in the
Warranty Forever, Covenant of
An element of a general warranty deed that guarantees that the grantor will compensate the grantee for any
losses or expenses to defend the title being conveyed against any party claiming superior claim to the property.
For more information, see the "All About Deeds" article in the "Real Estate In-Depth" section.
Warranty of Title
See Warranty Forever entry.
Waste
A real estate term referring to damage of property, particularly by a lease tenant or life tenant. For more
Water Heater
The fixture that provides heated water to the hot-water system of a house or building. Water heaters are usually
heated by gas, oil or electricity. Gas and oil heaters tend to be cheaper, but need ventilation. Water heaters are
usually separate from the boiler system that heats some buildings, although some buildings do use the boiler as
a source for hot water. The water heater typically consists of a tank that receives cold water, heats it and stores
it until it needs to be delivered through the hot-water system. Most single-family homes require a 40- to 60-
gallon tank.
Water Rights
Real estate term referring to ownership interest in bodies of water along a property owner's parcel, as well as the
right to draw large amounts of water from such sources. Water rights normally include riparian rights, littoral
rights and prior appropriation rights. For more information, see the "Real Estate Introduction" article in the "Real
Water Softener
A mechanical system used to soften the hard water--water with more than five grains of salt (carbonates and
sulfates) per gallon--found in much of the U.S. Hard water tend to clog pipes, leave scum and complicate
washing. Water softeners pass the water through a bed of resin and a silica sand filter to absorb the salts.
Typical systems have a second tank of brine that regenerates the brine, which regularly loses its efficiency.
Watts
A measurement of electrical power equal to the amperage of a current times its voltage. Wattage provides a
measurement of the amount of power required by a device or set of devices.
Weep Hole
Construction term referring to holes at the bottom of brick and masonry walls that allow water to escape from the
space between the bricks and building sheathing.
Western Frame
See Platform Frame entry.
Wet Columns
Building columns that contain or are designed to contain pipes for plumbing fixtures.
Wholesale Lender
A lender who funds mortgage loans originated through brokers or correspondents, and then sells those loans to
investors in the secondary market. Some wholesale lenders are warehousers. For more information, see the
"History of the Mortgage Industry" article in the "Mortgage Industry" section.
Will
The legal instrument to control the disposition of a deceased individual's property and assets. A person who dies
with a will has died testate; to die without one is intestate. The deceased who made the will is the testator or
testatrix. The will's disposition of property is called a devise, and the receiver is the devisee. The assets
transferred is a bequest.
The will is filed with probate court, and the administrator of the will is the executor or personal representative. In
addition to the standard will, there are also holographic wills and nuncupative wills. For more information, see the
"Title Transfers and Wills" article in the "Real Estate In-Depth" section.
Window
Wall openings designed primarily to provide a view of the outside, as well as provide ventilation and light.
Typical windows normally consist of energy efficient glass, jambs, sashes, muntins, sills and rails. The most
common styles of window designs are awning, bay, casement, double-hung, fixed, hopper, horizontal sliding,
jalousie, skylight and triple-track windows.
Winged Gable
A type of gable roof with more pronounced overhangs.
Without Recourse
See Non-Recourse Loan entry.
Words of Conveyance
See Granting Clause entry.
Working Capital
Finance term referring to the current assets available to a business after subtracting all current liabilities. For
more information, see the "Creative Real Estate Investment Guide: Gathering Your Resources" article in the
Work Letter
Real estate term referring to the provision in the lease agreement that stipulates the work that the landlord,
property manager or owner must perform for the tenant. For more information, see the "All About Leases" article
Workout Loan
A finance arrangement in which the lender has agreed to lower the borrower's payment requirements in order to
prevent a foreclosure . For more information, see the "Everything You Want To Know About Foreclosures" article
Wraparound Mortgage
A junior mortgage that acknowledges and includes an existing mortgage loan in its principal amount due and in
its payment conditions. Payment is made to the lender of the wraparound mortgage, then that lender makes
payments on the previously existing mortgage loan(s). For more information, see the "Second Mortgages" article
in the "Loan Programs" section.
Writ of Attachment
An order issued by a judge, usually during court proceedings, prohibiting a property owner from a transferring the
title while the lawsuit or case is proceeding. For more information, see the "Transferring Title " article in the "Real
Writ of Execution
After a judgment has been issued against a property owner, the court may issue a writ of execution instructing
the local authority to seize and sell the property at an judicial sale. For more information, see the "Everything You
Want To Know About Foreclosures" article in the "Real Estate In-Depth" section.
Write-Off
Expenses or deductions that can be used to lower a person's or entity's taxable income. For more information,
see the "Investment Property Tax Advantages: Deducting Losses and Depreciation" article in the "Real Estate
Investing" section.
Y
Yield
The net return on an investment. An investment's yield usually takes into account certain expenses. For
example, a 1-year Treasury bill may pay guarantee a payment of $100 on a $1,000 bill--that's a 10% interest and
yield. If the original owner sells this T-bill to another investor for $1,100, that new investor would be receiving a
yield of only 9.0909% ($100/$1,100). [Note that mortgage rates are often tied to yields of Treasury notes. As
these notes get more expensive, their yield and the corresponding mortgage rates go down.] For more
information, see the "Interest Rates" article in the "Mortgage Industry" section.
Yield Curve
In the securities market, the yield curve is the graphic representation of the different yields of short-term, mid-
term and long-term U.S. Treasury notes. The 1-year T-Bill would have lower yields than the long-term 30-year T-
Bonds. When a line is drawn from the yields of the 1-year T-Bill, through the medium-term notes, to the 30-year
T-Bond's yield, the line is usually an ascending curve. In rare occasions, however, an inverted yield curve may
arise. For more information, see the "Interest Rates" article in the "Mortgage Industry" section.
Yield Spread Premium

The compensation brokers normally receive from the lender. This compensation, if any, is normally expressed
as basis points and is based on the interest rate. For more information, see the "Interest Rates" article in the
Z
Zoning
The division of a city or county into areas (zones), specifying the uses of the land and building codes regulating
each area. Zoning classifications vary by locale. See also related Variance and Covenant entries. For more
information, see the "Zoning and Building Codes" article in the "Real Estate In-Depth" section.
Zoning Amendment
A formal change to zoning regulation. For more information, see the "Zoning and Building Codes" article in the
Zoning Board
The local committee or department responsible for reviewing and approving zoning appeals and requests. For
more information, see the "Zoning and Building Codes" article in the "Real Estate In-Depth" section.
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Analyzing Employment & Income
The main factor that lenders look for when analyzing the applicant's current employment is stability. Employment
stability directly affects the borrower's future income and ability to repay the loan. Applicants with questionable
employment histories must have off-setting financial strength in order to be acceptable for the best financing
programs.
Although closely intertwined, mortgage lenders review income and employment differently.
1. Employment is analyzed to ensure that qualified income will continue. For more information, please
click on the highlighted tag.
2. Income is analyzed to determine whether it is sufficient to handle the loan payment obligations. For
more information, please click on the highlighted tag.
Note that if the applicant wishes to avoid having to provide information and documentation about his or her
employment and income, that applicant can always opt for No Income Verification (NIV) and No Documentation
(No Doc) loan programs.
Employment Qualification
Nobody can truly foretell the continued stability of an applicant's qualifying income—unless that income is in the
form of a heavily secured trust account. As with credit qualification, mortgage lenders attempt to project future
employment stability with current and past history.
Conforming lenders typically require two full year's of stable employment, preferably in the same field and
company. Non-conforming lenders will often accept significantly less, with some programs accepting borrowers
with only a two-month job history.
Loan processors will normally verify the applicant's employment stability with four documentation requirements:
● Verification of employment, completed by current and, when applicable, previous employers from the
most recent two years.
● Tax returns and W-2s for the past two years.
● Pay stubs for the past month.
There are exceptions to the two-year requirement, as well as additional requirements for special employment
situations. Applicants who have recently transferred to a new job can still be approved, as long as they can still
account for a two-year employment history.
An applicant with a gap in his or her employment during the past two years may still be acceptable as long as (1)
that applicant has been employed for at least six months at his current employment, (2) the new job is stable and
will probably continue and (3) the applicant provides a written explanation for the gap.
Favorable consideration will be given to applicants employed in a field in which advancement is possible
because of a continued demand for that kind of service. Frequent job changes in the same field is acceptable if
the applicant is advancing in the field. However, job-hopping without advancement might be a precursor to
future unstable income.
Exception to two-year minimum
There are two basic exceptions to the two-year employment history requirement: school and
military. Recent students who possess good credit ratings and applicants who have just been
discharged from military service do not have to meet this two-year requirement.
Military veterans will have to provide a copy of their discharge certificate, indicating the date of
their discharge. The circumstances surrounding the discharge (honorable or dishonorable) are
normally not a consideration for the underwriter.
Applicants who were in school and wish to claim that exemption must provide copies of a
current transcript. However, this school exemption usually only applies for post-secondary
education or training—such as college or special training programs. This school exemption
normally does not apply if the school in question was high school.
Special employment situations
Many mortgage loan applicants are in special employment situations that require additional
requirements. These special situations are discussed briefly below. The key is always full
documentation. However, they are all usually classified as unstable income, which affects how
the income is qualified.
There are four types of special employment situations that often arise and must be handled
with more work:
1. Self-employment. Technically speaking, applicant's who own more than 25% of a

company must classify income from that company as self-employment income. To
use this income, conforming lenders require the self-employed borrowers to show
steady self-employment for five years. This requirement can be lowered to three
years if the borrower was previously in a related field. In addition to the regular
employment requirements, self-employed applicants must provide three year's of
personal and company returns. Documentation for the company—such as business
license, incorporation papers and financial statements—may also be required.
2. Second jobs. Income from second jobs are acceptable as long as the applicant has
worked at that job or similar position for at least two years. Some lenders will waive
this two-year experience if the second job is related to the applicant's primary
employment or if the applicant has extensive experience in that second job's field.
3. Part-time employment. Income from part-time jobs are acceptable for qualification
purposes, as long as such employment has been ongoing for two years. As with
second jobs, applicants can waive this two-year requirement with experience in the
field.
4. Seasonal employment. Income from seasonal jobs are also acceptable as long as
they have held similar jobs during the last two years. This may be reduced to a one-
year requirement if the applicant has experience in the field.
Income Qualification
The basic question of income qualification is can the applicant afford the projected payments for the proposed
loan. For most mortgage lenders, the answer is a three-part process:
1. Determine effective income

2. Calculate long-term debts and housing payments.
3. Analyze debt-to-income (DTI) ratio.
1. Determine effective income
Before qualifying an applicant's income, the mortgage lender must first determine what the
applicant's qualifying income actually is. The fact is that not all of an applicant's income can be
used for qualification.
If there is a goal for the applicant in this first step, it is to maximize his or her gross monthly
effective income. Thus, the applicant must try to unearth all possible income sources.
The key to acceptable income is stability and documentation. Income must be stable and fully
documented as such. However, unstable income can still be acceptable--under certain
circumstances.
Acceptability is rooted in the employment source and documentation of the income. As long as
the income is derived from an acceptable employment source and that income is documented
and verified, then the income is normally acceptable.
When qualifying income, the lender seeks to calculate the GROSS MONTHLY acceptable
income. Gross income is basically all of your acceptable earnings prior to any taxes and
deductions.
Lenders tend to lump acceptable income into five groups. These groupings determined how
the applicant's qualifying income is determined. For more information about each of the
grouping, you can either scroll down further or simply click on the highlighted tag in the list.
1. Base income. Salary and wage earners can count on consistent base earnings.
2. Overtime, bonuses and commissions. These are inconsistent but still acceptable
sources of income.
3. Unstable personal income. Self-employment, dividends and interest income are
innately inconsistent, but can still be applied.
4. Rental income. This is acceptable income, with special qualification procedures.
5. Other income. Other sources of income may be applicable, depending on
documentation and legality.
Base income
This is the starting point with most borrowers. Salaried borrowers merely
divide their annual income by 12 months. Hourly wage earners must
calculate income for 35-40 hours per week (as applicable) and multiply by 4.2
weeks (per month). However, wage earners can also include average
overtime, as reviewed below.
Overtime, bonuses and commissions
Unstable income such as overtime, bonuses and commissions are averaged

over the past 24 months or two years. The monthly average is added to the
base income. For example, if Jane received commissions of $15,000 last
year and $12,000 the previous year, then her monthly average over the past
two years is $1,125 per month—that's $27,000 divided by 24 months. This
$1,125 calculation is then added to Jane's other income to determine her
qualifying income.
Loan processors and underwriters will normally scan the applicant's pay
stubs to determine average overtime earnings. Most pay stubs will provide a
year-to-date summary of overtime pay. Another method is to subtract the
base salary from the W-2 income—with adjustments for raises.
Unstable personal income
Income from self-employment, dividends and interest are also considered

unstable income and must be averaged over the past 24 months. Moreover,
there must be at least a two-year history with this income source.
Conforming lenders often will not accept income from recently initiated self-
employment or investments.
Self-employment income is often more difficult to calculate, because the

mortgage loan processor must add back certain deductions to the applicant's
taxable adjusted gross income. Many lenders will require documentation of
the self-employment through a business license, incorporation papers or CPA
letter.
Dividends and interest income is verified from 1099 statements issued by the
investment institution. If such income is reinvested into the original
investment, the applicant can still count that amount as personal income, as
long as it is fully documented. Appreciation in the applicant's portfolio value
is not counted as income—unless the applicant sells those investments and
counts it as self-employment income.
Rental income
Rental income is treated in one of two different ways, depending on whether

the applicant lives in the property.
● Owner-occupied: gross. With two-, three- and four-unit properties

wherein the applicant occupies one of the units, the applicant can
use 75% of the gross rental income as personal income. Only
current rental income from occupied units can usually be used.
Projected rental income from vacant units can sometimes be used,
based on what the appraiser indicates is the market rate and outlook
for the area. Moreover, the applicant cannot factor in potential
income from the unit he or she occupies. [For example, Arlene is
buying a three-flat; she intends to live in one of the units and rent out
the other two units for $500/month for each unit, or $1,000 gross.
When qualifying for the loan, she can use $750 (75% of the
$1,000/month gross) to increase her qualifying income.]
● Investment (non-owner-occupied): net. With properties that the

applicant does not occupy—as well as properties with five or more
units that the applicant does occupy—the applicant can use 75% of
net rental income. Net rental income is the gross revenue less
operating expenses and mortgage debts. On the plus side, the
mortgage debts in this situation are not included in the final debt-to-
income ratio calculations. However, if the net rental income shows a
loss, that loss is treated as long-term debt and is added to the
applicant's monthly debt calculation. [For example, Arnold is buying
an investment four-unit bulding. Each unit brings in $500, for a
monthly gross total of $2,000.His monthly mortgage, insurance and
tax payments total $1,900; so Arnold's net rental income is only
$100. Only $75 is added to his base personal qualifying income; but
that's okay, because the four-unit will not be included in his income
qualification.]
Other income
Other sources of income such as alimony, child support, judgment awards,

trust grants, public assistance, welfare, etc., are acceptable as long as they
satisfy three requirements:
1. Documented. The income's past, present and future must be fully

documented and verified.
2. Stable. The applicant must prove that the income is regularly
received. For example, an applicant cannot use alimony income
unless he or she actually receives that income on a regular basis.
3. Continuity. The applicant must confirm that the proposed income
will continue for at least three more years. Some lenders may
require longer terms. For example, an applicant who is supposed to
receive child support for her son until he turns 18 can count that
income--as long as her son is not yet 16.
2. Calculate long-term debts and housing payments.
After compiling gross monthly effective income, the applicant must calculate total long-term
debts. The projected personal housing payments are considered elements of the applicant's
long-term debts. The goal is to calculate the monthly payments for all long-term debts.
The key to identifying long-term debt is the 10-month rule. Simply, any debt that will take 10 or
more monthly payments to pay off are considered long-term debts. [Note that if an account is
close to 10 months and the applicant must lower debts, paying the few months to bring the
account under 10 months might be the key to solving this challenge.]
In this second step of the income qualifying process, four long-term debts must be calculated:
1. Projected housing payments. This is the principal, interest, taxes and insurance
(PITI) payments for the applicant's home. If the mortgage loan is for a home
purchase, the projected payments for that loan is calculated in this item. If the loan is
for an investment (non-owner-occupied) property, the payments for that loan is not
included here; instead it is considered in the above rental income calculation.
2. Installment debts. All installment loans that will have at least 10 more payments must
be included in this calculation. This line item includes student, car and personal loans.
3. Revolving debts. All credit card and other revolving debts must be included in the
calculation, as long as there is any balance on that account. The current minimum
monthly payment indicated by the creditor is used as the monthly payment
requirement. If no minimum monthly payment is provided, the loan processor will use
3%-5% of the balance as the monthly payment.
4. Other debts. Other liabilities that do not fall into any of the above categories but will
continue for at least 10 more months must also be included. This category would
include child support, alimony, separate maintenance, negative rental income and civil
judgments.
3. Analyze debt-to-income (DTI) ratio
The final step in the income-qualification process is to calculate and examine the applicant's
DTI ratio. Lenders normally limit their risk exposure by limiting the maximum DTI ratio they will
approve. Essentially, the DTI sets limits on how much of the applicant's gross income can be
used for the mortgage loan.
In fact, conforming programs examine two separate DTI ratios:
● Housing expenses. Often called the front-end ratio, this is the applicant's projected
housing payments. Most conforming limits set a maximum housing DTI of 33% to
35% of the applicant's gross monthly income.
● Long-term expenses. Often called the back-end ratio, this is the total of all of the
applicant's long-term debt payments. Most conforming programs limit the total long-
term DTI to 36% or 38%.
There are exceptions to these DTI ratio limits. Some conforming home-buyer programs allow
front-end and back-end DTI ratios to reach 38% and 42%, respectively.
Non-conforming programs allow DTI ratios to reach levels of 45% to 55%.
This final stage will use the preceding income and debt calculations to determine the
applicant's income qualification.
The following worksheet can be used to qualify an applicant's income by compiling the
applicant's debt-to-income ratios. It is an easy 16-step process that will quickly answer the
applicant's income-qualification request.
Housing Epenses: 28% (33%-36%) Total Long-Term Debts: 36% (40%)

1. Total Gross Monthly 9. Total Gross Monthly
$ $
Income Income
Now calculate your projected monthly housing
Now calculate your total long-term debts
expenses
2. Principal & Interest 11. Monthly Housing
$ $
payments: Expense (from line 6)
12. Total installment debt
3. Real estate taxes $ $
payments (mo.)
12. Total revolving debt
4. Hazard insurance $ $
payments (mo.)
13. Other long-term debt
5. PMI (if LTV > 80%) $ $
payments
6. Total Monthly Housing 14. Total Monthly Long-
$ $
Expenses Term Expenses
7. Housing Debt Ratio 15. Total Debt Ratio (line
% %
(line 6 ¸ line 1) 14 ¸ line 9)
8. Is housing debt ratio 9. Is total long-term debt
Yes / No Yes / No
acceptable? ratio acceptable?
If the applicant's DTI ratios do not meet the loan program requirements, he or she has the
following options:
● Change the requested loan. The most apparent option is to lower the loan amount,
which would lower the monthly housing payments. This may mean making a bigger
down payment or buying a smaller house. The applicant can also look at other loan
programs with lower interest rates. For other suggestions, see the "Money-Saving
Tips" article in the "Mortgage Industry" section.
● Lower debt payments. Related to the preceding option is trying to lower the monthly
payments on the applicant's non-housing debts. These options may include paying off
personal debts, paying them down to within the 10-month limit, refinancing debts with
personal loans or renegotiating a payment plan.
● Increase income calculations. The hardest option is to increase one's income
calculation. But it may be worth reviewing one's income calculation to see if there
were any uncounted income, such as bonuses, dividends, interest and seasonal
income.
● No income verification program. The borrower could select the no income
verification program, which can avoid income qualification requirements.
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About Mortgage Loan Processing
Much of the fear and anxiety that home buyers and mortgage applicants experience can usually be traced to
what seems like the mystery of the mortgage process. The articles in this section will pull the curtains back on all
questions about how lenders think and act:
1. Overview of Processing. What happens and when?

2. Reading Credit Reports. What is the likelihood that you will repay your debts?
3. Employment & Income Analysis. Are you able to afford the proposed loan?
4. Asset Issues. Do you meet the asset and cash requirements?
5. Liabilities Issues. Do you owe too much to afford this loan?
6. Property Requirements. Certain properties only qualify for certain loans.
7. Understanding the Appraisal Report. The appraisal gives the best insight into the property's
valuation.
8. Reviewing the Title Report. A clear and marketable title is usually the final obstacle for closing.
9. Sample Appraisal Report. Examine a typical appraisal.
10. Sample Credit Report. Review a sample credit report.
11. Sample title insurance commitment. Review a sample title insurance commitment policy.
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Analyzing Credit Reports
Lenders and creditors analyze an applicant's credit history to forecast the likelihood that the prospective
borrower will repay the requested loan amount. The theory is that credit histories demonstrate the consumer's
ability to manage debt and that past history is a strong predictor of future performance. Lenders accomplish this
by grading the applicant's credit history.
A sample credit report is available for review and comparison.
This article contains two parts:
1. Structure of the credit report. The first half reviews the contents of a credit report.
2. Grading a credit report. The second half discusses how a credit report is graded.
Credit reports display the applicant's recorded history for up to ten years. By law, consumer credit may remain
on a consumer's credit report for only seven years. Judgments—such as bankruptcies, foreclosures and
lawsuits—and debts owed to the government usually remain for up to ten years. When grading an applicant's
credit history, mortgage lenders place the greatest emphasis on the most recent 24-36 months.
The mortgage lender receives most of its credit reports from a credit reporting agency, which produce credit
reports by gathering information from the large national credit depositories such as TransUnion, Experian
(formerly TRW) and CBI/Equifax. These depositories, in turn, receive their data from creditors and lenders.
Note that lenders will also order their own credit reports from different sources.
Structure of the Credit Report

Credit reports normally contain the following sections:
1. Borrower background information

2. Credit score
3. Credit history
4. Inquiries
5. Public records
6. Consumer comments
7. Creditor information
Background information
The background information section occupies the upper portion of the front page of the credit
report and usually contains the following data:
● Subject identification. This section identifies the applicant's full name, home address
and social security number. The credit report will also list other name arrangements
and social security numbers used and previously recorded by the applicant.
● Marital information. This section displays the applicant's reported current marital
status, dependents and prior marriages. In most cases, this is obtained from the
URLA 1003 application form submitted by the applicant.
● Employment. This section identifies the applicant's current employer, position and
income level; this information is normally obtained from the application form completed
by the applicant. Previous employers, positions, income and dates of employment are
also provided, if they have been previously reported to the credit bureau.
● Housing. If available or reported, this section identifies the applicant's: current
housing type (rent or ownership) and monthly housing expense.
● Additional income. If secondary or non-employment income has been reported, that
amount will be identified in this section.
● Report order data. This section identifies the report's processing information, such as
when the report was ordered, the creditor who ordered it and information about the
loan or credit being considered.
Credit score
The first page of the credit report usually indicates the borrower's automated credit scoring.
Each of the three major consumer credit repositories (TransUnion, Experian/TRW and
Equifax/CBI) use their own software to calculate the consumer's credit score. More information
about credit scores are provided in the "Credit Grading" section below.
Credit history
The credit history section of the credit report normally appears in the following manner:
Sample Credit Report
Account Information Current Status Historical Status Rate
Last # of 30-59 60-89 90+ Type, Term,

Credit Date Highest Balance Past Due
Date Months Days Days Days Manner of
Grantor Opened Credit Owed Amount Reviewd Only Only Late
Report Payment
CITIBANK 1234-5678-9012-3456
4/92 10/90 5,000 1,000 0 30 0 0 0 R-1

MIDWEST FINANCIAL CORP. 9930892
2/9 2/89 100,000 98,000 0 48 0 0 0 M-1
Average credit reports normally span at least four pages. Obviously, consumers who have opened many
creditor accounts during the past seven years will have longer credit reports.
The credit history portion of the report will normally contain at least nine types of information,
which are divided and subdivided into columns. A more detailed discussion of each column
field is provided after the following list:
1. Credit grantor. The reporting creditor, lender or collection agent is identified in the
first column.
2. Date last reported. This column indicates the month and year in which the creditor
most recently reported the status of the account.
3. Date opened. The beginning date for the credit account is listed in this column.
4. Highest credit. This column indicates either the maximum credit limit or the original
loan balance.
5. Balance owed. This column identifies the current balance.
6. Past due amount. Any past due amounts are listed in this column.
7. Number of months reviewed. This column provides a tally of the number of months
that the creditor had reported on the account.
8. Frequency and duration of late payments. Payments that were reported as more
than 30 days late are identified in these three columns.
9. Credit payment type. This column identifies the type of payments required by the
creditor.
10. Terms and manner of payment. This final column identifies payment amounts--if
known--and the applicant's record of payments.
Credit grantor
This column contains two important items: the name and account number of
each reference. The creditor's name is often abbreviated. The account
number is indicated immediately following the creditor's name.
Some creditors report a different name than their publicly known brand; some
accounts may also be listed twice under different creditors. In such cases, a
comparison of the reported account numbers will help the applicant and
processor identify the account.
A few creditors, notably American Express, omit the full account number in
their reports to the credit bureau.
Date last reported
The date in the second column is the date of the last report submitted by the
creditor.
Most lenders and major creditors will issue reports every month; other
creditors will also report monthly if there is a balance on the account. Closed
and terminated accounts will often record the termination date in this column.
Current major accounts should display the most recent month. Lenders will
want to see that the applicant has sufficient current (open) credit lines.
Having no current credit is not the sign of good credit management. If a major
account does not display the most current reporting date, the loan processor
will have to order a new credit report or contact the creditor for a written
verification update.
Date account was opened

This self-explanatory column indicates the date that the applicant opened his
or her account with the creditor reference. This is a solid indicator of the
seasoning (age) and applicability of the account.
A number of young credit accounts is often an indication that the applicant is

trying to build or rebuild his or her credit record. But lenders and creditors will
insist on minimum track records. In fact, most creditors and lenders tend to
discount credit accounts that are less than one year old—unless there are
negative entries for that account. Negative entries, such as late payments
and delinquencies, on relatively new accounts are especially damaging.
With refinances and other programs that impose seasoning requirement on

the property or mortgage, the entry in this column is written verification of the
seasoning date.
Highest credit
This fourth column indicates the credit limit for the account. With revolving
accounts, this is the account's maximum credit allowance.
For installment loan accounts, the amount in this column indicates the original
principal balance. By contrasting the entry in this column with the current
balance owed, processors and underwriters can get a better idea of the
applicant's available equity and borrowing power.
Current balance owed
This fifth column indicates any current obligations still due on the account.
With credit cards and other revolving accounts, this column provides the
current account balance. Credit accounts that have been "maxed" damage
the applicant's credit history and lower the applicant's credit grade.
With installment loans, this entry provides the current principal balance.
Refinances will depend on this amount to preliminarily calculate how much
loan funds are needed or whether the approved loan amount will be sufficient
to pay off the existing loan.
Past due amount
If there are any past due amounts, they are listed in this column. Most
lenders and creditors will not list a payment as past due unless it is more than
30 days after the scheduled payment date. Obviously, any entries in this
column is damaging to the applicant's credit grade. Conforming loans and
many other programs require any past due amount be completely paid off
before closing.
The term delinquency normally applies to past due payment amounts. Short
of bankruptcies, foreclosures and major judgments, the entries in this past
due columns apply the heaviest negative effect on the applicant's grade,
because this column displays the account's current problems.
Number of months reviewed
This column indicates how many months the applicant's record with the credit
reference has been reviewed. This is normally tied closely to the date the
account was opened. As with that column, this entry helps to verify whether
seasoning requirements have been satisfied.
Frequency and duration of late payments
This group of three columns itemizes the applicant's late payments according
to severity. The entries in these columns record only late payments that were
actually paid. The earlier "past due amounts" column indicates what is still
owed.
Any recorded late payment is detrimental to the applicant's credit grade. As

can be expected, however, as payments become later and more delayed,
more damage is inflicted on the applicant's credit.
Although lenders and creditors have varying definitions of late payments,

credit reports only consider payments late when they are at least 30 days
past the due date. The three columns in the "Times Past Due" section
indicate varying levels of late payments on particular accounts:
● 30-59 days late. The first column indicates how many times the
credit reference has reported a past due amount that was paid within
the 30 to 59 days of its due date. This is the most common and least
damaging of the late payments.
● 60-89 days late. The second column indicates how many times the
credit reference has reported a past due amount that was paid within
60 to 89 days of its due date. A number of such late payments are
very serious and indicate poor credit management on the part of the
consumer.
● 90-days late. The third column indicates how many times the credit
reference has reported delinquencies that have lasted for longer
than 90 days. Recent entries in this column can easily disqualify
applicants. A number of entries in this section shows a lack of credit
management skills.
With most credit reports, any entries in these three columns will also contain
a date (month & year only) for the indicated late payment. This will allow
processors and underwriters to consider how recent or how long ago the late
payment occurred.
Loan type
This entry is normally combined with the final column that follows. This
column identifies the type of credit account listed in each row entry, by use of
a letter tag:
● O. Open account.
● R. Revolving or option accounts, such as some of the major bank
cards.
● I. Installment accounts, such as installment loans or credit cards with
department stores.
● M. Mortgage accounts.
● C. Checking account credit, such as a line of credit.
Term & manner of payment
The last column indicates the payment terms of each credit account, as well
as a number grade that identifies the payment habits of the applicant.
The payment terms for current accounts are typically listed as the basic
monthly amount required. revolving accounts will normally only indicate the
minimum monthly payment required for the current balance. installment
loans will list the monthly loan principal & interest payment.
The number grade for the manner of payment indicates the applicant's
current status on that account:
● 00-The account is not rated, is too new to rate, or has been

approved but is not being used.
● 01-The applicant pays (or paid) this account within 30 days of
billing. This is the ideal grade for all accounts, as it indicates that the
applicant is current.
● 02-The account holder is currently delinquent for more than one
scheduled payment. A grade of two or higher will normally coincide
with entries in the past due amounts column.
● 03-The account holder is currently two payments past due, with both
payments still unpaid.
● 04-The account holder is currently three or more payments past due,
with all payments still unpaid.
● 05-The account holder pays (or paid) in 120 days or more. This
grade normally indicates that the borrower is at least four payments
delinquent. However, such delinquency often translate into
immediate default.
● 06-The account holder is making regular payments under a wage-
earner or similar plan.
● 07-The account is in repossession or active collection. In such
cases, the consumer's credit privileges are typically assumed to be
terminated.
● 08-The credit reference has charged the account off as a bad debt.
This indicates that collection attempts have been unsuccessful.
Inquiries
The inquiries section lists every occasion that the consumer's credit report was requested by
any person, company or institution. Each inquiry entry will include the name of the institution or
person who requested the credit report, along with the date that the report was ordered.
Most credit reports will only list inquiries recorded during the past six to 12 months.
Public records
The public records section itemizes any reported judgments or governmental liabilities against
the applicant. This section will list instances of foreclosures, bankruptcies, tax liens and lawsuit
judgments.
Each public record entry will provide a range of information about the incident, such as court
document number, filing date, current status, discharge date (if applicable), judgment amount
and judgment type.
Consumer comment
This final section will record any comments that the consumer may wish to include in his or her
credit report. This space is usually reserved for disputes and explanations. If the consumer
feels that a negative entry is inaccurate or undeserved, a dispute comment can be recorded to
provide elaboration.
Creditor information
If the applicant wishes to dispute any account, he or she may contact the creditor directly. The
address and phone number of all creditors are available through the credit reporting agency. In
fact, most credit reports will immediately provide an addendum page identifying the creditors.
Applicants and loan processors can then contact these creditors directly for verification,
updates and pay off statements.
If the applicant believes that the account is false or incorrect, the applicant can and should
contact the creditor and credit bureau with a dispute letter. The creditor will compare the
applicant's dispute letter information with its recorded data. By law, the creditor must respond
to the applicant's dispute letter within 30 days or remove the disputed negative entry.
Analyzing & Grading Credit History

Most conforming and many non-conforming lenders today do not perform the detailed analysis of the credit
report that they did during the 1990s. Mortgage lenders are more frequently relying on the consumer credit
scores, although some review of the credit details are still performed. The future trend, as the mortgage industry
becomes even more automated, will be an even greater reliance on credit scores.
Nevertheless, credit scores are derived from the applicant's recorded credit history. This article section will
analyze credit grading in detail, starting with the nuts and bolts and concluding with interpretations of credit
scores. When analyzing the credit report, mortgage lenders concentrate on the negative entries. Specifically,
lenders look for five types of potentially adverse entries:
1. Insufficient entries
2. Recently opened credit accounts
3. Late payments
4. Current delinquencies
5. Judgments
6. Credit grade
If any of the above are found in an applicant's credit report, the applicant must provide a letter of
explanation—with supporting documents, if necessary—before the lender can give full approval.
Insufficient entries
The first step to grading a credit report is to count the number of entries and determine their
adequacy.
A-grade credit will require at least four or five active credit accounts. Applicants with no active
(open) trade lines, but with good previous account histories, are usually considered B-grade.
However, it is rare for any American adult to truly have no credit. For instructions on how to
quickly build credit, please review the "Building Credit" article in the "Damaged Credit Options"
section.
In addition, each credit entry must meet different program restrictions. For example, most
lenders require the active credit accounts to be at least 12 months old to be considered. The
credit accounts should also indicate the most current reporting date.
Recently opened credit accounts
New accounts and potential liabilities can be a problem because they can lower the applicant's
net worth and increase the applicant's debt-to-income (DTI) ratio to levels that may lead to
rejection.
Specifically, lenders will review the inquiries section. The applicant must confirm whether or
not any inquiry entry resulted in a credit account or loan. If so, that account should be included
in the credit report and in the applicant's liabilities calculation. Lenders are obviously
concerned about hidden liabilities that may threaten the applicant's current qualification or
future financial stability.
Late payments
As mentioned earlier, credit reports do not consider a payment as late until it is at least 30 days
past the due date. By the way, the difference between a delinquency and a late payment is
that the delinquency still hasn't been paid.
When counting late payments, lenders focus primarily on the past two years. Mortgage lenders
also place more weight on certain accounts than others. Lenders prioritize four types of credit
accounts as follows:
● Mortgage and rental accounts. Obviously, mortgage lenders must put the greatest
weight on the applicant's past history with mortgage loans and housing payments.
● Installment accounts. Loans with specific monthly payments are given almost as
much weight as mortgages. Mortgage loans, in fact, are forms of installment loans.
The common trait is regular monthly payments and the obligation to pay those debts
regularly. These accounts include car, student and signature loans.
● Revolving accounts. Credit cards are normally called revolving debts because the
monthly payments will vary from month to month, depending on the account balance
for that period. Mortgage lenders are normally more lenient with late payments on
revolving accounts than they are with late payments on installment and mortgage
debts.
● Other accounts. Utilities, lay-aways, debts with irregular payments and commercial
loans from the applicant's company often fall into this miscellaneous category. They
are often not reported; when they are reported, they are usually not given as much
weight by mortgage lenders as the other types of accounts.
Current delinquencies
Current past-due amounts are highly detrimental to a consumer's credit grade because it
indicates current problems. If there is more than one delinquent account, most lenders can
deduce that the applicant is having financial problems.
Very serious delinquencies become collection accounts. In such cases, the creditor has failed
to persuade the consumer to bring their account current and has turned the account over to a
collection agent. If the collection agent fails, creditors can then turn to civil courts for a legal
judgment against the borrower.
Conforming loan programs will accept an applicant who has a delinquency, but will normally
require that delinquency to be paid off prior to approval and closing.
Judgments
Civil court judgments against the applicant are often the most serious negative entries in a
consumer's credit report, because judgments are normally the final stage in a long
delinquency. Credit accounts will only lead to judgments after collection and default.
Other types of judgments include bankruptcies and foreclosures. These actions are court-
ordered procedures that do not happen overnight.
Although bankruptcy is the single most detrimental credit rating, borrowers who recover from
bankruptcy proceedings and demonstrate the ability to manage their finances should not be
severely penalized. The date of discharge is the date used for analysis. A person may file for
bankruptcy protection today, but the discharge may not occur until next month or next year or
next decade. Borrowers who have been discharged from their bankruptcy within the past two
years may be considered only if the bankruptcy was caused by circumstances beyond their
control and if the applicants have since repaired and recovered their credit.
Conforming lenders will not accept applicants with recent foreclosure or bankruptcy judgments,
unless those judgments are small and have been settled.
Credit grades
Credit is generally graded according to familiar letter grades. Negative entries progressively
damage the consumer credit rating. But it is not enough to simply avoid negative entries. The
consumer should also demonstrate that he or she can manage credit. Thus, maintaining
strong credit is a proactive task; having no recorded credit experience is not good enough to
show adequate credit management.
Credit scores, sometimes called FICO scores, arose out of established industry standards that
all lenders used prior to 1995. The matrix below lists the credit scores normally given for A+, A,
B, C and D/F credit. Note the following clarifications:
● Mortgage lates refer to a payment that is 30 days late. A payment that is 60-89 days
late counts as two (2) 30-day lates; a 90-day or more late payment is counted as three
30-day lates.
● Lenders distinguish between delinquencies during the past 12 months and the past 24
months. Note that the lender's underwriter will not overlook late payments prior to the
last 24 months, but the greatest focus will be on the most recent period.
With regard to bankruptcies and foreclosures, the time requirement indicated begins with the
discharge of the bankruptcy or foreclosure, not the filing date.
The following is a useful credit scoring matrix that you can use to measure your credit
grade.Credit scores can range from about 350 to about 835, depending on the credit bureau.
Note that different lenders have slight variations as to the dividing line between A+ and A, or A-
and B, etc.. This matrix does provide an industry average for residential mortgage loans.
A+ A B C D/F
Score 720+ 650-719 580-650 500-579 <500
Mortgage lates last 12 months 0 <1 <4 <6 >6
Mortgage lates last 24 months 0 <2 <4 <8 >8
Installment lates last 12 months 0 <2 <5 <9 >9
Installment lates last 24 months 0-1 <3 <6 <12 >12
Revolving lates last 12 months 0-1 <3 <6 <12 >12
Revolving lates last 24 months 0-2 <4 <8 <12 >12
<$1,000
Collections last 12 months 0 <500 (paid)
(paid)
>$1,000 >$5,000
<$1,000 <$2,000
Collections last 24 months 0
(paid) (paid)
>$2,000 >$5,000
<$1,000 <$2,000
Charge-off/Judgment 24 months 0
(paid) (paid)
>$2,000 >$5,000
Repossessions >7 yrs >5 yrs >2 yrs 1-2 yrs <6 mos
Bankruptcy >10 yrs >5 yrs >2 yrs <2 yrs <6 mos
Foreclosure >10 yrs >7 yrs >3 yrs <3 yrs <6 mos
The following offers a quick translation of what those letter grades actually mean or require:
● A-grade borrowers have excellent or very positive credit history. They usually
have credit scores of 650+, with A-plus credit starting at 720. Conforming loan
programs require A-credit of its applicants. In the mortgage industry, A-credit
borrowers must satisfy all of the following requirements: (1) no foreclosure or
bankruptcy within the past seven years; (2) no late payments on their mortgage history
during the past year and no more than one late payment in the past two years; (3) no
more than one late payment on any installment loan during the past year and no more
than two during the past two years; (4) no more than two late payments on revolving
accounts during the past year and no more than four during the past two years; (5) no
open collection accounts; and (6) a credit score of at least 650. A-grade borrower must
have at least four or five open accounts recorded on the credit report.
● B-grade borrowers have good but slightly flawed credit. They usually have credit
scores between 580 to 650. Conforming programs tend to deny B-credit applicants.
However, B-credit applicants usually have a good chance of improving to A-credit in a
relatively short period of one to two years. In the mortgage industry, B-credit
borrowers normally have one or more of the following traits: (1) no bankruptcies or
foreclosures in the past five years and no repossessions or major judgments in the
past four years; (2) three to six late payments on mortgage and installment debts
during the past two years; (3) five to eight late payments on revolving debts in the past
two years; (4) unpaid collections of $500 to $10,000. Note that a borrower with no
recorded credit history is normally graded B.
● C-grade borrowers have damaged credit, but their credit records will often show
some glimmer of effort. C-grade consumers are usually delinquent on several
accounts, and demonstrate an inability to efficiently manage debt; they usually have
credit scores obetween 500 to 579. For most C-grade consumers, their only financing
hope would be with non-conforming loan programs. In the mortgage industry, C-credit
borrowers usually have one or more of the following traits: (1) a bankruptcy,
foreclosure or repossession during the past two to three years; (2) at least 60-90 days
behind on mortgage or large installment debts ; (3) at least nine late payments on
revolving accounts in the past two years; and (4) more than one open collection
account. However, with proper attention to debt payments, a C-credit borrower can
usually return to A-grade within two to three years. If there has been a bankruptcy,
foreclosure or repossession in the past two years, the borrower can still salvage a C
grade by showing that he or she has made strong efforts to regain creditworthiness.
● D-grade borrowers have tremendously damaged credit, with no recorded
display of recovery. Some lenders label this level E-grade or F-grade, but the net
result is the same. The only financing hope for D-credit borrowers would be expensive
non-conforming loan programs. D-grade borrowers are often currently in foreclosure,
bankruptcy or repossession—or have just completed such actions within the past
year. Consumers can still be graded "D" when the foreclosure, bankruptcy or
repossession is two to five years old if that consumer has not made strides in
rebuilding credit. However, with proper attention to debt payments, a D-credit
borrower can usually return to A-grade within five to seven years.
Different lenders establish and regularly adjust their own credit-grading criteria. Some lenders
are more lenient than others. In general, however, lenders with the most attractive loan
programs and pricing often impose the tightest requirements.
If you have damaged credit, we recommend that you review the "Damaged Credit Options" and
"Repairing Damaged Credit" articles.
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Investment Property Tax Advantages:
Deducting Depreciation
Many beginning investors are initially perplexed about the concept of depreciation , particularly in the area of real
estate. How can you depreciate the value of real estate when its fair market value continues to increase?
For example, Lupe buys an apartment building for $500,000, with the underlying land worth about $100,000. The
building itself, apart from the underlying land, would thus be valued at $400,000. Lupe deducts about $10,000 in
depreciation every year for the building, reducing her taxable income by that amount. Nevertheless, within ten
years (after depreciation more than $100,000) Lupe's apartment building has actually gone up in value to
$800,000.
Depreciation is the periodic expending of the value of an asset over that asset's useful life. Depreciation is a
difficult concept for some to grasp, because it seems like an "imaginary" deduction. Depreciation is based on
projections of useful life, but these projections are by nature always inexact. We can arrive at worthwhile
projections about the useful life of any equipment, fixture or even building, by examining the past. But the
projections are just that, projections. For example, we can understand from experience that a fax machine may
have a useful life of four years; but there are many people who have fax machines that are more than seven
years old.
With regard to real estate, even buildings have a useful life. Normal wear-and-tear will gradually degrade the
building. Such useful life can be extended through rehabs, improvements and upgrades, but there's no stopping
the ravages of age. Depreciation is the accounting and tax method for considering the cost of such wear-and-
tear on an asset.
Nevertheless, there are many examples of real estate continuing to increase in value even while its useful life is
coming closer to an end. But property value and useful life are not always connected. Property value is more
often a consequence of increasing demand and limited supply.
Real estate investors who grasp the concept of depreciation deductions quickly realize its benefits and
advantages. Even investors who do not fully grasp the concept still appreciate the tax benefits of depreciation
deduction. This review will review the requirements and guidelines for real estate depreciation deductions:
● Investment property
● Calculating depreciation
● Recapturing depreciation
Investment Property
Homeowners cannot depreciate the value of their home. The IRS only allows investment real estate to be
depreciated. Real estate depreciation is also applied only to improvements, the term used to classify buildings,
landscaping, pavements and other artificial adjustments of raw land. The IRS does not allow the real estate
investor to depreciate the value of the land.
The following are additional guidelines required for real estate depreciation deductions:
● Use. Only investment properties qualify for depreciation deductions. Investment property may include
those used in a business, trade or industry; or the property must be income-producing, i.e. rental
properties. However, properties that are held for resale (such as condo conversion units and homes
intentionally built for resale) cannot be depreciated, because they would be considered inventory.
● Real property. All real property with qualified use is eligible for depreciation deductions. Thus,
condominiums (which provide the owner only with air space but no land or building physical structures)
may still be eligible for depreciation deduction if they are held for income or business.
● Mixed-use. Some properties are residences of the owner (thus non-depreciable) but contain business
or rental portions. For example, someone may own a three-flat and live in one of the units; or a
homeowner may have an office in his or her home. In such situations, only the prorated value of the
business or rental portions may be depreciated.
● Defined useful life. Depreciation requires a defined useful life, and the IRS usually sets those "useful
life" actuary tables. This explains why land cannot be depreciated, as it is nearly impossible to
determine a constant and applicable useful life for land. Moreover, depreciation requires a useful life of
at least one year. Useful life for real estate will be discussed in more detail in the "Calculating
Depreciation Deductions" section of this page.
● Capital investment. The depreciation amount will be based on the capital investment made by the
investor into the property. If the investor bought real estate for $100,000, and the depreciable parts
(building, driveway, etc.) were worth $75,000, the investor's depreciation deductions would be limited to
$75,000.
● Improvements. In addition to the initial capital investment, all other capital investments made during the
ownership of the property may also be depreciated. All real estate improvements (such as rehabs,
upgrades and additions) can be depreciated; however, repairs and operating costs are not subject to
depreciation . Depreciable improvements are any work that contributes to the property's value or
extends the property's useful life.
● Start date. Real estate depreciation starts when the property is placed in service. It need not be
occupied, just made available for occupancy or tenancy. Depreciation does not necessarily begin when
the property is purchased or acquired. [For example, Frank owns and lives in a downtown condominium.
He decides to move to the suburbs, but he wants to keep his condo and rent it out. When Frank moves
out and markets the property for lease, it becomes an investment property that can be depreciated.]
Calculating Depreciation
First of all, depreciation is mandatory. You must accept and claim depreciation deductions if your property
qualifies for depreciation . You cannot elect out of it. [Consequently, real estate investors cannot file 1040EZ
short forms.] You may wonder why someone would forego depreciation deductions; there are investors with
sufficient deductions elsewhere and don't need any more deductions. Moreover, depreciation tends to be
considered passive activity losses; so they cannot be easily deducted against ordinary or portfolio income.
The IRS has established fairly clear tables for determining depreciation deductions on investment real estate.
Real property depreciation can be simplified into two groups:
1. After 1987
2. Before 1987
After 1987
Investment real estate that the taxpayer has purchased and placed into service after January 1,
1987, uses the Modified Accelerated Cost Recovery System (MACRS) to calculate
depreciation . Note that this date is based on the taxpayer's action. The key date is not when
the property was originally built and placed into service, but when the current taxpayer bought
the property and placed it into service as a business, trade or rental property.
Real estate investors are most often concerned with the following MACRS tables:
1. Residential rental property—27.5 years

2. Commercial real estate—39 years
3. Building components
Residential rental property
Residential real estate that is held for rent and income-production is depreciated over
27.5 years. Such properties include apartment buildings, condominium units,
cooperative units, duplexes and houses rented as residences for tenants.
However, the IRS specifically excludes hotels, resorts and motels from this category.
Those "transient" properties are considered commercial real estate.
Mixed-use properties, which contain both residential and commercial units, are not
prorated. The entire real estate property must be categorized as either residential or
commercial. To qualify for the more beneficial residential category, the mixed-use
building must receive at least 80% of its gross rental income from the residential
dwelling units.
For example, Nasser owns a mixed-use building that contains three offices on the first
floor and three apartment units on the upper floors. Although the unit breakdown is 50-
50, Nasser actually receives $4,200 per month from his residential tenants and only
$1,000 per month for the office spaces. Because the residential income accounts for
more than 80% of the gross rental income, this property can be classified as
residential, with regard to depreciation deductions.
To calculate the depreciation deduction for residential real estate, you must first
determine your unadjusted "depreciable" basis. The depreciable basis is normally the
purchase price, less the value of the land (which cannot be depreciated). After
determining your depreciable basis, you can use the following MACRS table to
determine the factor by which you must multiply that depreciable basis.
Note that your factor will vary according to the tax year you are currently in, with
regards to the subject property, and the month of the year in which the property was
acquired and placed into service:
Years Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1 3.485 3.182 2.879 2.576 2.273 1.970 1.667 1.364 1.061 0.758 0.455 0.152
2-9 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636
10, 12, 14, 16, 18, 20, 22,
3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
24, 26
11, 13, 15, 17, 19, 21, 23,
3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
25, 27
28 1.970 2.273 2.576 2.879 3.182 3.485 3.636 3.636 3.636 3.636 3.636 3.636
29 0.000 0.000 0.000 0.000 0.000 0.000 0.152 0.455 0.758 1.061 1.061 1.667
For example, Gene buys an apartment building for $1.2 million. The land is
worth about $200,000, so his depreciable basis is $1 million. Gene bought
and purchased the property in May 2001. His annual depreciation deductions
for the first year would be as follows:
1. First year: (1 May factor) 2.273% x $1,000,000 = $22,730

2. Second year: (2 May factor) 3.636% x $1,000,000 = $36,360
3. Third year: (3 May factor) 3.637% x $1,000,000 =$36,370
Gene can therefore deduct up to $22,730 in depreciation deductions against

the property's income. If the property generates a passive activity loss, that
loss can then be deducted against other passive activity income. As will be
discussed in the "Passive Activity Deductions" section, a net passive activity
loss that arises from real estate investments can sometimes be deducted
from ordinary and portfolio income to lower the investor's taxable income.
You may notice that all of the even-numbered years between year 10 and
year 26 (i.e. 10, 12, 14, etc.) all have the same depreciation percentage rates;
while all of the odd-numbered years between years 11 and 27 (i.e. 11, 13, 15,
etc.) all share the same depreciation rates. Also, the depreciation percentage
rates for years 2 through 9 are all the same.
Commercial real estate
Depreciation for commercial properties is on a more extended basis of 39

years. However, commercial properties that were acquired before May 13,
1993, but after 1986, use a 31.5-year depreciation table.
Commercial real estate includes office and retail properties, as well as some
industrial facilities and mixed-use residential properties.
The 39-year deprciation table for commercial real estate purchased after May
13, 1993, is as follows:
Years Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1 2.461 2.247 2.033 1.819 1.605 1.391 1.177 0.963 0.749 0.535 0.321 0.107
2-39 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564
40 0.107 0.321 0.535 0.749 0.963 1.177 1.391 1.605 1.819 2.033 2.247 2.461
As noted above, commercial properties acquired between 1987 and 1993 use
the 31.5-year table. A copy of that table and all depreciation tables are
available from www.IRS.gov.
Building components
The IRS also maintains MACRS tables for a variety of other assets and
equipments, which tend to have shorter useful lives than real estate
improvements. Unfortunately for real estate investors, components that are
structural to the building and/or fixtures are categorized as real property and
are depreciated over the useful life of the building-27.5, 31.5 or 39 years.
This is a disadvantage for real estate investors, because even though a hot
water tank may have a useful life of 10 years, it must be depreciated for 27.5
to 39 years.
But wait…it gets even worse for components that are added to the building.
For example, if you need to replace the furnace in your office buildings five
years after you bought the property, you must depreciate that new furnace
over 39 years; and you must start on the date it was purchased and installed.
Furniture, equipment and other assets that the real estate investor acquires
are depreciated over a shorter time frame. The following are a few personal
property depreciation classes:
● Construction equipment. Most construction equipment and tools

are depreciable over five (5) years.
● Improvements to land. Sidewalks, driveways, sewers, landscaping,
drains, docks, canals and other similar non-building improvements to
land are normally depreciable over fifteen (15) years.
● Electronic office machines. Typewriters, copiers, computers,
printers and fax machines are normally depreciable over five (5)
years. Other office furniture, fixtures and equipment are depreciable
over seven (7) years.
● Residential unit furnishings. Apartment furniture, stoves,
microwave ovens, conventional ovens, trash disposals and
refrigerators are depreciable over five (5) years.
● Agricultural. General farm buildings are usually depreciable over
twenty (20) years, although special-use structures such as silos and
bins are depreciable over a shorter span of ten (10) years. Farming
machinery and other agricultural equipment are usually depreciable
over seven (7) years.
Note that savvy investors can use these different classes to improve their
depreciation situation. For example, if you buy an office building or farm, you
can shorten your depreciation period by separating certain equipment, land
improvements and farm components.
Before 1987
Our current MACRS rules were enacted by Congress with the Tax Reform Act of 1986. Prior to
1987, real estate investors used the Accelerated Cost Recovery System (ACRS), which offered
a more advantageous depreciation system. ACRS depreciation periods ranged from 15 to 19
years for investment real estate, almost half the time MACRS required.
If you bought your investment property and placed it into service before January 1, 1987, you
may qualify to use these shorter, more beneficial depreciation rates. Consult your CPA or the
IRS for more information.
Recapturing Depreciation
The benefits of depreciation deductions are somewhat offset by the requirement that all deprecation claimed on
the property must be recaptured and taxed when the property is sold. Nevertheless, the investor will still come
out ahead.
When the accrued depreciation is recaptured, it is taxed at 25%, slightly higher than standard capital gains .
However, when you claim depreciation deduction, you potentially could use that to lower your taxable income. If
you are in the 28% tax bracket, that's a base savings of three percentage points.
Moreover, when you consider that depreciation deductions allow you to enjoy your tax savings while paying a
lower rate later, you actually come out way ahead.
Savvy real estate investors also realize that they don't have to pay capital gain and depreciation recapture taxes.
They can dispose of their property through a tax-free real estate exchange. For more about depreciation
recapture and capital gains , please review the "All About Real Estate Capital Gains" article.
The "Investment Property Tax Advantages" article contains two sections:
● Deducting Investment Losses

● Deducting Depreciation

If you are interested in obtaining a mortgage loan commitment to determine your optimum loan qualification,
please complete the Preapproval Application form. We will obtain a preliminary approval for you, based on the
information you provide in the application. There are no obligations on your part. You may decide to cancel at
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Real Estate Investing
All About Capital Gains: Computing capital gain taxes; Homeowner exemptions; Creative exchanges to avoid
capital gain
All About Real Estate Exchanges:
Creative Real Estate Investing Guide: Overview of the Real Estate Investing Process; Standard Lending
Requirements; Creative Financing Basics; No Down Payment Programs; Looking for Target Properties; Property
Management Basics; Getting Started; Guide to Preparing a Business Plan; Analyzing, Building & Repairing
Credit; Property Take-Over Checklist; Rental Application; Sample Lease Agreement; Installment Agreement &
Proposal; Sample Purchase Option; Property Inspection Checklist; Property Investment Analysis Form;
Preapproval Request Questionnaire
Introduction to Real Estate Development
Introduction to Investment Property Types & Tactics
Investment Property Tax Advantages: Overview; Deducting Losses; Deducting Depreciation
Successful Property Management

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About the Good Faith Estimate (GFE)
The good faith estimate (GFE) is one of several government-required disclosures that you will receive at the time
of or within three days after application. It is a legal requirement that all lenders must follow.
The GFE provides the borrower with an honest approximation of the closing costs, down payment balances,
prepaid expenses and all other charges that the borrower must address at the closing.
The borrower should hold the lender to this estimate, with some obvious leeway. The lender must inform the
borrower immediately of any changes in the loan program, rate, pricing and closing costs. Obviously, the lender
can only guess at the time of application what expenses such as attorney fees, title charges, investor fees,
inspection costs and other such variable expenses will be. These expenses are set by other parties or chosen
by the seller or buyer, not the lender. However, the lender should be accurate with its own fees.
As a rule of thumb, the borrower should be concerned if the final closing costs are more than 15% higher than
the estimate. The exception is if the borrower is fully informed by the lender beforehand that these items will be
higher, and the borrower accepts. Note also that other expenses not anticipated by the lender may appear
during the processing period. If they are legitimate, they will often be unavoidable.
SAMPLE Good Faith Estimate: Click here to view a sample good faith estimate for "Jane & John
Doe."
The good faith estimate is normally divided into four sections, not including the necessary disclaimers,
application information and borrower acknowledgment.
This review of the good faith estimate is divided into four parts, not including this introduction. The four sections
itemize the projected amounts for the following elements:
1. Closing costs. These are one-time fees to be paid by the borrower at the closing.
2. Prepaid expenses. These are elements of the borrower's projected housing payments (interest, taxes,
insurance, etc.) that must be prepaid to establish the escrow and loan schedule.
3. Balance of cash for closing. This section provides the borrower with a balance sheet, to calculate the
amount of funds that the borrower will need to pay or will receive at the closing.
4. Projected monthly payment. This section itemizes and adds together the borrower's projected
monthly housing payment, based on the current loan amount, interest rate, term and other housing
debts.
Click on any of the four section headings above to jump to a more detailed review of that section. For additional
information about these expenses, please consult the "Housing Payments (PITI)" article, as well as the
"Homebuyer Guide" and "Glossary" sections.
The closing costs section often scares many unsuspecting applicants with the amounts normally disclosed. As
discussed in the "No Closing Cost Options" article, closing costs are unavoidable but can be greatly minimized or
sometimes eliminated.
Numbering System
In the closing costs and prepaid expenses section, the itemized charges have uniform line
numbers. These line numbers have been established by the U.S. Department of Housing &
Urban Development (HUD). These numbers are sometimes called RESPA (Real Estate
Settlement Procedures Act) category numbers, named after the law passed to provide
consumers with more protection through more thorough disclosure requirements—which
developed this system.
At the closing, all parties will receive a copy of the finalized HUD-1 Settlement Statement. This
statement is usually the last document reviewed and signed at the closing. The settlement
statement is the final balance sheet or financial statement for the loan transaction, and it will
review all funds collected and/or disbursed by the buyer, seller, real estate agents, title
company and lender during the course of the transaction.
You will notice that the settlement statement entries will have the same line numbers as the
good faith estimate, although the settlement statement will have more entries and details. In a
sense, the good faith estimate is the preliminary settlement statement.
Broker Compensation from Lender
In many loans involving a mortgage broker, the broker will receive commission or
compensation from the lender. This usually takes the form of a
Applying for a Loan: Overview
In addition to the Loan Preapproval and Prequalification forms, this section also provides additional background
material about the application and the many elements and documents you will encounter:
● Quick Loan Prequalification Form. A simple no-obligation analysis of your borrowing abilities.
● Mortgage Preapproval Application Form. Note that you can cancel your application at any time prior to
final commitment without any penalties.
● Combined Application Disclosures Packet (government required disclosures that lenders must provide
to all applicants)
● Personal Documents Required for Application
● About the Application Packet (a review of the documents that make up the application packet)
● About the Good Faith Estimate (an explanation of the charges and projections of the good faith
estimate)
● About the Truth-in-Lending Disclosure (a review of this federally required disclosure of loan terms)
● About the URLA 1003 Application Form (a review of the main application form required for residential
financing)
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Investment Property Tax Advantages
Although tax law changes during the past two decades have cut back many tax breaks, real estate investors
continue to enjoy several tax benefits unavailable to many people. These tax advantages are discussed in the
following two sections:
● Deducting Investment Losses

● Deducting Depreciation
Note that this lengthy article is only an introductory discussion. You must consult an experienced tax accountant,
preferably a CPA, and real estate attorney when applying any of the tactics and advantages discussed in this
article, its attached pages and, for that matter, this entire website.
Go to next section: "Deducting Investment Losses"
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Hazard Insurance
Hazard insurance is a standard part of most real estate transactions, but the truth is that hazard insurance is
typically not required by law. Often called homeowners or fire insurance, hazard insurance is required by the
mortgage lender, whenever mortgage financing is involved. Even if hazard insurance were not required, it would
be foolish for homeowners or investors not to have adequate coverage.
Simple fire insurance policies have been in use since the 17th century, particularly after the 1666 Great Fire of
London. Early fire insurance policies tended to heavily favor the insurer with an abundance of fine print that
severely limited the policyholder's protection. It wasn't until the late 19th and early 20th century that policies
began to provide a more balanced agreement, but policies still tended to favor the insurer.
The original fire insurance policies were just that. They only covered fire damage. It has only been in the past
century that more expansive hazard insurance coverage has developed. This article will review the development
and current state of hazard insurance in the following sections:
● Coverage and policy types

● Elements and procedures
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Overview of the Mortgage & Real Estate
Industry
This section contains articles that discuss different aspects of the residential mortgage loan industry. For
borrowers and property buyers who want to know more about what motivates the institutions and parties in the
real estate market, these articles are highly informative reading:
● Overview of the Mortgage Industry. Today's dynamic mortgage industry is mainly due to
developments of this century..
● Regulatory Requirements. Consumer protection tools enacted by Congress and the federal
government.
● Fannie Mae (FNMA). The largest financial company in the country is the most powerful in the mortgage
industry.
● Freddie Mac (FHLMC). Fannie Mae's smaller, younger cousin.
● Ginnie Mae (GNMA). A little bit of the original Fannie Mae that went its own way.
● Loan Purposes—Purchase, Refinance, Construction. The loan usage will affect the terms,
requirements and price.
● Loan Programs & Pricing—How long are you staying? When selecting among different loan
programs, the most important factor should be how long the buyer intends to keep the property.
● Loan Servicing. Loans are regularly sold and transferred between lenders and servicers.
● Housing Payments—PITI. A dissection of the elements that make up the monthly housing payment
and their importance.
● Private Mortgage Insurance (PMI) options. PMI adds $30 to $100 per month to the average loan.
This article offers options to reduce or eliminate PMI.
● Prepayments on Principal. A great way to save thousands of dollars on a mortgage loan is to prepay
on the principal.
● Amortization and Term. Often confused, these two elements are actually separate factors that can
change the price and process of any mortgage loan.
● Mortgages vs. Loans. Not all loans are mortgage loans. In fact, mortgages strictly speaking are not
loans.
● Loan-to-Value (LTV) ratios. The LTV is the primary tactic used by lenders to limit and control risk.
● Hazard (Homeowner) Insurance. Hazard insurance has become a fact of life for all real estate,
particularly when a mortgage loan is involved. This article will review the many elements of the hazard
insurance.
● Money-Saving Tips. There are many ways to save money with mortgage financing--if consumers only
knew.
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Adjustable Rate Mortgages
An Adjustable Rate Mortgage (ARM) loan is any mortgage loan program that allows the lender to periodically
reset or adjust the loan's interest rate, according to agreed measurements and at pre-set periods.
Don't worry, though. The mortgage lender will not have free reign with the adjustments. Today's ARM loan
borrowers actually have several protections built into the residential ARM loan program. However, that has not
always been the case. In fact, the ARM loan as we know it today is a fairly recent introduction into the mortgage
loan market.
This article will review the ARM program, through a discussion of four ARM program issues:
● Advantages of ARM Loans

● ARM Loan Details
● Borrower ARM Qualifications
● Disadvantages of ARM Loans
Advantages of ARM Loans

Most residential loans in the past have been fixed-rate loans with short terms. Before the Great Depression of
1920s and 30s, many of these loans were balloon programs, often with high rates. This was necessary because
the mechanism that ARM loan adjustments depend on, a reliable index, had not been widely available.
The residential ARM loan was first introduced into the national market as the Variable Rate loan. This term still
remains in use with credit cards and installment loans, but it has been replaced in the mortgage industry with the
more specific and catchy "ARM" description.
When the variable rate mortgage loan first appeared, it was overly restrictive on the lender. So much so that
many of them lost money on it. That was good news for borrowers in the short term; but it was bad news in the
long term, as lenders and investors threatened to abandon these programs. In the past three decades, the
variable rate mortgage was renamed and further redeveloped, as well as diversified, into today's ARM loan.
Most home buyers still have a natural aversion to ARM loans. Older homeowners who remember the 19%
interest rate of the 1970s, are especially leary of the inherent risks of ARM programs. However, ARM loans do
have their advantages, which make them ideal for people who can see the home or property purchase as a
financial investment.
First of all, if you are only keeping the home for three years or less, you will save money by selecting an ARM
loan, instead of a fixed-rate loan. Even if you decide to stay past the third year, many ARMs have a conversion
option and some lenders provide no-lender-cost refinances.
With the development of 3/1, 5/1 and 7/1 ARMs, which will be discussed in more detail below, ARM programs
ffer an even greater opportunity for homebuyers planning on up to a seven-year ownership period with any one
property.
When compared side-by-side, the typical borrower will still save more money with the 1-Year ARM (compared
with the fixed-rate) for the first three years. After the third year, depending on how the market reacts, the fixed-
rate or balloon loans are generally better.
The reason for the ARM loan's advantage is that even with any wild increases in the market's current interest
rates, the rate increase caps—or limits—means that monthly payments normally remain lower with the ARM loan
for at least two years.
Secondly, ARM loans are the program of choice during periods of high interest rates. History has shown that
interest rate fluctuations are normal and tend to be cyclical. During times of comparatively higher rates,
borrowers can elect to go with an ARM loan that has a much lower interest rate than theregular 30-year fixed-
rate. When the market finally improves to lower rates, the borrower can refinance his or her loan.
Even if you plan to keep your newly found property forever, if you find yourself searching for a mortgage loan
during a period of relatively higher interest rates, go with the lower teaser rate of the ARM loan. Then, once
interest rates have decreased, just refinance the mortgage loan to a lower rate—preferably a fixed-rate program.
Many times, your current lender will give you a free refinance, just so they can keep you as a borrower.
ARM Loan Details

An adjustable-rate mortgage (ARM) allows the lender to change the interest rate—at periodic intervals—without
altering other conditions of the loan agreement. When the interest rate is adjusted, the monthly principal &
interest (P&I) payment is also readjusted.
By so doing, the ARM loan allows the borrower to share more of the loan's risk. This lowers the lender's relative
risk exposure, so the interest rate on ARMs is usually much lower than those of comparable fixed-rate loans.
Several distinct features of the ARM loan will be discussed below. They will include the following subjects:
1. Periods
2. Index & Margin
3. Caps
4. Negative amortization
5. Teaser rates & Start rates
6. Conversion option
7. The Adjustment process
ARM Periods
The period is the span of time that a lender must wait before it can readjust the interest rate of
the ARM loan. The lender may only change the interest rate on a loan once each period,
normally on the anniversary date of each period.
The exception are ARM loans based on the prime rate, which normally have no set period. This
is the case with many credit cards, business loans and commercial loans. The prime rate is
adjusted by banks, according to overall market conditions. The prime rate may not change for
two years in a row; then it may increase five times in one month.
Typical periods can range from one month to several years, with one-year ARM periods being
the most common.
Generally speaking, ARMs with shorter periods usually provide lower interest rates, since
shorter periods give the lender more opportunities to adjust the interest rate—and thus further
lower the lender's overall risk exposure.
Do not confuse the loan term or amortization with the period. A 30-year amortization is the
norm for all ARM loans, although shorter amortization settings and terms are also available.
Note that similar to the conventional fixed-rate loan, the ARM loan's term and amortization are
the same.
Rates adjust every Term Amortization

3-month ARM 3 months 30 years 30 years
6-month ARM 6 months 30 years 30 years
1-year ARM 1 year 30 years 30 years
3-year ARM 3 years 30 years 30 years
As you can see from the above table, the ARM period does not affect the term and
amortization. The ARM period merely indicates how often the loan's interest rates—and
consequently, its monthly payments—are adjusted.
In addition to the above standard ARM programs, balloon or two-step ARM programs have also
become more popular. The most common are 3/1, 5/1, 7/1 and 10/1 ARMs.
Rates adjust every Term Initial Amortization

3/1 ARM 1 year; after the 3rd 30 years 30 years
year
5/1 ARM 1 year; after the 5th 30 years 30 years
year
year
year
2-year/6-month 6-month; after the 2nd 30 years 30 years
year
These ARM loans are one-year ARM loans, however the interest rate is fixed for the first three,
five, seven or ten years, depending on the program.
For example, a 3/1 ARM is basically a one-year ARM loan with one-year periods. However, for
the first three years, the ARM loan's rate is fixed (will NOT adjust). After the third year, the
ARM loan's rate will begin adjusting as normal.
The 2-year/6-month ARM is primarily used by non-conforming loan programs.

Index & Margin
On the anniversary date of the ARM loan's original closing, the interest rate is adjusted—which
will have a subsequent effect on the monthly payment.
When the lender adjusts the ARM loan's interest rate, they must do so according to the
agreement set forth in the original promissory note signed at the closing. The standard method
for adjusting ARM interest rate is to add the defined "margin" to the current "index" rate.
The margin is a constant amount—usually 2.750 to 3.250 for most conforming ARM
loans—which is added to the index to determine the new interest rate. The margin is
established by the loan program's note signed at the closing. The margin stays the same
throughout the life of the loan. Borrowers entering into an ARM loan should know beforehand
what the margin will be.
It is the index that changes and underlies the ARM loan's adjustments. The interest rate on
ARM loans is tied to the rates of securities, financial papers or a basket of indicators that
adequately reflect market conditions. This indicator rate is normally called the index rate. The
index may be one of many widely recognized measurements of lending costs.
The most popular and commonly known are the U.S. Treasury Bills and the Prime Rate. The
following are the four most commonly used indices:
● US Treasury Bills. The T-Bill index rate is based on the yield prices established by
the daily sale and trade of the U.S. Treasury Bills on the financial markets. There are
actually several T-Bills (2-year, 6-month, 3-year, etc.), but the one-year T-Bill is the
most commonly used index.
● Prime Rate. The prime rate is the rate that banks charge to their best customers,
usually commercial. The prime rate is actually higher than other indices because it
factors in the bank's profit margin. Although, each bank sets its own prime rate, they
tend to be uniform as they are all based on the same market data.
● Cost-of-Funds Index (COFI). The COFI index is calculated by each of the Federal
Reserves' regional districts, the most popular of which is the 11th District. The Cost-of-
Funds index is a monthly survey of the cost to the banks of the money they have at
their disposal. Thus, the COFI index takes into account current CD rates, savings
account rates and other costs that banks must pay for funds.
● London InterBank Offered Rate (LIBOR). The LIBOR index has become the index
of choice for non-conforming lenders, especially with sub-prime (B/C/D/E) credit
loans. The LIBOR rate tends to remain close to—though slightly higher—than the T-
Bills.
The index is a publicly available and trusted mechanism that measures changes in the
economy (generally) and the mortgage industry and real estate market (specifically). The index
measures fluctuations in the financial markets on a continuous basis. When the adjustable-rate
loan is signed, the loan's promissory note will indicate the specific index to be used.
Caps
Again, at the anniversary (one-year, six-month, etc., depending on period) of the ARM loan, the
lender adjusts the interest rates and payments by adding the constant loan margin to the index
rate.
However, this raw index-plus-margin number is not necessarily the borrower's new interest
rate. This preliminary rate must be within the restrictions established by the specific loan
program's caps. The new interest rate and monthly payment is the index plus margin, less
whatever restrictions are required by the program's caps.
Caps protect the borrower by limiting the movement of the interest rate, payments and principal
balances, normally associated with ARM loans. There are four types of caps that can be
involved with each ARM loan:
● Periodic
● Lifetime
● Payment
● Principal
Periodic cap
The periodic cap limits how much the loan's interest rate may change from
one period to the next. The norm for most conforming lenders is a periodic
cap of one (1) or two (2) percentage points.
For example, if the loan program specifies a periodic cap of 2.00 percentage
points, then the borrower's loan rate cannot increase (or decrease) by more
than two (2) percentage points from one period to the next.
Thus, if the borrower had an interest rate of 6.50%, even if the index shot up
to 19.00%, the most that the borrower's new rate can be is 8.50%.
Life cap
The lifetime cap establishes a maximum—and sometimes minimum—level

that the interest rate may never surpass during the entire life of the loan.
Most conforming loan programs set a lifetime cap of five (5) or six (6)
percentage points, applied to the start rate.
For example, an ARM loan with a six (6) percent life cap and a starting rate of
5.50% would have a maximum limit of 11.50%. This means that even if the
index would increase to 17.50% (which has happened in recent history), this
ARM loan's interest rate would never exceed 11.50%.
For many ARM loans, the start rate is the lifetime floor cap.
Payment cap
The payment cap limits how much the loan's monthly payment (not rate) may
change from one period to the next. The typical payment cap, if any, would
be 7%-12% of the current payment. For example, if an ARM loan had a
payment cap of 7% and a current mortgage payment of $100, the new
payment would be a maximum of $107 per month ($100 * 1.07).
But payment caps do not limit the increases of interest rates. Consequently,
payment caps may induce negative amortization, which means that the
principal balance increases instead of decreases. Check the ARM disclosure
to be sure. Just because the payment increases are restricted does not
mean that the interest calculated need not be paid.
Principal cap
The principal cap often accompanies loans with payment caps, by placing a
ceiling on negative amortization, so the principal amount increase will not
exceed 125% of the original loan balance.
As mentioned above, some ARM loans run the risk of negative amortization, in which the loan's
principal balance is increasing rather than decreasing.
Negative amortization occurs whenever the monthly payments are not enough to cover the
interest due on the debt. Unless the loan explicitly waives this unpaid interest, that deficit
amount is added to the principal balance.
This unfavorable situation is a regular byproduct of ARM loans with payment caps. Often, the
payment caps so limit the payment adjustment that the new payment calculation is not enough
to cover the interest due on the loan. Worse yet, as unpaid interest is added to the principal
balance, the borrower will be charged interest on the unpaid interest.
Because this situation could lead to endlessly increasing principal balances, ARM loans with
payment caps usually also contain principal caps, as a protection against negative
amortization. Principal caps still allow negative amortization to increase the principal balance,
but sets limits on how high the principal may increase. Most principal caps limit negative
amortization increases to 125% of the original loan balance. Thus, an ARM loan with negative
amortization and an original balance of $100,000, can have its principal increase to $125,000.
Any unpaid interest after that limit is reached is usually waived by the lender.
It would seem apparent that negative amortization is undesirable. But ARM loans with
payment caps and negative amortization are still prevalent, because they usually offer very low
start rates. For borrowers who intend to keep a loan for only a year or so--even though the
loan is amortized for 30 years--these loans could be wise investments.
Teaser & Start Rates
The most important advantage of ARM loans over fixed-rate programs is the ARM loans' low
initial start rates. These are often called teaser rates, because they are meant to attract
borrowers to these slightly riskier program.
The ARM loan's start rates are typically 1.5 to 3.0 percentage points lower than comparable 30-
year fixed-rate programs. In some rare occasions, the spread could be even more
pronounced. The graph of the difference between the rates of short-term and long-term loans
is often called the yield curve.
There have been a few brief periods when fixed-rate loans offered the nearly the same interest
rates as ARM loans. This occured because the fear of long-term inflation, which controls long-
term loan rates, was minimal; while the fear of short-term inflation, which affects short-term
loan rates, was high. Such periods produce what is often called an inverted yield curve.
Conversion Option
An additional protection for most ARM and balloon loan borrowers is the option to convert into
a long-term fixed-rate loan. The conversion option is not a refinance, although it looks and acts
like one. Rather, the conversion option amends the original mortgage loan note, without
substantially changing the mortgage and title record.
For example, an ARM loan borrower who is in the third year of her loan can convert it into a 27-
year fixed-rate loan. The interest rate of the new fixed-rate loan will be based on current
market rates, as predefined in the conversion option clause
Most lenders charge a fee of $200 to $500 to prepare, execute and record the conversion
documents.
Borrowers must also meet certain requirements to exercise the conversion option. They
cannot be delinquent on the account or have an unacceptable payment history. In addition,
there will be a time limit to the option. With most loans, borrowers must exercise the
conversion option after the first full year and before the end of the fifth year.
The Adjustment Process
As the rate is adjusted at the beginning of each period, the new payment is not calculated on
the same 30-year amortization as the beginning payments.
The amortization for the new payment calculation is usually only for the remaining term. The
lender, as does the borrower, normally want the loan to be completely repaid within the
standard 30-year period.
Consider the following graph of how payments are adjusted at the beginning of each year of a
one-year ARM:
ARM Period Interest Rate Loan Amount Amortization Period

Year 1 Start Rate Original Loan 360
Year 2 Margin + Current Index Current Balance 348
Because the amortization period is constantly decreasing, the monthly payment will remain the
same or increase--even as the loan balance decreases or if the interest rate remains the same.
In cases of negative amortization, the loan promissory note will make arrangements for paying
the additional balance during the latter years of the loan or as a balloon amount at the
conclusion of the term.
Borrower ARM Qualification

The interest rates charged by ARM loans tend to start at a lower level than similar fixed-rate loans.
With conforming programs, ARM loan rates tend to start 1.500 to 2.000 percentage points lower than
comparable fixed-rate loans. Non-conforming ARM rates tend to be 2.00 to 5.00 percentage points lower than
comparable non-conforming fixed-rate programs.
Although ARM loans start with a lower rate and payment, the applicant must be qualified and underwritten using
a rate that is higher than the start rate. Most lender will qualify the applicant's income based on a monthly
payment with an interest rate of two (2) percentage points greater than the start rate.
For example, if the ARM loan's start rate is 5.750%, the lender will normally qualify the applicant at a 7.750%
interest rate.
Some conforming lenders and many non-conforming lenders will offer a slight advantage to the borrower by
qualifying based on the fully indexed rate. The indexed rate is the program's margin added to the current index
rate. Essentially, the fully indexed rate offers no teaser discount.
Disadvantages of ARMs
The primary disadvantage of the ARM loan is obviously the adjusting interest rate. The caps provide some
degree of protection; however, any rate and payment adjustment still hurts.
Also, if the ARM starts with a teaser rate, then the new adjusted rate is bound to be higher—even if the market
rate does not increase. Many borrowers will look at the first periods of the ARM—when the teaser discount is
still in effect—to be the ARM loan's honeymoon. Eventually, however, reality must beckon.
A second, albeit minor, disadvantage of the ARM loan is that the mortgage insurance, if any, will be slightly
higher than the fixed-rate loan. The mortgage insurance premiums for ARM loans will normally be 10%-20%
higher than the mortgage insurance for comparable fixed-rate programs.
The reason for this is because ARM loans do tend to carry more risk for the borrower. Remember that ARM
loans allow the borrower to share more of the loan's risk with the lender. The mortgage insurance is merely a
reflection of that increased borrower risk, which is borne out by higher default levels of ARM loans.
Nevertheless, ARM programs have their moments. The key for the home buyer is to use short-term ARM loans
for short-term purposes.
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Loan Programs Library
This section contains information about a variety of mortgage loan programs, from the common to the almost
unheard-of:
● Fixed-Rate loans
● Adjustable-Rate Mortgage (ARM) loans
● Balloon loans
● Buydown Programs
● Purchase loans
● Construction loans
● Refinance loans
● Conforming loans
● Non-Conforming loans
● Jumbo loans
● Non-Conventional (FHA & VA) loans
● Biweekly Payment Program

● Graduated Payment Mortgage (GPM) loans
● No Income Verification (NIV) loans
● No Documentation loans
● Debt Consolidation loans

● Second Mortgage loans
● Home Equity Line of Credit (HELOC)
● 125% LTV Second Mortgage loans
● Reverse Mortgage loans

● Mortgage & Home Options During Divorce
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Creative Investment Guide
Overview of the Real Estate Investment

Process: Preparation & Planning (Real
Estate Investment Analysis Tools)
The specific measure of a property's profitability depends on who is doing the analysis. How do you get beyond
the hype being spouted by the sellers or their agents? Sometimes you get the same hype from your own agents,
especially if they are more concerned with closing a purchase (and collecting their commission) than they are
with forging a long-term relationship with you.
For lenders, the bottom line often focuses on the Debt Service Ratio (DSR). With larger investors, the focus is
normally on the anticipated return on investment (ROI) and the capitalization rate. If you are serious about real
estate investing, you must understand the key financial and analysis terms involved with real estate investments.
Fortunately, they're not difficult to understand. They are, in many ways, common sense. These terms are not
accidental concepts. They were developed as a way to gauge the subject property's chances for success. Many
beginning and novice real estate investors feel overwhelmed when these terms and figures are thrown at them.
To avoid that feeling, you need to recognize and understand the following concepts:
1. Operating expenses
2. Carrying costs
3. Net operating income
4. Debt service ratio
5. Capitalization rate
6. Return on investment
7. Development market's cycle
Operating Expenses
As the name suggests, operating expenses includes all regular expenses associated with the running of the
property. They include scavenger (trash collection), janitorial, maintenance and management services, as well as
utilities, fees, service contracts, supplies, taxes, insurance and advertising. The underlying theme to operating
expenses is that they are costs involved with the day-to-day operations of the investment.
It is also necessary for the beginning investor to understand the difference between operating expenses and
those expenditures for the property that are not operating expenses. Just because you spend money on your
property does not make that expenditure an operating expense. Understanding this difference could mean
thousands of dollars in additional cash refunds from your tax withholdings.
You must remember that operating expenses do not include mortgage payments and other debt servicing. Not all
properties have mortgage lien against them; and mortgages are actually part of the acquisition cost—not the
operating cost. The following is a breakdown of typical costs which are considered operating expenses and
others that are not.
Operating Expenses Non-Operating Expenses

Maintenance and janitorial Acquisition (closing) costs
Repair and decoration Mortgages and debt servicing
Service contracts Capital improvements
Supplies Equipment and fixtures
Scavenger services Marketing, selling costs
Management fees
Accounting and administrative services
Advertising and leasing services
Insurance premiums
Real estate and corporate taxes
Government fees and licenses
Utilities (paid by owner)
As you can see, capital improvements are separated from operating expenses. Unlike repairs, which serve to
maintain the property's current value, capital improvements are additional investments made to the property that
will increase its value. For example, building additions, major renovations and installation of a security system
are considered capital improvements, because they add to the value of the property. This distinction between
repairs and capital improvements becomes very important when income taxes and capital gains come into play.
Accurate identification of operating expenses is important for real estate investors, primarily because the
operating expenses are necessary to determine the net operating income. Investors who are investing in real
estate for its cash flow and income profits need to examine operating expenses carefully.
Operating expenses are those costs that the investor can reasonably expect during the ownership of the
property. A property's income stream and operating profits are improved in one of two ways: increasing revenue
or lowering operating expenses. Experienced investors will often focus on the operating expenses—looking for
potential reductions and savings—when analyzing a potential cash flow investment.
Another advantage with understanding the difference involves actual dollars and cents you can get through
depreciation . The building (though not the land), fixtures and equipment can be depreciated.
Example: Maximizing Depreciation Deductions
Becky owns a four-flat that is basically breaking even, after paying her operating expenses,
debt servicing and other out-of-pocket expenses. But she's not disheartened, because breaking
even means that she won't have to pay any income taxes. What's more, while her property is
appreciating in value, she still intends to generate thousands in cash revenue from her
depreciation deduction.
The total property is valued at $400,000, of which the building alone is worth about $330,000.
She can depreciate the building's value over 40 years, for an annual deduction of $8,250.
Since she is in the 28% tax bracket, she figures that $8,250 deduction will translate into actual
cash back to her (from her withholdings) of $2,310. In addition, the carpeting, window blinds,
laundry machine and stove she purchased can be depreciated for their useful life of three to
five years (check with your CPA).
We'll have much more on depreciation later.
Carrying Costs
Speculators and real estate investors who purchase property with the primary goal of reselling for profit must be
especially concerned with the project's carrying costs. Carrying costs refer to the net amount of expenditures that
investors must outlay before the property is resold and profits are realized. The carrying cost usually excludes
the purchase price and deducts operating income.
Unfortunately, uninformed real estate investors often look at just the purchase and resell prices. On the surface,
buying a property for $100,000 and reselling it for $150,000 would seem like a no-brainer. This transaction,
however, would be a disastrous decision if the carrying costs came to $60,000.
Savvy investors know that the purchase price is only part of the total expenses required by a real estate
investment. Carrying costs include the operating expenses, as well as the acquisition costs, mortgage payments,
capital improvements and selling costs.
For example, you may be looking to buy a seemingly undervalued house for $100,000 and resell it within six
months for $120,000. That would seem like a reasonable investment for a $20,000 profit. But look again.
Purchase price $100,000

Purchase closing costs $4,000
Clean-up and decoration $3,000
Mortgage interest payments (at 8%) $3,600
Real estate taxes $1,000
Hazard insurance $300
Utilities $600
Supplies $300
Resale broker commission $6,000
Resale closing costs $2,500
Total 6-month carrying costs $21,300
Total Investment $121,300
Resale price $120,000
Net gain/loss -$1,300

As you can see in this example, the investor will lose about $1,300 in this investment. The net loss moreover
does not take into account the investor's time or interest income lost by pulling cash out of savings to use as a
down payment. This net loss also does not take into account possible capital gain taxes that the investor may
incur, even with the operating loss.
Rule of thumb for quick buy-resale. In most cases, you must resell your property for a new price at least 11%
more than your purchase price just to break even. Think about it! When you bought it, you probably had the
typical total closing costs of about 3% of the purchase price. When you resell it, you can usually expect about
1.5% to 2% closing costs. On top of that, average commissions to real estate brokers will be about 5.5%. This
doesn't include the cost of your time or the lost interest income you would have been earning off the money you
took out of your savings to make the down payment for the purchase. This rule of thumb also assumes that you
sell it right away. Every day you have to wait to re-sell the property mean additional costs!
Understanding carrying costs is often the difference between success and failure as a real estate investor,
particularly for speculators. Actually, a savvy investor may still be able to make the above project work by
successfully eliminating some of the expenses and/or increasing income. For example, the investor may decide
to rent out the garage for storage and the house to seasonal renters for additional income of $5,000 over six
months. That would make it a more profitable endeavor. But be careful nevertheless.
I laugh when I overhear people boasting that they bought a property and then resold it for a decent, but sizable
profit. In most cases, the investor actually lost a lot of money-but just doesn't want people to know that he wasn't
very smart. If you're feeling ornery, you can dig for details about the price; then drop the hammer and ask the
braggart about his carrying costs.
Net Operating Income

Here's a fast trick that many experienced investors use to estimate a potential value for an income-generating
property. Multiply the annual net operating income (NOI) by ten; that will give you a very rough estimate value
based on income for the property. Of course, this doesn't work for hot or depressed areas.
The key in such a method is determining the net operating income. We begin with the gross income, which
includes all revenues generated by the property. Gross income would include rent, laundry income, late fees and
parking charges. From this gross income, we would subtract the operating expenses.
The NOI is the gross income minus the operating expenses (discussed above). Again, the NOI does not include
mortgage and other debt servicing payments in its calculation. As noted above, the NOI also does not take into
account capital improvements and acquisition costs. The operative term is "operating": the net operating income
consists of the gross operating income minus the operating expenses.
SAMPLE: Calculating NOI (annual calculation)
Rental income $24,000

Laundry income $4,000
Penalties and late fees $300
Storage and parking $2,700
Interest income $50
Gross operating income $31,050
Maintenance and repair $2,500

Supplies and janitorial $1,800
Scavenger
All About Real Estate Capital Gains—and
avoiding them
A review of real estate capital gains taxation can get complicated because of the many regulations and
allowances provided by law. But a good working knowledge of these tax regulations and benefits can often mean
the difference between profit and loss for many real estate investors.
The stock market has introduced most Americans to the scourge of capital gain taxes. The problem many
Americans (especially Republicans) have with capital gain taxes is that it smacks of unfair double taxation. For
example, if you own stock in IBM, that company pays income taxes on its earnings, which also happen to be
your earnings. Paying capital gains seems to many as another layer of income taxes.
Real estate, however, offers special opportunities to defer and avoid capital gain taxes. The details covered in
this article require us to split this review into three sections:
● Computing capital gain taxes

● Homeowner exemptions
● Creative exchanges to avoid capital gain
Click on one of the above title sections to jump directly to that section; or click below to review this article in
standard order.
Go to next section: "Computing Capital Gain Taxes"
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Conforming Loan Programs
For most home buyers, the best type of mortgage financing are the conforming loan programs, as opposed to
nonconforming or portfolio loan programs. Unfortunately, depending on the applicant's situation, some borrowers
may not have the option to choose.
Conforming loans typically have lower interest rates and better terms than similar nonconforming loan programs.
They also have more consumer-friendly elements (often with lower down payments and no prepayment
penalties) that many nonconforming programs do not offer.
Conforming programs can be fixed-rate, ARMs, balloons or temporary buy-downs. The term conforming
essentially apply to those mortgage loans that "conform" to the guidelines established by Fannie Mae (FNMA, or
the Federal National Mortgage Corporation), Freddie Mac (FHLMC, the Federal Home Loan Mortgage
Corporation) and Ginnie Mae (GNMA, the Government National Mortgage Association).
As discussed below, conforming programs carry lower risk for the lender and investors. Consequently,
conforming programs have lower interest rates than comparable loan programs. These lower risk levels and
interest rates are due to explicit or implied government backing of the mortgage-backed securities formed by
conforming loan programs.
1. Overview of conforming loans

2. Basic restrictions
3. Additional conforming requirements
Overview of Conforming Loans

Conforming programs have lower interest rates because they have a greater supply (remember supply &
demand theory) and present the lender with relatively lower risk.
Agencies such as Fannie Mae, Freddie Mac and Ginnie Mae purchase, securitize and resell multi-million dollar
blocks of mortgage loans. They buy only conforming loans from lenders; these loans are then turned into
mortgage-backed securities (or some similar instrument) which are then sold in the financial markets.
Through this process, agencies such as Fannie Mae reduce the lender's risk exposure. If one borrower defaults,
the losses are diffused among all the investors. For the Wall Street investors who buy such mortgage securities,
they do not bet on a single loan; instead they bet on a piece of thousands of loans (used to create this block of
mortgage securities).
Also, agencies such as Fannie Mae and Freddie Mac provide a limited guarantee on these securities to
investors. Again, with the lowered risk exposure, the pricing and interest rates are likewise reduced.
Wall Street and the financial markets to which these securitized mortgages are sold is called the secondary
mortgage market. By comparison, the primary mortgage market involves lenders and borrowers.
By connecting the residential mortgage market with the broader, more powerful financial market, home buyers
receive an increased supply of loan funds. Without this connection into the secondary mortgage market, banks
will have a more limited supply of mortgage funds. Again, this abundant supply means lower pricing or interest
rates.
Before the advent of the secondary mortgage market, bank loans basically were limited to the deposits that the
banks had in their institution. Once those deposits were all loaned out, the bank could not really lend any more
funds.
The secondary mortgage market replenishes the lender's funds by buying the lender's existing loans. For
example, consider a hypothetical bank with about $1,000,000. If this bank disbursed $100,000 each in loans to
ten (10) different people, the bank would now be servicing ten loans but would have no more cash available for
more loans.
Overview of Loan Processing
After receiving the mortgage loan application, the lender will immediately begin processing it toward closing.
Loan processing revolves around the information requested in the application and confirming the borrower’s
qualification for the mortgage loan.
Most lenders follow a four-step plan when processing a loan application:
1. Documentation
2. Verification
3. Underwriting
4. Pre-closing Preparation
Documentation
The processor will examine the application packet and collect any documents still required for processing. If
there are any documents still missing from the file, the lender will contact the borrower promptly, as these
documents must be collected before the loan can be approved and closed.
Depending on the applicant's situation and data, additional documents may be required, such as explanation of
credit problems, copies of canceled checks or additional bank statements.
To ensure speedy processing, the applicant should provide all necessary documents at the time of application.
For a list of documents required, please consult the "Borrower Documents Required" article.
Practically all conventional conforming loan programs share the same core document requirements:
● Pay stubs for the past two pay period.

● Bank statements for the previous two months.
● Tax returns and W-2s for the past two years.
Some programs are called no income verification, no asset verification and no documentation loans.
Unfortunately, many homebuyers and investors misinterpret the true program requirements. Contrary to what
many people mistakenly believe, these programs will still require a good deal of borrower documents. They just
don't require as much.
The no income verification program will not require income documentation, but lenders will still require
documentation of the borrower's employment. The no asset verification program will not require documentation
of the "source" of the asset funds that the borrower must have to qualify for the loan. However, the no asset
verfication program will still require documentation of the current funds.
The no documentation loan is a combination of the no income verification and no asset verification programs.
The "no doc" will require income and asset-source documentation, but it will still require employment, current
asset and other documentation.
Verification
The loan processor must verify the applicant's qualification data, while simultaneously collecting the verification
documents. Most verifications are written forms that are mailed or faxed to employers, creditors, landlords,
banks, investment accounts and income sources.
For these verifications, the lender will send verification forms to the appropriate parties (borrower’s employer,
bank, etc.). However, the applicant can often save time by providing extra bank statements and pay stubs, as
well as canceled checks for rent payments and copies of previous appraisals.
However, part of the verification process includes third-party reports, such as credit, appraisal and title insurance
reports. The processor will request these reports from the appropriate parties.
Depending on the applicant's situation, the verification stage can last as little as two days to as long as three
months. However, the typical verification period does last about two to three weeks. The report that requires the
longest period of time is usually the appraisal, which usually takes 10 to 14 days to complete. Completed
verification forms normally return to the processor within five days, as they are standard procedure for many
institutions.
However, some verification forms—such as of mortgage debts, landlord confirmation and pension
accounts—may take longer. Again, for faster processing, the applicant should prepare and provide necessary
documents at the time of application.
Underwriting
Only underwriters can issue a loan approval. Many lenders provide a preliminary approval after a preliminary
underwriting review of the applicant data supplied to date.
The complete approval will come after the applicant's data have been documented and verified. This verification
and review stage will analyze the borrowers data in several areas:
1. Income and employment. The "Analyzing Employment and Income" article reviews the typical income
and employment requirement.
2. Asset. The "Analyzing Assets"article reviews the typical asset requirement.
3. Liabilities. The "Analyzing Liabilities" article reviews the typical lender requirement for borrower
liabilities.
4. Property. The "Analyzing Property Types" article reviews the typical property qualification requirement.
5. Credit history. The "Analyzing Credit Reports" article reviews the typical credit requirements.
6. Appraisal value. The "Analyzing Appraisal Reports" article reviews the typical appraisal requirements.
7. Property title. The "Analyzing the Title Report" article reviews the typical title requirements.
Once the lender has compiled the necessary documents and verifications, the lender will underwrite the
completed package to determine its credit-worthiness. Sometimes, the underwriter may request additional
information or documents as conditions to its approval. These conditions must be satisfied before the
underwriter provides a full approval and allows the loan to close.
After reviewing the completed package, the underwriter will issue one of three decisions:
● Suspension. If the lender’s underwriter still requires important documents or information to make an
accurate decision, the underwriter will suspend the loan application until it receives those additional
documents. This suspension is not a rejection, though it may be on the verge of rejection. Instead, it is
an indication that the lender requires more documents.
● Approval. If the applicant is qualified and the application is relatively complete, the underwriter will
issue an approval. Often, the lender’s approval will have certain conditions that must be satisfied prior
to the closing. These conditions may include explanation letters, additional pay stubs or supporting
documents. The application is basically credit-worthy; the required items are meant to confirm the basic
strength of the applicant.
● Rejection. If the borrower’s application is not qualified, the lender will reject the loan. If that happens,
the borrower will have to try a different program or lender.
Pre-closing Preparations
Once the lender's underwriting department has provided final approval, the lender will begin pre-closing
preparations. This normally includes the following tasks:
● Obtaining certificate of adequate insurance coverage.

● Scheduling the closing.
● Ordering the closing documents.
● Coordinating the closing with all parties involved.
The "Closings and Transactions" article goes into further detail about the closing process and requirements.
After the closing, the closing agent will normally be responsible for recording the mortgage deed and title
changes. The lender will then collect the loan documents from the title company.
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Analyzing_Assets
Lenders process the borrower's assets to analyze the borrower's eligibility in two areas:
1. Confirm that the applicant has sufficient assets to meet closing costs and program guidelines.
2. Verify that such assets are acceptable.
The accumulation of assets demonstrates how well the borrower has used his or her income; while the record of
liabilities shows how well the borrower has handled debt. A negative net worth generally means that the
applicant is over-leveraged (over-borrowed) and could result in rejection.
Mortgage loan applicants do not have to disclose all assets, just enough to qualify. The applicant must show
sufficiency in two areas:
● Liquid assets. The borrower must verify sufficient liquid (cash or easily cashed) assets for any down
payment, closing costs, prepaid expenses and reserve requirements.
● Hard assets & Net worth. The borrower should demonstrate positive net worth. For most borrowers,
hard assets must be counted to establish positive net worth.
Liquid Assets
The prospective borrower must have enough verified liquid assets to cover the loan's down payment, closing
costs and prepaid items without resorting to borrowed funds as well as additional reserves for the first payments
due. These four expenses require cash or easily cashable assets because they are paid at the closing or in the
initial months.
The reserve requirement for homebuyers is usually two months of PITI (principal, interest, taxes and insurance).
For investment properties, the reserve requirement is typically six months.
With a few exceptions, qualified liquid assets must be verified as having belonged to the borrower or coming
from a source that belongs to the borrower. The burden of proof is on the applicant. Failure to document
sufficient liquid assets will result in rejection or suspension of the application. Additional details and exceptions
are provided below.
The following liquid assets are acceptable in determining the applicant's qualification:
● Cash on deposit
● Cash deposits toward purchase
● Cash gift
● Secured loan proceeds
● Sale of assets
● Life insurance policies
● Stocks, bonds and money market funds
● Real estate commissions
● Seller and lender subsidies
● Rent credit
● Pension, IRA and 401K accounts
● Bonus income
Cash on deposit
The primary source of documented liquid assets for most applicants is the applicant's bank
account balances. The typical processing requirements are copies of at least two months of
the applicant's bank statements. This should be the most recent two months.
Undeposited cash or "mattress money" will not be acceptable with conforming programs,
primarily because those funds may be borrowed (which increases debt) or unreported income
(which is illegal). Applicants with substantial undeposited cash should deposit those funds
immediately. Unfortunately, that applicant may have to wait at least three months before
applying for a conforming residential loan.
If the applicant cannot provide bank statements, he or she can request a printout from the bank
teller. Otherwise, the loan processor will have to send a verification letter to the bank to verify
the current and average balance for the borrower's accounts.
As the processor reviews these bank statements, he or she will confirm the account ownership
but will focus on two elements:
1. Current balance. This amount is normally what the applicant can use for qualification.
2. Average balance. The account's average over the past two to three months will tell
the processor whether the borrower has made any large deposits during the past
months. Any unusual, large deposits must be explained and documented, because
lenders are primarily worried those deposits may have come from unacceptable
sources.
Cash deposits toward purchase
With purchases, buyers are normally required to make a large deposit to secure the purchase
contract. This deposit is usually called the earnest money deposit, and is held by the seller's
agent. This deposit is credited toward the applicant's liquid asset requirements.
Loan processors will normally require the following items to confirm that the funds used for the
earnest money deposit are acceptable:
1. A Verification of Earnest Money Deposit (VEMD) completed by the agent or Realtor

currently holding the earnest money.
2. The canceled check used for the down payment, if it has been processed by the
applicant's bank and returned to the applicant. This shows that a deposit was actually
made.
3. Copy of bank statement showing source of the bank funds.
Cash gift
Gifts from relatives are normally acceptable source of funds, with restrictions. If the applicant is
using gift funds, the applicant is still required to have sufficient personal funds to cover a
minimum portion of the down payment:
● 97% LTV loan. If the applicant will be providing a total down payment of only 3% of
price, that entire 3% must come from the applicant's personal funds. Gift funds may be
used for closing costs and reserves, but NOT for this minimum down payment.
● 95% LTV loan. When the total down payment is 5%, the first 3% must come from the
applicant's personal funds. The remaining 2%—as well as other closing costs and
reserves—may be covered by gift funds.
● 90%+ LTV loan. If the applicant will be providing at least 10% of down payment, the
first 6% must come from the borrower's personal funds. The remaining 4% and
more—as well as other closing costs and reserves—may be covered by gift funds.
When gift funds are being used, the loan processor will require additional items to verify that
the funds are acceptable:
1. Gift letter. The gift letter must come from a qualified donor (relative) and must clearly
state (1) the relationship between the borrower and donor and (2) that no repayment is
expected or implied. Gifts or equity credits from the builder or seller are not acceptable
gift funds.
2. Donor source documentation. The donor must demonstrate that they have the funds
to give as a gift. Copies of the donor's bank or asset statements for the accounts from
which the gift funds will be drawn must be provided.
3. Copy of gift check. The applicant must make a copy of the gift check provided by the
donor.
4. Verification of deposit. The applicant must verify that he or she has deposited the
gift funds. A deposit slip indicating the date, account and amount should be sufficient.
Secured loan proceeds
Funds derived from a loan secured by a personal property or real property owned by the
borrower may be considered as acceptable liquid asset. Of course, these debts must be
included in the applicant's debt-to-income (DTI) qualification ratio.
Unsecured personal loans (e.g., credit card cash advance, signature loans, personal loans,
etc.) are normally not eligible for conforming loans. However, some non-conforming programs
will allow unsecured loan funds.
Lenders are very concerned about potentially borrowed funds, because these would increase
the borrower’s liabilities and may disqualify the borrower’s debt-to-income ratios. The
borrower must explain events that may indicate borrowed down payment funds:
● New account. A savings or checking account that was recently opened may indicate
borrowed funds.
● Sudden deposit. An existing account that suddenly contains a significantly higher
than average balance may indicate the deposit of unacceptable funds.
● New loans. A new loan may indicate that the applicant has borrowed money for the
down payment. A more serious event may be if the lender sees several inquiries on
the credit report indicating that the borrower is racking up debt. For example, if the
borrower’s credit report shows several inquiries by car dealerships, the lender will
want to know if the borrower has just obtained a car loan.
● Undocumented money. Due to verification difficulties, "cash on hand" and "mattress
money" are not acceptable liquid assets with conforming loans; however, many non-
conforming lenders will accept them.
Sale of assets
Proceeds from the sale of the borrower's personal or real property are acceptable liquid assets,
as in the case of current homeowners who are selling their current properties and purchasing a
new home.
The main challenge is to document the source of funds to be used for closing. For example, it
is acceptable for the applicant to sell a car or jewelry to gather cash for the closing. However,
the applicant must provide documentation of the sale and the borrower’s receipt of funds.
If real estate is being sold to generate cash, the seller will normally receive a certified HUD-1
settlement statement from the closing agent. This statement is the typical documentation
requirement.
The sale of other possessions—such as jewelry, electronic equipment, luxury items and
cars—require more documentation:
● Bill of sale. A signed bill of sale identifies the details of the sale.
● Copy of payment check. The loan applicant selling the item should only accept a
check payment, preferably a money order or cashier's check. The applicant should
then make a copy of the check before depositing it.
● Deposit receipt. To properly document qualifying cash assets, the applicant must
deposit the sales proceeds and provide to the lender a copy of that bank deposit
receipt.
● Automobiles. If the asset being sold is a car, the applicant must also explain why that
car is no longer necessary.
Life insurance policies
The cash value of a whole life insurance policy is an acceptable liquid asset. Most loan
applicants are allowed to borrow against this cash value, and those funds are treated as
secured loans. If the loan applicant were to default on that secured loan from the insurance
company, the insurer/creditor can deduct the past due balance from the life insurance policy's
cash value.
The loan proceeds from this insurance policy have similar processing requirements as secured
loans.
Stocks, bonds and money market funds
Investments in securities—such as stocks, bonds and money market funds—are acceptable

liquid assets. Some institutions allow the applicant to borrow against market value of their
investments. In such cases, these margin loan funds are treated as secured loans.
If the applicant will be liquidating investment funds, the following processing tasks are normally
required:
1. Most recent statements. The processor should provide copies of the most recent
asset statements for the investments.
2. Liquidation check. Investment liquidations are normally remitted to the individual
investor with a check. The applicant should make a copy of this check before
depositing it and submit it to the lender with any accompanying summary statements.
3. Deposit receipt. The applicant should immediately deposit the liquidation check and
provide the lender with a copy of the deposit receipt.
Real estate commission
If the buyer is a real estate agent, he or she may want to use his or her share of the real estate
commission to satisfy asset requirements. The acceptability of future funds varies from lender
to lender, and program to program. Some lenders allow the agent to use the projected
commission to cover projected closing costs, as well as satisfy asset requirements. Other
lenders and programs will not
Subsidies from seller or lender
Most programs allow the seller or lender to pay the borrower's closing costs and a small portion
of the down payment. These subsidies are normally limited to 3% of the purchase price or
refinance loan amount.
The primary documentation requirement for seller subsidies is an addendum or amendment to

the purchase agreement. Lender subsidies normally do not need any additional
documentation.
Note that if the seller subsidy is being used for the down payment, there are limits. Actually,
there are minimum down payment requirements for the borrower, as described in the "Cash
Gift" section of this article.
Rent credit
This variation of the "lease to own" option is acceptable as liquid assets with conditions. With
most lenders, only that portion of a buyer's rent that exceeds the property's appraised market
rent can be treated as cash accumulated for down payment. The original lease must contain an
option to purchase provision specifying rent credited toward purchase.
IRA and 401K accounts
The net cash value of pension funds, such as individual retirement accounts (IRA) or 401-K
accounts, are acceptable sources of funds. Instead of cashing these retirement accounts,
however, applicants are often allowed to borrow against the current cash value of these
accounts.
Proceeds from these accounts are treated just like funds from investment portfolios. They
should be documented with copies of the most recent statements, the disbursement check and
the deposit slip.
Even if no loans are made against these retirement accounts, the vested balance can still be
used to satisfy reserve requirements.
Bonus Income
Some bonus or miscellaneous income can be used to document acceptable source of funds.
The basic guideline is that these funds must be fully documented to verify their validity. Each
lender makes the final decision about specific fund sources. Some examples of often
acceptable sources of funds include the following:
1. Regularly expected bonus

2. Commissions above normal average
3. Income from a special short-term contract
4. Wedding gifts
5. Tax refunds
6. Gaming and lottery income
Hard Assets & Net Worth

Hard assets are any possessions that are not cash or cannot be quickly converted into cash. This category
includes cars, jewelry, electronics and real estate. Businesses are also often considered hard assets.
For mortgage loan applications, hard assets do not need to be disclosed unless necessary to show positive net
worth. This is especially the case with real estate or vehicles who have outstanding loans against them.
Obviously, if the borrower has a mortgage loan reporting as a liability on his or her credit report, that debt should
be offset by the value of the property. Otherwise, the borrower may generate a negative net worth.
If after preparing your loan application, your net worth is low or negative, you should begin itemizing your hard
assets in the assets column. Lenders do not bother with appraisals of your personal possessions, so the
valuation of your hard assets will be left to you.
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Analyzing Liabilities
An applicant's liabilities regularly play a limiting role in the applicant's search for credit. The applicant's income
establishes the maximum amount of credit that the consumer can carry; that applicant's liabilities chip away at
that maximum. The current balances on certain liabilities may also harm the applicant's credit grade.
For example, an applicant's income may initially qualify him or her for a $200,000 loan. However, if the applicant
has other major debts that require regular payments, the loan amount for which the applicant may qualify will
decrease.
This article will review two areas of concern regarding the applicant's liabilities:
1. Qualifying liabilities
2. Types of liabilities
Qualifying Liabilities
Debts and liabilities tend to have the greatest impact on the applicant's income qualification. The "Analyzing
Employment & Income" article discusses this facet of loan qualification. At the same time, the applicant's
liabilities may also affect the applicant's credit report; the "Analyzing Credit Report" article discusses this issue.
The basic liability qualification requirement of conforming loan programs is that the applicant's income is strong
enough to afford both the proposed mortgage and all of the applicant's other debts.
For most owner-occupied loans, the borrower's projected monthly debt load should be less than 40% of the
borrower's monthly gross income. Some programs may require total debt loads to be less than 33% of the gross
income. If this is a problem, the applicant will have to rely on a no income verification program.
The applicant's liabilities include all demands for repayment—even if payments are not currently scheduled.
Mortgage lenders tend to focus on long-term debts, which are liabilities that will take at least 10 or more months
to pay off. One way to improve applicant qualification is to prepay some loans, so as to turn it into a short-term
loan.
For example, Wayne has applied for a mortgage loan, but has run into an obstacle. His debt load is just slightly
too high for his current income. His biggest liability is his $500/month car loan, which still has a full year
remaining. However, by prepaying three months on his car loan, he would reduce the balance to only nine
months of payments. His car loan would now be a short-term loan so it would not be considered part of his
qualifying debt load.
Types of Liabilities
Some of the more common types of liabilities include the following:
● Installment debt
● Revolving charge accounts
● Education loans
● Checking account credit line
● Single payment notes
● Pledged asset obligations
● Contingent liabilities
● Alimony, child support and separate maintenance
● Debts on other real estate
● Interim financing
● Collections, delinquencies and judgments
● Employer-guaranteed mortgage
Installment debt
Installment liabilities are any loans and similar debts that require regular monthly payments on
a predetermined schedule. In some ways, many of the other liabilities that are discussed below
can be considered installment debts if regular installment payments are involved. For
mortgage lenders and credit reports, however, installment debts are primarily formal liabilities,
such as automobile, student and personal loans.
Technically, mortgage loans are installment debts; however, most mortgage lenders place
them in a unique category.
Business loans are also considered installment debts. However, most business loans often are
not weighted against the applicant. The business loan is considered against the company
owned by the applicant. The applicant's income is usually based on the net revenue of the
business.
Revolving charge accounts
Revolving charge accounts with outstanding balances are considered long-term liabilities if the
borrower will continue to use the account. For debt-to-income qualification purposes, the
lender will use the minimum monthly payment reported by the creditor. The minimum monthly
payment on most credit card bills is typically calculated at 3% of the current balance.
If the creditor does not indicate a minimum payment, the lender’s underwriter will calculate five
percent (5%) of the account balance (after adjusting for any planned pay down of the balance
from the loan proceeds) as the monthly payment amount.
Revolving credit tends to be the most prevalent among Americans. Mortgage loan processors
and underwriters do not give revolving accounts as much weight as installment loans. So when
grading credit, mortgage lenders allow a few late payments on revolving accounts.
Education loans
Student loans are installment debts, with special features. In the U.S., student loans are
typically delayed payment programs. While the student is attending college or graduate
studies, no payments will be due on the student loan.
When the student ceases his or her formal studies, however, loan payments will normally begin
after a six-month grace period. It is assumed that the borrower will have a found a steady job
within this time. However, some student loans do allow extensions of this grace period.
Mortgage lenders will sometimes omit student loan payments from consideration if payments
will not be beginning in the next 12 months.
Checking account credit line
A line of credit extended in connection with a checking account is normally considered a long-
term liability if a balance is owed. It is essentially classified as a revolving account.
If the monthly payment amount is not indicated by the lending institution, five percent of the
remaining balance is normally calculated and used as the monthly payment.
Single payment notes
Single-payment loans are often interest-only programs, in which the total principal balance is
due at the end of the term but interest payments are normally due each month. It is sometimes
referred to as interest-only balloon loan programs.
Monthly interest payments on single-payment notes are treated as long-term liabilities,

depending upon the loan amount and remaining term. In addition, mortgage lenders will
analyze the borrower's assets to confirm his or her ability to pay the note at its scheduled
maturity.
If the note will be coming due within two years and the applicant has no clear ability to repay
the obligation, mortgage lenders may decline financing.
Pledged asset obligations
Pledged asset obligations are basically installment loans, and mortgage loans are the most
common. There are, however, other types of pledged asset obligations.
Often called secured credit, pledged asset debts are any credit accounts that require the
borrower to pledge some asset as security for the credit or loan.
The mortgage lender will not consider the pledged assets against the applicant. Also, because
these credit accounts are secured by other assets, most creditors do not analyze these
accounts as stringently as consumer debts. However, mortgage lenders do place much weight
on the applicant's history with pledged asset loans because of their similarity with mortgage
loans.
Contingent liabilities
Contingent liabilities are any debt obligations that may demand payment at a future date. The
most common type of contingent liability is the co-signed loan, in which the applicant is
normally not responsible for the monthly payments. However, if the primary borrower defaults,
the co-signer will be held responsible for the loan and default.
Another type of contingent liability is student loans, which do not require payment until six
months after the borrower ceases his or her formal studies. With student loans, monthly
payments will be taken into consideration if payments must begin within the next 12 months.
If an applicant has co-signed for a loan but does not make payments on that loan, mortgage
lenders will exempt those debt payments from consideration against the applicant. For this
exemption, the applicant must provide copies (at least 12 to 18 months' worth) of the canceled
checks that the primary borrower used to pay the monthly charges of that loan. By showing
that someone else was making the payments, the applicant can avoid having the co-signed
debt counted against him or her.
Alimony, child support & separate maintenance
These liabilities are considered long-term debts if they will continue for at least ten more
months. Separate maintenance is a form of support payments for couples who are involved in a
formal separation, but not yet divorced.
If an applicant is divorced or separated, he or she must submit to the mortgage lender a copy
of the separation agreement or divorce decree, with accompanying property settlement
agreement. These documents will indicate the monthly alimony, child support and separate
maintenance payments that is expected from the applicant.
Debts on other real estate
Mortgage loans on investment (non-owner-occupied) properties are treated differently from

other installment loans. The payments on such mortgage loans are not directly held against
the applicant. Instead, these investment property loan payments are held primarily against the
property.
Ideally, the rental income from investment properties should offset the monthly payment
requirements for those properties. In fact, most investment properties should provide the
owner with an operating profit, and 75% of this net profit is actually credited to the applicant as
additional income.
However, if the property is operating with a net loss, that shortfall is counted against the
applicant as long-term debt.
Interim financing
Short-term financing in anticipation of a long-term loan is often called interim financing. Many
construction loans are actually interim loans. Construction loans are typically short-term
financing that is paid off as soon as the building is completed.
Another form of interim financing may involve obtaining a second mortgage on the applicant's
current home in order to cash out sufficient funds for the down payment on another purchase.
These interim financing arrangements are normally not counted against the applicant.
However, they must be paid off prior to or during the closing.
Collections, delinquencies and judgments
Collections and judgments are serious liabilities that must be addressed as quickly as possible,
if the applicant is pursuing mortgage finanicng. However, not all collection accounts and
judgments are the same.
Judgments are probably the most serious of the negative credit entries. Bankruptcies and
foreclosures are the most damaging types of judgments. Judgments remain on the applicant's
credit report for ten (10) years after the discharge date. Other judgments include personal
judgments and tax liens.
Delinquencies are past due bills that are at least 30 days late. Strictly speaking, delinquencies
refer to past due amounts on currently open accounts. If the delinquencies are allowed to
fester, they become a collection or charge-off account. In the case of cars, they can result in
repossession.
Medical and utility collections are some of the most common type of collections seen on credit
reports. Medical collections usually are now counted as seriously against the applicant. Most
mortage lenders will require the borrower to pay off the collection and delinquency amounts
prior to or duing the closing.
Employer-guaranteed sale
As an additional incentive for a proposed transfer or relocation, some companies and

employers may guarantee the sale of the employee's current home. Often, the employer will
simply guarantee to purchase the property, and resell it later.
If an employer has guaranteed to purchase the applicant's current residence as part of a

transfer or relocation, the existing mortgage loan on that residence is not treated as long-term
liability. The applicant can obtain a new mortgage loan without having to bother with the sale of
his or her current home.
As usual, however, there are always conditions:
1. The employer's responsibility to purchase the property is clearly defined and

documented.
2. The borrower's financial responsibility for the property is clearly short-term.
3. It is readily apparent that the employer has the financial capacity to honor the
guarantee.
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properties.

Analyzing Property Types
All lenders limit the types of property they will finance with a mortgage loan. Even the menu of programs that a
single lender will offer will have a varying property requirements from program to program. Because of the
intricacy of real estate, property obstacles may exist that make it difficult to obtain mortgage financing for many
properties, including homes.
From the mortgage lenders point of view, real estate tend to fall into the following general categories:
● Residential
● Commercial
● Government
● Agricultural
● Industrial
This article will review these categories, with a special emphasis on residential properties. There are, of course,
other categories of real estate, such as churches, hospitals and special use properties.
Residential Property
Residential properties are real estate constructed and used as homes and dwellings. Interestingly, the residential
mortgage market has created a more limiting definition of acceptable residential properties.
Standard residential loans deal with exclusively residential housing in the "conforming" sense. Conforming
programs define residential properties as having 1-4 units, with all of the units zoned and occupied for residential
usage.
This definition obviously excludes apartment buildings with fve or more units, as well as mixed-use properties,
such as three-flats with a store front or office on the first floor. These properies are treated like commercial
properties.
The specific property type has a major impact on loan amounts, pricing, terms, loan-to-value (LTV) limits and
program restrictions. With each mortgage application, loan officers, processors and underwriters must confirm
that the requirements for the specific property type are satisfied. Loan underwriting will typically revolve around
five possible issues:
● Occupancy. Owner-occupied, second home or non-owner-occupied.

● Number of units. Single-family, two-unit, three-unit or four-unit.
● Community structure. Condominiums, townhouses, cooperatives and PUDs.
● Condition. Structural, mechanical and functional stability.
● Zoning. Conforming or non-conforming. Urban, suburban or rural.
Occupancy
There are basically three types of occupancy applied to residential properties, and the specific
type affects the loan program requirements:
1. Primary residence. Often labeled owner-occupied, primary residences have the best terms
and highest loan-to-value (LTV) limits.
2. Secondary residence. Second homes are acceptable security for conforming mortgage loans,
but have slightly more restrictive terms.
3. Investment property. Don't make the mistake of confusing investment property with
commercial property. In the residential mortgage market, investment properties are non-owner-
occupied properties.
Primary residence
Owner-occupied properties have the best pricing and most favorable terms. They
typically charge lower rates and fewer points than investment properties. Typical
maximum LTV limits for the purchase of owner-occupied properties are 97%—with
many 100% LTV programs also available. Cash-out refinances for primary residences
can also approach 80% with conforming programs, and to 125% LTV on some second
mortgages.
Each person normally can occupy only one primary residence. However, most
mortgage lenders do allow applicants to have up to two primary residences, as long as
those two residences are in two different metropolitan areas or at least 100 miles
apart.
A primary residence property must be occupied by the applicant for at least six months
of the year. The address of the primary residence must match the address of record
for such activities as tax reporting and voter registration.
Secondary residence
Second homes include vacation condominiums, summer cabins and that alpine chalet
in the mountains. There is no occupancy requirement for second homes. Applicants
are under no pressure to occupy the property for a minimum number of days or
weeks.
Owners can rent out their second homes for short periods of time. However,
mortgage lenders will not allow them to count such rental income in their qualifying
income. Also, most lenders will require that renters be limited to seasonal or short-
term renters—so that the borrower may actually be able to use the property as a
second home.
The pricing and terms for secondary residences are usually the same as for owner-
occupied property loans. The main exception is that LTV ratio limits for secondary
residences are slightly lower than those for primary homes.
Timeshare units tend to have a more difficult time obtaining mortgage financing,
primarily because of the ownership situation. In many cases, the timeshare owner
does not really own the property. He or she only owns the right to use the unit for a
certain period each year. Some timeshares do let the participants actually own the
property with fee simple title, but the ownership is so restricted that conventional
mortgage loans are rare.
Investment property
In the residential mortgage market, investment properties are any properties with one
to four units, all of which are zoned for and occupied as residential dwellings but are
NOT occupied by the owner. The operative term for investment property is non-owner-
occupied.
Commercial properties, strictly speaking, are not investment properties in the

residential mortgage sense.
Of the three usage options, investment properties normally face higher mortgage
interest rates, charge more points and impose more restrictions.
Most conforming lenders charge 1.50 to 2.00 points—or higher rates—for non-owner-
occupied properties, compared to usually no points for primary residences. Also,
conforming lenders impose lower loan-to-value (LTV) ratio limits of 75% to 80% on the
purchase or no-cash-out (rate & term) refinance of investment properties. Investment
property LTVs on cash-out refinances are even lower, with most conforming programs
limiting them to 60% to 70%.
Non-conforming programs do provide much higher LTVs, up to 95% and 100% LTV in
some instances.
As with all other elements of mortgage loan pricing and terms, the logic behind this
disparity normally points to risk exposure. Programs with higher risks will demand
more from the borrower in other areas.
Investment properties are a riskier investment for mortgage lenders. Homeowners will
work hard to keep their homes from going into foreclosure. Unfortunately, most
lenders believe that property owners will often not work as hard with investment
properties—relatively speaking.
With all of these penalties, investment properties continue to be a good investment.

As discussed in the "Real Estate Investing" section, property investments are
historically profitable and stable moves.
Number of units
As previously noted, the conventional residential mortgage market is limited to four units, all of
which are zoned for and occupied as residences. Any properties with five or more units are
considered apartment buildings and commercial properties.
With most loan programs, the number of units in a single parcel of property will limit the loans
available to the buyer or owner.
Conforming programs, for example, have the following loan-to-value (LTV) ratio limits for owner-
occupied properties:
1. Single-family residences (SFR). For purchases, the norm is 95% LTV, with 97% LTV
available for many homebuyers. For no-cash-out refinances, 90% LTV is the standard, with
95% LTV programs available. Cash-out refinances are normally limited to 75% LTV.
2. Two-unit properties. For purchases, the norm is 90% LTV, with 95% LTV available for many
homebuyers. For no-cash-out refinances, 80% LTV is the standard. Cash-out refinances are
normally limited to 75% LTV.
3. Three-unit properties. For purchases, the norm is 80% LTV for many home buyers. For no-
cash-out refinances, 80% LTV is the standard. Cash-out refinances are limited to 70% LTV,
with 75% programs available.
4. Four-unit properties. These properties have similar LTV limits as three-unit properties.
Second homes are limited to only one-unit properties. Investment properties, as noted earlier,
have much lower LTVs across the board.
Community structure
Many single-family residences are situated in a complex shared with other residences. The
four most common include the following:
1. Cooperatives
2. Condominiums
3. Townhouses
4. Planned unit developments
Cooperatives
Strictly speaking, residents in a cooperative do not own their units. Instead

they own shares in the cooperative, which then assess the individuals based
on the specific unit they occupy. Obtaining mortgage financing for
cooperatives is often difficult, with most co-op buyers having to search for
banks who specialize in co-op mortgages.
The individual unit dwellers of a cooperative do not own any property. The
entire cooperative is owned by a corporation and not by individual owners.
The shareholders of the cooperative gain the right to particular units and to
use common areas. The unit dweller thus leases the unit from the
corporation; and it is the cooperative that owns all of the units.
Because the cooperative is a single corporation, it is taxed as one corporate

entity. Since the units are not individually owned, the entire co-op project is
financed with a blanket mortgage. Individual mortgage loans will finance a
portion of the entire blanket loan for each of the shareholders.
A final element of the cooperative project is that prospective unit owners must
be approved by the current stockholders. In this way, the cooperative project
can act as an exclusive club or organization. Cooperative projects present a
higher degree of risk for lenders. The most influential risk factor is that if one
unit owner (mortgagor) defaults on his or her loan, the entire cooperative
project can be foreclosed.
For more information, see the "Cooperatives" article.
Condominiums
Condominium units are individually owned; each owner is then a member of

the homeowners association which owns and maintains the common area.
Unbeknownst to many, however, most condo owners only own the air space
within their units.
Mortgage loans for condominiums are processed the same as for regular
single-family homes, except that additional documents and restrictions are
required. For example, the homeowners association or condo manager must
complete a lengthy questionnaire about the complex.
In addition to the standard loan application requirements, the following

condominium documents must be collected:
1. Condominium certificate and insurance information form. This

questionnaire is sent by the mortgage processor to the condominium
association. The certification will request information about the size, type and
occupancy rate of the condominium property. The insurance information
request that makes up the latter half of this form gathers information about
the condominium's blanket insurance.
2. Assessment letter. In this assessment letter, the condominium association
will verify what the current assessment dues are for the condo unit involved in
this loan application. In the case of a refinance, the assessment letter will
also indicate the owner's payment record.
3. Copy of insurance coverage certificate. The insurance company that is
insuring the condo property will have provided the condominium association
with a document indicating the type and amount of insurance coverage. The
mortgage lender needs a copy of this certificate for the application package.
4. Copy of owner's policy or master deed. The condo association will have
provided this to the unit owner at the time of purchase. A copy of this policy
must be presented for verification.
5. By-laws of homeowners association. The association by-laws manual is
often required.
6. Association budget. The association's budget must demonstrate sound
fiscal management.
Most conforming lenders require condominium projects to meet Fannie Mae

and Freddie Mac requirements. Analyze the appraisal, title, owner's policy or
master deed, condo by-laws and condominium certification letter for
information about these criteria.
● All common areas, facilities and amenities must be for the exclusive use of the
owners.
● Title must be fee simple (straightforward ownership).
● At least 60 percent of all units in the project must be owner-occupied by the unit
owners as their primary year-round residences or second homes.
● No single entity (the same individual, investor group, partnership or corporation) may
own more than 10% of the total units in the project.
● The project is covered by the kinds of hazard, flood, liability and fidelity insurance that
most conforming lenders require for condominiums.
● All rehabilitation work related to condominium conversion must be 100% completed.
● All condominium conversions that were legally created within the last 3 years must
provide a review of the architect's or engineer's report that was obtained at the time of
conversion.
● Zoning must allow the property to be rebuilt to current density, if partially or completely
destroyed.
● The phase in which the condominium unit is located must be 100% completed.
● At least 70% of the units in the condominium project have been sold or are legally
obligated to close, to purchasers other than the developer.
● Project must have a minimum of five (5) units.
● Loans in any one completed development are limited to 10 loans or 25% of the units in
the project, whichever is the lesser.
Fannie Mae and Freddie Mac also offer limited review condo programs (at
lower LTVs) for condominium properties that may not meet all of their Class I
or Type A requirements.
For more information, see the "Condominiums" article in the "Real Estate In-
Depth" section.
Townhouses
Townhouses are similar to condominiums in most respect. They are also

processed in a similar fashion.
The primary difference is that many townhouse owners also own the land on
which the townhouse is built. They also own the walls, although they must
share the party walls adjacent to the neighboring townhouse. For more
information, see the "PUDs and Townhouses" article.
Planned unit developments

PUDs are looser associations normally consisting of houses and residences
that are part of a development or neighborhood. These neighbors are legally
part of this PUD, which pools funds to maintain common areas and
responsibilities, such as mowing greenways and snow-plowing roads.
There are few additional requirements for PUDs. The key tasks involve
verification of PUD assessments and restrictions. For more information, see
the "PUDs and Townhouses" article.
Condition
Mortgage loans assume that the property is in acceptable condition Conforming programs will
not lend to properties that are in non-habitable conditions. Some lenders may provide loan
approvals conditioned on completion of specified repairs and improvements.
Underwriters and processors do not normally visit the residential properties involved in the
mortgage applications they are processing. They depend on the appraiser's comments in the
appraisal report. However, loan underwriters also examine the pictures required and
providedicmas well as their general knowledge about an area—to see if improvements are
required. FHA loans actually require more review from the appraiser, with regard to the
property's condition.
The nice thing about problems with the property's condition, is that most of them can eventually
be fixed. Mortgage loans, in fact, are available for just that purpose.
Underwriters review the property's condition with a focus on the following issues:
● Structural stability. The walls, roofs, windows and entryways must be able to give
occupants full protection from the elements. As best as can be discerned, the building
must also meet all applicable zoning codes.
● Aesthetic. Loan processors and underwriters will consider some of the property's
aesthetic features in assessing the acceptability of the neighborhood and subject. For
example, graffiti on the garage doors or a dilapidated front porch are often causes for
loan denial or suspension.
● Functional. The building's functional equipment must be in good working order,
especially the essential plumbing, heating and electrical systems.
Zoning
Zoning regulations limit the usage allowed on any given parcel of property. Building codes
restrict the way improvements are made. Local zoning laws and building codes change
regularly, especially in larger cities and developing areas. What was once acceptable may now
be non-conforming. Loan underwriters and processors must ensure that properties meet legal
requirements.
Part of the appraiser's task is to determine the zoning designation for the subject property. He
or she will also offer comments on major elements in the property that are against code.
Most residential mortgage lenders will not close an approved loan if the property does not meet
zoning regulations or obtain a variance. For example, if the appraisal indicates that the subject
property is zoned commercial, the borrower must obtain a variance.
Another example is that coach houses (apartment units in former garages) are no longer
allowed in the city of Chicago. In order to close a purchase or refinance on a property that
includes a coach house, the borrower must obtain a letter from the building department that
allows the borrower to rebuild the structure if it is ever destroyed by fire.
The problem with building codes only arises with a handful of purchases. Many homeowners,
for example make major improvements without obtaining building permits. When it comes time
to sell, those additions and improvements pose a problem. Some cities will prohibit the
purchase by refusing to issue transfer stamps; they may even require major improvements or a
tear-down, as well as a fine.
For more information, see the "Zoning and BuildingCodes" article.
Commercial Property
As the name implies, commercial property are all properties involved with commerce. Most commercial
properties fall into the following categories:
● Apartments. Residential apartment buildings with five or more units are often treated as commercial
property. For more information, see the "Investing in Apartment Buildings" article.
● Retail properties. Shopping centers, strip malls and storefronts are some of the visible examples of
residential properties. For more information, see the "Investing in Retail Properties" article.
● Office. Buildings and complexes dedicated to offices and professional services are commercial
properties. For more information, see the "Investing in Office Buildings" article.
● Entertainent and hospitality. Movie theaters, restaurants, hotels and resorts are all types of
commercial properties geared toward the entertainment and vacation industry. For more information,
see the "Investing in Hospitality and Entertainment Properties" and "Investing in Golf Courses" articles.
For more information about commercial properties in general, see the "Commercial Property Development,"
article.
Government Property
Properties belonging to the government or similar authority constitute a majority of the available real estate in the
country. These properties include the following, to name a few:
● Federal buildings
● State buildings
● County properties
● City and municipal properties
● Schools
● Public hospitalities and libraries
● Military bases
● Public thoroughways
● Parks and forests
Agricultural Property
Farm properties are the most recognized form of agricultural properties. However, this category ca also include
aquaculture facilities, timber supply forests, grazing lands and ranches.
Industrial Property
Industrial proreties are involved in manufacturing and general industrial uses. This category would include the
following properties
● Utility plants
● Warehouses
● Factories
● Railroad yards
For more information, see the "Investing in Industrial Properties" article.
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properties.

Analyzing Appraisal Reports
Mortgage lenders have begun exploring methods for decreasing or eliminating the need for full appraisal reports.
Automated systems are being developed to provide acceptable estimates of appraisal values, with a simple
analysis of online records and no appraisal inspection and report. However, such programs are still in their
infancy.
Full appraisal reports are still the norm for mortgage loans. This article will review the following elements of the
residential property appraisal:
● Purpose of appraisal reports

● How lenders handle appraisals
● Information collected by appraisals
● Appraisal factors that restrict approval
Purpose of Appraisal Reports

Lenders process appraisal reports with two goals in mind:
1. Determine the subject property's fair market value.

2. Confirm that the subject property meets the parameters of the specific loan program.
The most important element that the appraisal report provides is the market value of the property. This element
is the main difference between the appraisal and building inspection, which focuses the property's structure and
mechanical equipment.
To compare the descriptions contained within this article with an actual appraisal report, please go to the sample
appraisal report.
The appraised market value determines the LTV and consequently limits the amount of money that an applicant
may borrow on a property. This appraised value normally is a reconciliation of at least two or three value
calculation methods.
● Value indicated by market data (sales comparison) approach. This is the average selling price of
recently sold properties of the same type, quality and location as the subject property—with
adjustments. All appraisal reports will normally contain this approach.
● Value indicated by income approach. This estimate deals with income-producing properties and
takes into account the rental rates in the property's area, neighborhood or region.
● Value indicated by cost approach. This estimate is based on how much it would cost to build a
comparable house—less depreciation. All appraisal reports will normally contain this approach.
After obtaining the necessary data for the above valuation methods, the appraiser will then arrive at a best
estimate of value. This final estimate is the appraisal value, which is determined through a reconciliation of the
different value approaches.
Appraisers are not supposed to produce appraisal reports for the purpose of meeting specific valuation goals set
by the party ordering the report. However, most appraisers will inform the loan officer if preliminary estimates
show that the appraised value will fall below the contract price or loan target. In such a case, the full appraisal
order can be canceled.
How Lenders Handle Appraisals

For residential mortgage loan underwriters, appraisal reports normally have a shelf-life of three months. If the
appraisal report is older than three months but less than twelve months old, most lenders will accept it as long as
the appraiser can issue a re-certification letter, which states that the appraiser has reviewed current data and
that the original value estimate is still valid.
When the appraisal report is completed, mortgage lenders will submit it to the underwriter. The underwriter will
review the appraisal data to confirm that the property meets the program requirements. The underwriter will
occasionally submit the report through a formal appraisal review, conducted by an in-house specialist or an
independent appraiser. The goal of the appraisal review is to double-check the final value. If the appraisal
review returns with a lower appraisal value, the underwriter must accept that lower value.
There are two types of appraisal reviews:
● Desk review. Most lenders, especially for conforming loan programs, conduct simple desk
reviews—nominally at their desk. Such reviews simply go through a checklist of items as they analyze
he appraisal report for completeness and acceptable conclusions.
● Field review. Many non-conforming lenders, especially when dealing with high-LTV loans, will order a
field review of the appraisal. An independent third-party appraser will be contracted to review the
appraisal report and then actually verify the accuracy of the data, elements and procedures used by the
original appraiser.
Note that with larger jumbo loans and larger property sizes, many lenders will require a second appraisal report.
Lite Appraisals
Increasingly, many conforming lenders require and accept lighter versions of the standard
appraisal report for their underwriting. Instead of a full-blown appraisal report, an exterior or
"drive-by" appraisal is deemed acceptable. This exterior-only appraisals do not require the
research and legwork of the standard appraisal report; so the costs are usually significantly
lower.
Commercial Property Appraisals
Appraisal reports for commercial and industrial properties are more detailed and researched.
As such, they tend to cost at least $1,000 for a small apartment building. They usually take a
more narrative approach, unlike the residential property appraisal which uses a standard form
to list the facts.
Information Collected By Appraisals
The appraisal includes a large variety of information that must be read and analyzed by the loan officer or
processor. The appraisal examines the property to determine its worth and to provide the lender with a risk
assessment.
Whether the house will be single-family, multi-unit, condominium or construction affects the type of information
that the appraiser must gather, which partially explains why the appraisal for a four-unit building costs more than
the appraisal for a single-family home.
The appraisal must contain the market value and an analysis of the following eight data categories:
1. Property & lender information

2. Neighborhood description
3. Site description
4. Improvements to the site
5. Cost approach analysis
6. Market data analysis
7. Income approach analysis
8. Reconciliation of value estimates
9. Additional support documents
Again, we have also included a sample appraisal report for your perusal.
Property & Lender Data
This first section presents information about the property, prospective borrower and lender.
The homeowner should especially examine this section to confirm the appraiser's researched
information about real estate taxes, homeowners association dues and census tracts.
Neighborhood Information
The appraisal describes the property's neighborhood, providing at least the following
information:
● Location. The appraiser must indicate the area's level of population development.
Specifically, the appraisal must label the property as (1) urban, (2) suburban or (3)
rural.
● Build up. The appraiser must indicate the neighborhood's level of development. Most
appraisals offer three possibilities: (1) over 75%, (2) 25% to 75%, or (3) under 25%.
Option 3 (under 25%) may be problematic in many situations, because rural properties
can be more difficult to market.
● Growth rate. The pace of development is measured with one of four levels: (1) "fully
developed" means that there is little or no potential for future development; (2) "rapid"
usually indicates a hot market; (3) "steady" areas are average; (4)" slow" applies to
depressed areas with much potential but no action.
● Property value movement. The appraiser must determine whether the property value
is (1) increasing, (2) remaining stable, or (3) declining. A declining value often
translates into automatic loan application rejection.
● Demand and supply. This market indicator estimates whether (1) there is a shortage
of marketable properties in the area, (2) there is a balance between the area's supply
and demand, or (3) there is an oversupply of marketable properties in the area.
● Marketing time. The appraiser will check the area's property listings and sales
records to determine how long it is taking to sell properties: (1) under 3 months; (2)
between 4-6 months' or (3) over 6 months. Option 3 (over 6 months) may be
problematic as it indicates a slow market, which creates a drag on property prices.
● Present land use. The appraiser must estimate how the neighborhood's parcels are
currently improved and developed: (1) single-family, (2) properties with 2-4 units, (3)
multi-family apartments, (4) commercial, (5) industrial, or (6) vacant.
● Changes in land use. The appraiser must determine the probability of the area's land
usage drastically changing in the future: (1) not likely, (2) likely, or (3) already taking
place. If the report indicates options 2 or 3, some lenders may request more
information to determine if those changes will affect the property's market value.
● Predominant occupancy. The appraiser will estimate which type of occupancy is
most prevalent in the area: (1) by the owner, (2) by tenants, or (3) mostly vacant.
Option 3 (mostly vacant) can be bad news as it often indicates a depressed or
declining neighborhood.
● Price and age ranges. The appraiser determines the range of market values and
building ages for comparable properties in the area. Obviously, the subject property's
appraised value should fall within this range.
● Neighborhood rating. The appraisal will analyze and grade the neighborhood
according to its general features and other consumer-desirable elements. A negative
rating could be problematic.
● Description of favorable or unfavorable factors that will affect marketability. The
appraiser must determine the demand for this property and provide brief reasons for
that finding.
● Neighborhood boundaries. The neighborhood's geographical boundaries must be
described. The appraiser will usually identify the streets or landmarks that make up
the property's boundary.
Site Description
The property's site refers to the parcel of land. The site appraisal section reviews the following
categories of information.
● Lot dimension. The area size of the property is usually described in square feet,
although acres may be substituted in rural or suburban locations. Many conforming
lenders limit allowable site size to five acres.
● Zoning classification. The local zoning classification of the property is indicated in
this entry. Obviously, residential loan applications should have residential zoning. If
the property does not meet zoning restrictions—such as number of units or height--the
lender may require a letter from the building department indicating that the property
can be rebuilt to current non-conforming specs if it is destroyed.
● Conformity of present improvements to zoning. This entry is a yes-or-no question.
Either the improvements, if any, do conform or don't conform. As in the preceding,
properties that do not conform to zoning will require additional processing tasks.
● Highest and best use for the property. Ideally, the appraiser will indicate that
present use would be the best use for the property and appraisers usually do.
However, there are always exceptions.
● Utilities. The appraisal must indicate whether the main utilities—(1) electricity, (2) gas,
(3) water, (4) sanitary sewer, and (5) storm sewer—are public or other. The "other"
entry refers to private utilities obtained by the individual or a subdivision community.
● Topography. This entry refers to the general slope of the property. The appraisal
must indicate whether it is level or sloped, or a combination of both. This is normally
not a major issue, unless there are prevalent landslide or flooding problems.
● Size and shape. The appraiser must indicate whether the size and shape of the
property are standard or irregular both in respect to general norms and as compared
to the neighborhood.
● Drainage. The appraisal must indicate whether the property's drainage is adequate or
inadequate.
● View. If the view of the property adds or detracts from its relative market value, then
the appraisal must provide a description of the view amenity. Scenery and view are
important valuation factors, especially for condominiums. A unit whose windows look
out over a scenic vista will have much higher values than units whose windows look
out into a parking garage or alley.
● Landscaping. The appraisal should provide a general description of the property's
landscaping.
● Driveway. If the property has a driveway, the appraiser must describe it and evaluate
its adequacy.
● Flood zone designation. The appraisal will federal flood map to determine property's
status.
● Off-site improvements. The category of off-site improvements consists of (1) the
street, (2) the curb and gutter, (3) the sidewalk, (4) any street lights, and (5) the alley.
The appraisal must describe the existence of any such off-site improvements, as well
as whether such improvements are public or private.
● Comments. In this entry, the appraiser should describe any easements,
encroachments, zoning problems or other adverse or positive characteristics of the
property being appraised.
Improvements to the Site
These improvements refer to the house and other structures built on the property. Land is
considered as an empty lot. Structures, utilities and pavements added to this lot are
considered improvements to the land.
● General descriptions. This portion provides information about the building and other
improvements to the subject property lot.
● Exterior descriptions. The appraiser must indicate the material type and condition of
at least the following six exterior elements of the structure: (1) foundation, (2) exterior
walls, (3) roof surface, (4) gutters and down spouts, (5) window type, and (6) storm
sashes.
● Description of the foundation. The condition of the basement and cellar areas add
and detract from the total value of the property. The appraiser must describe the
following items as applicable: (1) slab, (2) crawl space, (3) sump pump, (4) dampness,
(5) settling of the foundation, (6) infestation, and (7) the overall condition and finish of
the basement.
● Insulation. The appraiser must indicate the existence of any insulation in the roof,
ceiling, walls, and floor as well as the insulation's R-rating, if known.
● Surfaces. The type and condition of the property's interior surfaces are one of the first
things that any buyer will consider. The appraiser must describe and evaluate the
type and condition of the (1) floors, (2) walls, (3) trim and finish, (4) bath floor, (5) bath
wainscot, and (6) doors.
● Heating. The appraisal must evaluate the property's heating system according to four
categories: (1) type of heater, (2) fuel used by heating unit, (3) unit's condition, and
(4) its adequacy.
● Cooling. If the property does have some sort of cooling system, the appraisal must
indicate the type (central or other), its condition and its adequacy.
● Kitchen equipment. The appraiser must describe and evaluate the condition and
number per unit of refrigerators, range/ovens, automatic trash disposal units,
dishwashers, fans/hoods above stove, compactors, washers and dryers, microwave
ovens and intercoms.
● Attic. If the property has an attic, the appraisal must describe (1) the type of stairs, (2)
the existence of a drop stair or scuttle, (3) the condition of the floor (whether it is
finished or unfinished) and (4) heating.
● Improvement analysis. The appraiser evaluates applicable improvements as good,
average, fair or poor.
● Car storage. The appraisal must describe applicable car storage features: (1)
number of cars it can accommodate; (2) type (garage or carport); (3) attached or
detached; and (4) evaluation of adequacy.
● Comments. The appraiser must evaluate and describe any needed repairs or current
features.
Cost Approach Analysis
The cost approach to the market value of the property calculates how much a new home of this
size and type would currently cost to build. The appraiser applies current industry and market
price estimates for the underlying land, building supplies and construction costs.
The appraiser would then subtract the subject property's depreciation (physical, functional and
external aging) from that new cost price to determine the cost approach value.
The cost estimate is an integral part of all property appraisals of buildings. But it is not the
whole story, because it does not fully take into account current market forces.
Market Data (Comparable Sales) Approach
This section focuses on current market forces in the determining the subject property's
estimated value. The appraiser will garner at least three comparison property values, or
“comparables.” Some lenders and programs—such as for jumbo loans and properties that
have experienced rapid appreciation—require four or more comparables. These appraisal
comparables are recently listed or sold properties of similar type, size, quality and locale as the
subject.
The market comparison approach is a standard part of all appraisal reports. This comparable
estimate is the more reliable of the three approaches because it is based on verifiable market
events.
Income Approach Analysis
The income approach applies only to income-generating rental property. This calculation
begins with a review of comparable rental rates and market values in the subject's area. These
rates are then used to compute a gross rent multiplier (GRM).
The appraiser then applies this GRM to the subject property's current rental data to determine
the value by income approach. This approach will also normally review current operating
expenses and average market rental rates in the subject's area.
Reconciliation of the Value Estimates
This section evaluates the conclusions of the three value-appraising approaches to determine
the market value of the property.
● Comments and conditions of appraisal. The appraiser will include the conditions
upon which the appraisal report is based.
● Final reconciliation. The appraiser must provide the final market valuation, including
the reasoning behind the market value estimate.
Additional Documents from the Appraiser
In addition to the preceding list of analyzed categories, the appraisal will also include the
following seven items in his or her report.
1. Sketch of the subject building or unit.

2. Photographs of the property
3. Photographs of the comparables (properties used for comparison)
4. Local maps, indicating the location of subject & comparable properties
5. Copy of most recent property survey, if available
6. Background information about the appraiser
7. Appraisal certification
Appraisal Factors that Restrict Approval

The existence of certain physical factors may make the property ineligible for maximum financing. In such
cases, the lender may reject the loan outright or impose a much lower Loan-to-Value ratio limit. Some of the
factors that may cause such ineligibility include the following seven appraisal findings.
1. Economic obsolescence
2. Major functional obsolescence
3. Declining property values
4. Deferred maintenance
5. Rural property < 25% built up
6. Buildings are not typical of the area
7. Items that affect the marketability or livability of the property
When faced with any of the above conditions, the property owners must review the situation carefully. Some
factors, such as functional obsolescence, deferred maintenance and livability, are within the owner's control.
Other factors, unfortunately, are not.
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properties.

Analyzing the Title Report
The title records the legal ownership of a property and the claims against it.
● Ownership. The title identities the current owners of a parcel of property.

● Claims. As important as the ownership, the title also identifies any claims against the property.
During the mortgage process, two institutions are normally involved in coordinating the ownership and claims
against a property:
1. Local records office. The records office, usually a department of the county, is responsible for
recording a property's title ownership and claims against the property.
2. Title insurance company. The title is normally inspected through the title insurance commitment,
usually provided by the title insurance company or the seller's attorney.
Mortgage lenders always want to ensure that before they finalize and close the loan, they will have a clear and
unimpeded lien on the property. Buyers will also want to ensure that the title is clear of unnecessary or
damaging restrictions. A sample copy of a title insurance commitment is available to support this article.
This article only provides an introduction to some of the title issues that underwriters must analyze, with regards
to the title. More detailed information can be found in the "Marketable Title" and "Title & Title Insurance" articles.
Ownership
The county records office maintains extensive records of all the property parcels in the county. These records
can go all the way back to the first person to legally record a claim to the property. In most cases, however, the
lender will only be concerned with the identity of the current owners, who must acknowledge and accept the
mortgage transaction.
The title will identify the current owners, as well as the types of ownership the current owners may have on the
property. There are many elements and dimensions to ownership. For example, a condominium owner may only
own the air rights within his or her unit, but own no walls, floors, buildings or land. For more information, see the
"Title and Estates in Land" and "Introduction to Real Estate" articles.
The title must also clearly identify the property. The description of the property is typically not according to the
common street name recognized by locals. Precision is required. Most counties use a PIN, or parcel
identification number, particularly for subdivided lands. They also record the full legal description, which provides
even more clarity.
Lenders and recorders want descriptions so exact that it can only apply to one property in the world. Remember
that there are many "Main Streets" or "Washington Boulevards" in this country; this makes street address an
insufficient method for recording property with the precision the industry requires. An example of typical legal
description may be as follows:
"Units 2334 and 166 in the Madison Square Condominiums as delineated on a survey of the
following described real estate: Lots 1, 2A, 2B, 3, 4, 5 and 6 in William J. Harold's Re-
subdivision of Land, Property and Space of part of the Southeast 1/4 of Section 2, Township 27
North, Range 19 East of the Third Principal Meridian, which survey is attached as Exhibit "C" to
the Declaration of condominium recorded as Document 45, 176, 749, together with its
undivided percentage interest in the common elements in St. Clair County, Oklahoma."
For more information, see the "Surveys and Legal Description" article.
Claims
Lenders and property buyers have the same concern with regard to the title. They want to make sure that it is
clean and defect-free, or at least reasonably clear. Mortgage lenders and property buyers will seek to avoid all
encumbrances that may affect their interest in the title. The first mortgage lender wants to be sure that it has the
first lien position (after the real estate taxes) on the title; the second mortgage lender wants to ensure that it has
the second lien position.
Liens, easements, deed restrictions and other encumbrances against a property restrict how property can be
handled, owned and transferred. Thus, if the property owner owes taxes or has defaulted on a loan, a lien for
that debt can be recorded against the property. The "Marketable Title" article discusses this issue in depth.
If the current owner does not or will not eliminate these liens, he or she may still be able to sell it. But it would be
difficult. The new buyer would have to agree to accept the existing liens and encumbrances. If the new buyer will
be using a mortgage loan to buy the property, the first mortgage lender will normally require that all liens be paid
off before or at the closing.
Claims against the property, such as liens, follow certain rules:
1. Legal recording of liens.

2. Order of liens.
Legal recording of liens
Legitimate liens are legal regardless of whether they are recorded or not. However, liens will
not carry any weight against the property unless recorded with the local governing authority,
which is usually the county records office. Moreover, there are often time limits as to how long
a unrecorded lien is valid and recordable. Anyone may record a lien against another person's
property, as long as the current property owner has legally agreed to the lien. For example,
most home improvement contracts contain a clause allowing the contractor to record
"mechanics & materialmen" lien if the home owner fails to pay the bills.
Order of liens
Property liens are normally recorded and satisfied in chronological order: "first come, first
serve." A first mortgage loan, for example, holds the first lien position against a property. A
second mortgage loan is recorded in the second lien position. When a property is sold, all the
funds will pay off the first lien debt; any funds remaining will then be used for the next lien, etc.
The exception, of course, is the government. Taxes owed to the government normally take
primary lien in effect, the government always cuts to the front of the line.
First mortgages always want to be first in line—i.e., they want to have first lien. If other liens
already exist when a homeowner applies for a first mortgage loan, the borrower must satisfy or
subordinate the other liens.
Thus, if a homeowner has both a first and junior mortgage but refinances only the primary
mortgage, the junior mortgage must be subordinated to the new first mortgage. The lien
subordination agreement (issued by the junior mortgage to be subordinated) will then be
recorded into the county records so that the new order of liens becomes official.
Local Records Office

Throughout most of the United States, property titles are recorded and maintained by the local county
government. The records office primarily records four title elements with every property:
1. Transfers. Whenever the property is sold or the ownership identification is altered, the records office
will update the title ownership.
2. Liens. Claims against the property, such as mortgage, tax and contractor liens, are recorded against
the property—with proper documentation that the lien can be recorded.
3. Restrictions. The ownership and use of the property can be restricted with legally recorded
encroachments, easements, lease agreements and covenants.
4. Releases. Liens and restrictions against a property can be legally removed with a formal release,
properly authorized by the lien holder or legal authority behind the restriction.
For each instance of recording any of the above items, the records office will normally charge a recording fee.
This fee will vary from county to county. For more information, see the "Recording" article in the "Real Estate In-
Depth" section.
The Title Company at Work

The title company is an integral part of the mortgage loan process. The title search and title insurance
commitment certify that the borrower or buyer will truly own the subject property clearly and cleanly.
To accomplish this certification, the title company will examine the ownership and lien records about the
property:
1. Analyze the description. The title company will analyze the legal description to the property to ensure
that the property actually does exist where it claims to exist. More to the point, the title will serve to
assure the buyer or lender by confirming the subject property.
2. Trace the succession of ownership. The title company will also examine how ownership of the land
has been transferred from the first legally recorded owner of the property down to the current owner.
This is often called the chain of title. The title company will ensure that there were no questionable
breaks or interruptions in the succession of ownership—which may jeopardize the real ownership status
of the current owner.
3. Review the restrictions against the property. The title company will then review and report all
unreleased restrictions against the property, such as recorded encumbrances, easements and liens.
Once the title company has completed its search and examination of public records, it will describe its findings to
the person or company who ordered the title search. The title company will then issue a commitment to insure
its discoveries. The title insurance does not go into effect until the title insurance premium is paid, which usually
occurs during the loan closing.
In most mortgage transactions, the title insurance company usually issues two separate types of insurance
coverage:
● Owners policy. With most purchases, the seller will pay for this portion. With refinances, it is normally
the buyer's responsibility.
● Lenders policy. With both purchases and refinances, the borrower will normally be responsible for the
cost of the lender's title insurance coverage.
The title insurance premium is a one-time charge and varies according to the title company. The title insurance
protects the owner and lender against possible losses from title-related problems.
For example, consider the hypothetical situation of a Native American tribe winning a claim in court that a
person's house is on top of their ancestral burial grounds and the court orders the homeowner to surrender the
property. The title insurance would protect the homeowner by either (1) paying the tribe for the land or (2) paying
the original mortgage amount plus down payment and losses to the current owner.
For more information, see the "Title and Title Insurance" article.
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properties.

Sample Appraisal Report
The following is a portion of a sample appraisal report. It contains the main elements of an appraisal; it has excluded the photo pages, floor sketch,
location map, appraiser certification, appraiser resume and a standard statement of limiting conditions. This specific example is for a condominium
unit being refinanced.
Subject
Property address 3741 W. SEDGWICK City CHICAGO State IL Zip code 60614-1077
Legal description SEE ATTACHED ADDENDUM County COOK Unit # 1702
Assessor’s Parcel No. 23-155-102-322-017 Tax Year 1998 R.E. Taxes $1,826.50 Special Assessments: NA
Project Name/Phase No. Gold Coast Frontenac, Phase 2 Map Reference 1200 Census Tract 0307
Borrower JONES Current Owner OF RECORD Occupant OWNER
Property rights appraised fee simple Monthly Homeowners Association Assessment $229.00
Sales Price NA (REFINANCE) Date of Sale N/A Loan charges to be paid by seller NONE
Lender/Client INTEGRITY MORTGAGE Address 4928 W. IRVING PARK RD, CHICAGO, IL 60641
Appraiser BETH APPRAISAL SYSTEMS Address 1234 S. HIGGINS ROAD, BERWYN, IL 60029
Neighborhood
Location URBAN Predominant single family occupancy OWNER & VACANT 0-5%
Built up OVER 75% Single family housing price $375,000 to $3,000,000+ Predominant: $1,076,000
Growth rate STABLE Single family housing age NEW to 75 years old Predominant: 75 years
Property values STABLE Predominant condominium occupancy OWNER & VACANT 0-5%
Demand/supply IN BALANCE Condominium housing price $55,000 to $3,000,000+ Predominant: $298,000
Marketing time UNDER 3 MOS condominium housing age NEW to 75 years old Predominant: 75 years
Present land use % One-Family: 40% 2-4 Family: 10% Apartments: 20% Com’l: 10% Ind’l: 0 Vacant: 0
Land use change: IN PROCESS TO SINGLE FAMILY RESIDENCES AND CONDOMINIUM/CONVERSIONS
Neighborhood boundaries and characteristics: SUBJECT NEIGHBORHOOD IS BOUNDED BY STATE STREET TO THE NORTH, RANDOLPH
TO THE SOUTH, HALSTED TO THE EAST AND ASHLAND TO THE WEST.
Factors that affect the marketability of the properties in the neighborhood: HIGH MARKET APPEAL DUE TO EASY ACCESS TO
ENTERTAINMENT, PARKS, EMPLOYMENT, AMENITIES AND SHOPS.
Market conditions in the subject neighborhood (including support for the above conclusions related to the trend of property values, demand/supply,
and marketing time—such as data on competitive properties for sale in the project and neighborhood, description of the prevalence of sales and
financing concessions, etc.) GENERAL MARKET CONDITIONS ARE FAVORABLE DUE IN LARGE PART TO THE AVAILABILITY OF
FINANCING AT ATTRACTIVELY LOW RATES. THERE IS STRONG SUPPORT FOR THE condominium MARKET. TYPICAL condominium
STYLE PROPERTIES SELL WITHIN 1-3 MONTHS, WHEN PROPERTY MARKETED. THE TYPICAL AVERAGE MARKETING TIME IS 51 DAYS
IN IMMEDIATE AREA.
Site
Specific zoning classification & description RBPD NO. 403 GENERAL BUSINESS/RESIDENCE
Zoning compliance LEGAL Highest & best use as improved PRESENT USE
Electricity PUBLIC Gas PUBLIC Water PUBLIC Sewer PUBLIC
Street PUBLIC (Asphalt) Curb/gutter PUBLIC (Concrete) Sidewalk PUBLIC (Concrete) Lights PUBLIC
Topography GENERALLY LEVEL Size INTEGRAL Density AVERAGE
View SIMILAR RESIDENCE Drainage APPEARS ADEQUATE Apparent Easements NONE
FEMA Zone C FEMA Special Flood Area NO FEMA Map No. 170074 0060B Map Date 06/01/81
Comments (apparent easements, encroachments, special assessments, slide areas, illegal or legal nonconforming zoning use, etc.) THE
SUBJECT HAS NO KNOWN ADVERSE EASEMENTS, ENCROACHMENTS OR ASSESSMENTS ASSOCIATED WITH IT. NO SPECIAL
ASSESSMENTS WERE REPORTED TO THE APPRAISER.
Project Improvements
No. of stories 37 Exterior walls CONCRETE
No. of elevators 6 Roof surface FLAT
Existing/Proposed EXISTING Total # parking 350
If conversion, original use APARTMENT Ratio (spaces/units) 1.1:1
Conversion date 1989 Type GARAGE
Age (Years) 11 Guest parking AMPLE
Effective Age (Years) 1
If project completed If project incomplete Subject Phase
Total # of phases 2 Total # of phases Total # of units 168
Total # of units 336 Total # of units Total # of units completed 168
Total # of units for sale 0 Total # of units for sale Total # of units for sale 0
Total # of units sold 336 Total # of units sold Total # of units sold 168
Total # of units rented 57 Total # of units rented Total # of units rented 27
Data source MLS/MGMT Data source Data source MLS/MGMT
Project type: x Primary res. o 2nd home or recreational o Row/townhouse o Garden o Mid-rise x High-rise o Other:
Condition of the project, quality of construction, unit mix, appeal to market, etc: THE PROJECT IS IN GOOD OVERALL CONDITION WITH WELL-
MAINTAINED COMMON AREAS. MARKET APPEAL IS GOOD DUE TO THE RECENT RENOVATION/CONVERSION.
Are the heating and cooling for the individual units separately metered? NO If no, describe and comment on compatibility to other projects in
market area and market acceptance: SEE ATTACHED ADDENDUM
Describe common elements and recreational facilities: COMMON AREAS AND EXERCISE ROOM, BIKE ROOM, LAUNDRY AND 24-HOUR
DOORMAN
Are the common elements completed? YES Is the builder/developer in control of homeowners association? NO
Are any common elements leased to or by the home owners association? NO
Subject Unit
Rooms Foyer Living Dining Kitchen Den Family Rec. Bed Bath Laundry Other Area SF
Basement 0
Level 1 1 1 1 1 1 539
Level 2 0
Level 3 0
Finished area above grade contains: 3 Rooms: 1 Bedrooms; 1.00 Bathroom; 539 Sq. Ft. of Gross Living Area for Unit
GENERAL DESCRIPTION HEATING KITCHEN EQUIPMENT
Floor # 24 Type HOT WATER x Refrigerator
No. of levels 1 Fuel GAS x Range/oven
Condition GOOD x Disposal
INTERIOR (materials/condition) x Dishwasher
Flooring CARPET/GOOD COOLING x Fan/hood
Walls DRYWALL/GOOD Central YES x Microwave
Bath floor CERAMIC/GOOD Other NONE o Washer/dryer
Bath wainscot CERAMIC/GOOD Condition GOOD
AMENITIES CAR STORAGE INSULATION
Fireplaces N/A Type: GARAGE Roof CONCEALED
Patio N/A # of cars: 1 Ceiling CONCEALED
Balcony CONCRETE Assigned/owned: OWNED Walls CONCEALED
Deck N/A Floor N/A
Porch N/A
Fence N/A
Comments
Condition of the unit, depreciation, repairs needed, quality of construction, remodeling/modernization, additional features (special energy efficient
items, etc.): SEE ATTACHED ADDENDUM
Adverse environmental conditions (such as, but not limited to, hazardous waste, toxic substances, etc.) present in the improvements, on the site, or
in the immediate vicinity of the subject property: THERE ARE NO KNOWN OR APPARENT ADVERSE ENVIRONMENTAL CONDITIONS THAT
WOULD NEGATIVELY IMPACT THE VALUE OF THE SUBJECT PROPERTY.
Cost Analysis
Estimated Site Value……………..$10,720,000 Comments on Cost Approach (such as, source of cost estimate, site
value, square foot calculation and, for HUD, VA and FHA, the estimated
remaining economic life of the property): THE LAND IS ESTIMATED AT
Estimated reproduction (new) cost
$95 PER SQUARE FOOT, BASED ON SIMILAR LAND SALES IN THE
Structure: 250,000 sq. ft. @ $205 per sq.ft.…..$51,250,000
AREA. LAND IS VERY SCARCE IN THIS COMMUNITY AREA AND,
Extras: bathroom/carpeting, equipment, etc.…..$3,200,000
THEREFORE, VERY EXPENSIVE. VERY LITTLE LAND IS
Garage: 60,000 square feet @ $110 per sq. ft.…..$6,600,000
AVAILABLE FR NEW CONSTRUCTION DEVELOPMENT. THE
Total Estimated Cost New………..$61,050,000
SUBJECT PROPERTY IS DEPRECIATED AT 10% DUE TO AGE AND
ACCRUED DETERIORATION. NO OTHER DEDUCTIONS ARE
Less Depreciation: Physical--$6,105,000; Functional--$0; Economic-- NEEDED. THE COSTS DATA USED HERE WAS OBTAINED FROM
$0…...$6,105,000 THE MARSHALL & SWIFT COST HANDBOOK. BASED ON THE
Depreciated Value of Improvements………..$54,945,000 ABOVE DATA, THE INDIVIDUAL DWELLINGS WOULD HAVE A
SQUARE FOOT COST VALUE OF $221 PER SQUARE FOOT.
“As is” Value of Site Improvements………..$553,600

Indicated Value of Cost Approach………..$55,498,600
Project Analysis
Unit charge $229.00 per month x 12 = $2,748 per year

Ratio of annual assessment charge per year to square feet of gross living area: $5.10 per s.f.
Is the project subject to ground rent? NO
Utilities included in unit charge: x Heat x Air conditioning o Electricity x Gas x Water x Sewer
Note any fees, other than regular HOA charges, for use of facilities: NONE
Compared to other competitive, similar projects, the subject unit charge appears: TYPICAL
To properly maintain the project and provide the services anticipated, the budget appears: ADEQUATE
Management Group: o Homeowners association o Developer x Management agent: LAURENT & CO.
Quality of management and its enforcement of Rules & Regulations based on general appearance: ADEQUATE
Special or unusual characteristics in the condominium Documents or other information known to the appraiser that would affect marketability: NO
SPECIAL OR UNUSUAL CHARACTERISTICS WERE OBSERVED. condominium DOCUMENTS NOT AVAILABLE FOR REVIEW.
Sales Comparison Approach Analysis
ITEM SUBJECT COMPARABLE #1 COMPARABLE #2 COMPARABLE #3

Address 3741 W. Sedgwick #1702 3741 W. Sedgwick #1214 3741 W. Sedgwick #1010 2544 S. State Street #1200
Proximity to sub. Same building Same building 3 blocks
Sales price Refinance $139,900.00 $137,500.00 $135,000.00
Price/GLA $271.12 $264.42 $249.09
Data Source Inspection MLS #99030555 MLS #99051835 MLS #99041189
Value Adjustments (Description & Amount)
Sales or Finance None Conventional; No concessions Conventional; No concessions Conventional; No concessions
Concessions
Date of Sale N/A 4/24/99 6/19/99 5/12/99
Location Urban/Average Urban/Average Urban/Average Urban/Average
Lease/Fee Smpl Fee Simple Fee Simple Fee Simple Fee Simple
HOA Assessmnt $229.00 $302.00 $304.00 $363.00
Common Elements Typical, Common Typical, Common Typical, Common Typical, Common
Project Size/Tp Mid-rise/Condo Mid-rise/Condo Mid-rise/Condo Mid-rise/Condo
Floor location 17 22 10 12
View Similar residence Similar residences Similar residences Similar residences
Design/Appeal Condo/Good Condo/Good Condo/Good Condo/Good
Construction Concrete Concrete Concrete Concrete
Age 10 years 10 years 10 years 8 years
Condition Good Good Good Good
Above-Grade Room Total-3 Total-3 Total-3 Total-3
count & Gross Living Bedrooms-1 Bedrooms-1 Bedrooms-1 Bedrooms-1
Area Baths-1.00 Baths-1.00 Baths-1.00 Baths-1.00
539 s.f. 516 s.f. 520 s.f. 544 s.f.
Finished Below-Grade None None None None
Rooms
Functional Util Average Average Average Average
Heating/Cooling Gas H/W C/Air Gas H/W C/Air Gas H/W C/Air Gas H/W C/Air
Energy Efficient Typical Typical Typical Typical
Car Storage Garage: 1 Garage: 1 Garage: 1 Garage: 1
Balcony, Patio, Balcony Balcony Balcony Balcony & Fireplace $5,000
Fireplace, etc.
Upgrades Good Good Good Good
Net Adjustments $0.00 $0.00 -$5,000.00
Adjusted Price $139,900.00 $137,500.00 $140,000.00
Comments on sales comparison (including the subject property’s compatibility to other condominium units in the neighborhood, etc.): SEE
ATTACHED ADDENDUM.
Analysis of any current agreement of sale, option or listing of the subject property and analysis of any prior sales of subject and comparables within
one year of the date of appraisal: PERSONAL PROPERTY IS GIVEN NO VALUE IN THIS REPORT. ALL SALES ARE CLOSED. NONE OF THE
ABOVE SALES WERE SOLD PREVIOUS NOR SINCE THE ABOVE LISTED SALES.
Reconciliation
Indicated Value by Sales Comparison Approach……………$138,000
Indicated Value by Income Approach [Estimated market rent $__/mo x GRM] ……………N/A
Indicated Value by Cost Approach……………N/A
The appraisal is made x AS IS o subject to repairs, alterations or conditions o subject to completion
Conditions of appraisal: SEE ATTACHED ADDENDUM
Final reconciliation: SEE ATTACHED ADDENDUM
The purpose of this appraisal is to estimate the market value of the real property that is the subject of this report, based on the above conditions
and the certification, contingent and limiting conditions, and market value definition that are stated in the attached Freddie Mac Form 439/Fannie
Mae Form 1004B.
I/WE ESTIMATE THE MARKET VALUE, AS DEFINED, OF THE REAL PROPERTY THAT IS THE SUBJECT OF THIS REPORT, AS OF 6/30/99
(WHICH IS THE DATE OF INSPECTION AND THE EFFECTIVE DATE OF THIS REPORT) TO BE $138,000.00.
Signature: ______________________________ License Number/Certification
ADDENDUM PAGE
Legal description
Refer to the lender’s title policy. Unavailable to the appraiser.
Neighborhood market factors
The subject is located north of the Chicago Loop in an area commonly known as Old Irving Park. The immediate area consists of varying aged
structures, predominantly New to 120 years old mid-rise condominiums/apartments, 2-4 family housing, manufacturing and commercial building
exhibiting good curb appeal. Good access to various schools, shopping, parks and pubic transportation on arterial streets.
Compatibility of Market to Metering
The subject’s common radiant heating system is typical for condominium buildings this age and market. Both situations are typical and readily
accepted by the market.
Condition of the unit
The subject is a single-level one-bedroom one-bath condominium located in Chicago’s Near North side. The subject unit experiences typical
depreciation due to normal wear and tear. There are no functional or external inadequacies noted. The subject unit faces south on LaSalle. The
subject was constructed in 1989 in the form of an apartment building and converted into condominiums in 1992, completed in 1993. The subject
property has the following additional features: Berber carpet throughout, sliding/thermo-pane windows, beveled edge mirrors, mirror closet doors,
ceiling fans in living and dining room, the bathroom has ceramic tile flooring, ceramic wainscot and standard wainscot, the kitchen has white
cabinets, rolled edge counter tops and mirror backsplash.
Comments on Sales Comparison
The comparables used in this report are the most recent closed sales of the most similar condominiums in the Near North side of Chicago. All
comparables offer similar utility and marketability. No adjustments are required for lower and higher association fees, as the fees vary due to
different gross living areas and amenities received. Comparable 3 has a corner location buy required no location adjustment due to the additional
monthly association fee for the superior view. Comparables 2 and 3 are located on lower level floors and received no floor level adjustment due to
the similar views of units above the 5th floor.
Conditions of Appraisal
The appraisal is made from an interior and exterior inspection of the subject property and an analysis of the Near North Side real estate market. No
liability is assumed for the structural or mechanical elements of the property. Personal property was given no value in this report. All sales are
closed.
Final Reconciliation
The market approach is considered the most reliable indicator of value. The cost approach is considered inapplicable due to the difficulty in
estimating the value of the improvements in combination with land value based upon percentage of ownership. The income approach is not utilized
in this report. However, significant rental data is available for a reliable GRM.
We hope that you've found our Mortgage and Real Estate Resource helpful and informative. We welcome all comments, critiques and suggestions;
please send emails to atlas@atlastitle.net. Remember that whether your are buying a home or an office building, you are investing in real estate. As
with all investments, the best investors are those who can gather the most knowledge, tools and resources. Regardless of whether you use our
lending services, please spread the word about our resource center to anyone you know who may benefit from our site.
If you would like to obtain a mortgage loan preapproval to determine your optimum loan qualification, please complete the Preapproval Application
form. We will obtain a preliminary approval for you, based on the information you provide in the application. There are no obligations on your part;
you may decide to cancel at any time until the closing, and even until three days after the closing with refinances of owner-occupied properties.

Sample Credit Report
This is a sample credit report, containing the main parts of a typical mortgage credit report for consumers. It is a
preliminary report for a married couple.
ABC Mortgage Credit Reporting

1234 S. Michigan Avenue, Anycity, IL 23232
Phone: (312) 987-5432
RESIDENTIAL MORTGAGE CREDIT REPORT (Confidential)

Provided for: INTEGRITY MORTGAGE, 4938 W. IRVING PARK RD., Anycity 60641
Attention: LORI PROCESSOR
Date Order Received: 1/5/00 Date Mailed/Delivered: 1/5/00
Type of Report Requested: PRELIMINARY
Applicant Information
Name: SMITH, MARIA L.

Social Security Number: 123-45-6789
Address: 6789 W. KIMBALL, Anycity, IL 60613
Residence since: 1992
Previous Address: NOT PROVIDED
Marital Status (& Dependents): MARRIED (NO DEPENDENTS)
Age: 35
Name of Employer: GUARDIAN INSURANCE COMPANY
Employer Address: 9876 S. ADDISON, OAK PARK, IL 60699
Position Held & Income:
Sample Title Insurance Report
COMMITMENT FOR TITLE INSURANCE

Issued By
KOKOMO TITLE INSURANCE COMPANY
8492 W. Michigan Avenue, Chicago, IL 60606; (312) 412-9292
AGREEMENT TO ISSUE POLICY

We agree to issue a policy to you according to the terms of this Commitment. When we show the policy amount
and your name as the proposed insured in Schedule A, this Commitment becomes effective as of the
Commitment Date shown in Schedule A.
If the Requirements shown in this Commitment have not been met within six months after the Commitment Date,
our obligation under this Commitment will end. Also, our obligation under this Commitment will end when the
Policy is issued and then our obligation to you will be under the Policy.
Our obligation under this Commitment is limited by the following:
● The Provisions in Schedule A

● The Exceptions in Schedule B
● The Conditions, Requirements and Standard Exceptions contained herein and in the attached
schedules.
The Commitment is not valid without Schedule A and Schedule B
To: AtlasMortgage.com
File No. 5579608 Reference: SMITHE
Invoice Date: December 25, 1999
Attn: REY VILLAR
6935 W. Irving Park Road, Chicago, IL 60641
Property Description: 636 SOUTH PALADIN LANE, LAWNDALE, ILLINOIS 03301
Description (Amount)
LOAN POLICY.......$478.00
CLOSING FEE.......$178.00
EPA ENDORSEMENT.......$65.00
INTERIM RISK PREMIUM.......$65.00
CONDOMINIUM ENDORSEMENT.......$65.00
ADDITIONAL ENDORSEMENTS.......$65.00
RECORD MORTGAGE.......$36.00
RELEASE OF ONE PREVIOUS MORTGAGE LIEN.......$36.00
TOTAL AMOUNT DUE.......$851.00
Please make check payable to: KOKOMO TITLE COMPANY
SCHEDULE A
AGREEMENT TO ISSUE AN ALTA RESIDENTIAL SUBORDINATE LOAN POLICY
File Number: H79608

Effective Date for Commitment: January 15, 2000
Refer Title Inquiries to: NANNETTE Block (117) 989-2533

Policy or Policies to be Issued:
ALTA Owner’s Policy Form 0-5-21 Proposed Insured: FREDRICK SMITHE AND MARY B. SMITHE
ALTA Policy Form 0-5-21 Amount $166,500
Proposed Insured: Atlas Mortgage, ITS SUCCESSORS AND/OR ASSIGNS, AS THEIR INTEREST MAY
APPEAR, AS DEFINED IN PARAGRAPH 1 (A) OF THE CONDITIONS AND STIPULATIONS OF THIS POLICY.
The fee simple interest in the land described in this Commitment is owned, at the Commitment Date, by:
FREDRICK SMITHE AND MARY B. SMITHE, AS JOINT TENANTS
The mortgage and assignments, if any, covered by this Commitment are described as follows: Atlas Mortgage,
ITS SUCCESSORS AND/OR ASSIGNS, AS THEIR INTEREST MAY APPEAR, AS DEFINED IN PARAGRAPH
1(A) OF THE CONDITIONS AND STIPULATIONS OF THIS POLICY.
The land referred to in this Commitment is described in Schedule C attached. Note: For information purposes
only, the land is known as: 636 SOUTH PALADIN LANE, LAWNDALE, IL 03301
This commitment is valid only if Schedules B and C are attached.
SCHEDULE B
File Number: H79608
This commitment does not insure against loss or damage (and the Company will not pay costs, attorneys’ fees or
expenses) which arise by reason of the matters set forth below:
1. Those taxes and special assessments which became due and payable subsequent to date of policy, or
which are not shown as existing liens by the records of any taxing authority that levies taxes or
assessments on real property or by the public records of any taxing authority that levies taxes or
assessments on real property or by the public record. Proceedings by public agency that may result in
taxes or assessments, or notice of such proceedings, whether or not shown by the records of such
agency or the public record.
2. Any discrepancies or conflicts in boundary lines, any shortages in area or encroachment or overlapping
of improvements.
3. Any facts, rights, interests or claims, which are not shown by the public records, but which could be
ascertained by an accurate survey of physical inspection of the land.
4. Easements, liens or encroachments or claims thereof, which are not shown by the public records.
5. Any lien or right to lien for services, labor or material imposed by law and not shown by the public
records.
6. Covenants, provisions, conditions and restrictions, if any, appearing in the public records.
7. Any easements or servitudes appearing in the public records.
8. Any lease, grant, conveyance, exception or reservation of minerals or mineral rights appearing in the
public records.
9. Rights or claims of parties in possession not shown by the public records.
10. Roads, streets, highways, rights of way or streams, if any.
11. Mortgage dated September 15, 1997, and recorded December 8, 1997, as Document 43928870 made
by FREDRICK E. SMITHE and MARY A. SMITHE, Husband and Wife as Joint Tenants and given to
TransCity Mortgage to secure a Note for $164,000 and the terms and conditions thereof.
12. Taxes for 2000 are not ascertainable or payable.
All General Taxes for the year 1999, 2000 and subsequent years.
Taxes for 1998 in the amount of $2,373.64 are Paid.
Taxes for the 1st installment of 1999 due 03/01/00 in the estimated amount of $1,186.82 is Unpaid.
All General Real Estate Taxes prior to the year 1999 are paid.
Tax Identification Number 36—68—637—388—5650.
13. If any document referenced herein contains a covenant, condition or restriction in violation of 42 USC
3604(c), such covenant, condition or restriction to the extent of such violation is hereby deleted.
14. Provisions, conditions, restrictions, options, assessments and easements as created by the Declaration
of Condominium recorded as Document 435028869 on December 16, 1984.
15. Provisions, conditions and limitations as created by the Condominium Property Act.
16. Upon a conveyance or mortgage of the property in questions, a statement from the Secretary of the
Board of Managers that there are no unpaid special assessment liens arising by reason of the non-
payment of common expenses should be furnished. [Note: such statement should cover the recording
date of the mortgage or if title is to be conveyed, the date of the deed, whichever is later.
NOTE FOR INFORMATION
The spouse, if any, of the borrower(s) should join in signing any instrument of encumbrance for the purpose of
waiving rights of homestead. We will require properly executed and acknowledged judgment affidavits from all
parties to this transaction prior to closing.
Effective January 5, 1995, an amendment to Chapter 49 of the Illinois Complied Statutes became effective. The
Recorder shall charge an additional fee in the amount equal to the fee provided by law for recording a document
that does not conform to new standards. Recording fees on this commitment have been adjusted accordingly. If
an excess has been charged, a refund will be issued to the property party once all documents relating to the
transaction have been recorded.
We should be furnished an ALTA Owner’s Extended Coverage or Loan Policy combined statement executed by
the purchasers/mortgagors, mortgagee and seller. The date of the statement should cover the date of
disbursement or the date of this commitment, whichever is later. Note: in the event purchaser/mortgagor or
seller is a trust, the statement must be executed by the beneficiaries thereof, as well as the trustee.
The 8.1 Environmental Protection Lien Endorsement has been approved for the loan policy.
Condominium Endorsement approved for loan policy (if applicable).
Location Endorsement approved for loan policy.
SCHEDUE C
Legal Description:
UNIT 54-335/3966 IN COVENTRY PARK CONDOMINIUM, AS DELINEATED ON A SURVEY OF THE

FOLLOWING DESCRIBED REAL ESTATE:
CERTAIN LOTS IN COVENTRY PARK UNIT 5, (PHASE 5 AND 6), BEING A SUBDIVISION OF PART OF THE
NORTHEAST 5/8 OF SECTION 68, TOWNSHIP 86 NORTH, RANGE 53 EAST OF THE THIRD PRINCIPAL
MERIDIAN, IN COOK COUNTY, ILLINOIS.
WHICH SURVEY IS ATTACHED AS EXHIBIT “A” TO THE DECLARATION OF CONDOMINIUM OWNERSHIP

RECORDED IN THE OFFICE OF THE RECORDER OF DEEDS OF COOK COUNTY, ILLINOIS ON
DECEMBER 16, 1994, AS
About Atlas Mortgage
Giving you more...

Atlas Mortgage Corporation is an Oklahoma mortgage Supervised Lender. Atlas’s loan consultants have
amassed decades of experience in banking, home mortgages, commercial finance and real estate. Atlas is a full-
service mortgage supervised lender licensed to provide mortgage loans for any properties in Oklahoma.
Whether you're buying a home, consolidating your debts or building a real estate investment portfolio, Atlas can
provide you with the exact mortgage financing you're seeking.
We still provide the same mortgage loans you'll find at your neighborhood bank. But we also provide many other
loan programs that your local bank does not or will not offer. We deliver all of these with professionalism and
attention, for the simple reason that mortgage loans are all we do. We cherish and depend on your patronage.
Our past success has been based on word-of-mouth. Our future success will only come from your complete
satisfaction.
Although our specialty is residential properties, Atlas also provides mortgage financing for commercial properties,
mixed-use buildings, apartment complexes and businesses.
To provide the widest array of programs, Atlas deals with investors, banks and lending companies from all
across the nation—as well as several overseas lenders on commercial projects. Today, Atlas offers more than
500 different programs for residential mortgage loans alone. In addition to providing conventional loans, Atlas
also offers a multitude of nonconforming loans for alternative or sub-prime applicants.
Among our proudest achievements have been savings homes from foreclosure, recovering homes after
foreclosures, saving borrowers from bankruptcies and helping homebuyers achieve their dreams.
Atlas promises honesty, quality and professional service—and we deliver.
We provide borrowers and real estate agents with a realistic assessment as soon as we perform the preliminary
qualification. We then employ all our resources to ensure that our borrower receives the best loan possible.
I welcome any comments, questions or requests you may have. You’ll notice as you proceed through this
resource center that we avoid hard-sell pressuring. That doesn’t mean we don’t want your business; it’s simply
that it isn’t our style, and I hope that you will allow us to be of service to you.
Sincerely,
Doug Jennings
doug@atlastitle.net
We hope that you've found our Mortgage and Real Estate Resource Center helpful and informative. We welcome
all comments, critiques and suggestions; please send emails to atlas@atlastitle.net. Remember that whether
your are buying a home or an office building, you are investing in real estate. As with all investments, the best
from our site.
properties.

Loan Preapproval Request Form
This prequalification is a quick and simple way to determine your qualification for a specific loan amount.
Please answer the following prequalification questions and entries as completely as possible. We will provide
you a prequalification certificate based on the information you provide.
Per Oklahoma regulations, you may cancel this application at any time until the actual closing. You may even
apply with other lenders at no penalty.
As you go through the application, you can link directly to the glossary for more thorough explanations to get
more information about questions and options you may not understand.
Requested Loan
Type:
Standard 1st Mortgage If Other:
Purpose:
Purchase property If Other:
Special Options: None If Other:
Biweekly Plans
Damaged Credit options
Loan Amount:
$
Loan Term:
30 years (360 months)
Loan Program: 30-year Fixed-Rate If Other:
20-year Fixed-Rate
Property Usage:
Owner-occupied (primary home)
Property Type:
Single-family house If Other:
Refinance, Home Equity Loan or Credit Line questions
Year of original purchase:
Original purchase price:

$
Current mortgage liens on property:

$
Major improvements made since purchase:

Cost of those improvements:
$
Primary Borrower Information
First Name: MI:
Last Name: Age:
Social Security #
Home Street Address:
Home City: ST:
Home Zip Code Home Phone:
Gross Monthly Income:

[Only for primary borrower.]
Co- Borrower Information
First Name: MI:
Last Name: Age:
Social Security #
Home Street Address:
Home City: ST:
Home Zip Code Home Phone:
Gross Monthly Income:

[Only for primary borrower.]
By submitting this prequalification application, both borrower and co-

borrower authorize Atlas Mortgage Corporation to order and review your
credit record for the purpose of arriving at a prequalification.
Submit Reset
This prequalification is helpful, but does not have the strength of a mortgage preapproval. It provides a working
estimate of what type of loan you can probably obtain.
For an actual preliminary mortgage approval, you will need to complete the Preapproval Application. The
preapproval will provide a preliminary mortgage loan approval commitment. You will have no obligation to
accept or close. You may even apply with other lenders simultaneously.
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Fixed-Rate Loans
The "typical" mortgage, if there is such a thing, is a 30-year loan at a fixed interest rate, with equal payments
made monthly. This type of loan offers the security of a fixed payment amount that you can factor into your
budget. The amount of the payment is allocated between interest and principal based on the declining balance of
the loan; in the earlier years a larger part of the payment goes toward interest. (Your lender might calculate the
interest using either the "30/360" method, in which it is assumed that a year consists of 12 equal 30-day months,
or the "actual number of days" method, in which interest is calculated more precisely based on how many days
are in each month and exactly when your payment is received.)
Some lenders have begun offering 15-year loans. A 15-year loan gives you the benefit of a shorter loan life,
meaning you pay significantly less total interest on the loan. Since the loan term is shorter, however, you have to
pay more each month--not double the amount of a payment on a 30-year loan, but significantly more,
nonetheless.
For example, on a $100,000 loan at 10% interest, your monthly payment would be about $1,075 for a 15-year
loan term, compared to $875 for the 30-year loan. However, the $200 difference in the monthly payment saves
you over $120,000 in total interest. (These figures do not take into account any payments you would have to
make each month to be put into escrow for property taxes and insurance.)
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Balloon Loans
The balloon mortgage loan is an installment note whose amortization is longer than its term. Simply, the
payments are calculated for a long-term period, but the loan's actual life is relatively short-term—with the
"balloon" mortgage balance due at the end of that short term.
The balloon loan used to be one of the chielf alternatives to the fixed-rate program, because it offered lower rates
without the increased risk of the ARM loan. With the evolution of the 3/1, 5/1 and other Two-Step ARM programs,
the balloon program is regularly ignored by most homebuyers and homeowners. However, it is still widely used
for commercial and non-conforming loans.
The most common types of residential balloon mortgage loans are the five-year and seven-year balloons for
conforming loan programs. However, 10-year and 15-year balloons are also prevalent among non-conforming
programs. The majority of commercial and apartment building loans today are balloon loans.
This article reviews two elements of the balloon loan program:
● Advantages
● Mechanics
Advantages of Balloons
Balloon mortgage loans have two important elements that provide a considerable advantage to the borrower: a
shorter term and a longer amortization.
The shorter term (as compared to a standard 30-year loan) means a relatively lower risk exposure for the lender
and so a lower interest rate. The interest rate for a conforming five-year balloon, for example, is typically 0.500
to 1.000 percentage points less than conforming 30-year fixed-rate loans.
At the same time, the balloon loan's longer amortization (usually 30 years) provides the borrower with lower
monthly payments than short-term loans, such as a 15-year mortgage. Except for the short-term, the conforming
(Fannie Mae or Freddie Mac) balloon loans are very similar to the 30-year fixed-rate program.
The Middle Choice
In many respects, the balloon mortgage loan falls between the fixed-rate and the adjustable-
rate mortgage (ARM) loans. The balloon loan's interest rate, for starters, is usually lower than
comparable fixed-rate loans, though higher than comparable ARM programs.
The balloon program also provides a middle ground between risk and stability. Whereas the
ARM loan's fluctuation in interest rate and payments means more instability for the borrower,
the conforming balloon loan is fixed rate.
Thus, the balloon loan can offer a bit of the best of both worlds: a lower rate than fixed-rate
programs, but more stability than ARM loans.
If a home buyer is considering a stay of only five to seven years, the balloon mortgage loan is
the definite choice. It has all the stability of a 30-year fixed-rate loan (during that period) but at
a lower interest rate and, consequently, payment.
Even if the home buyer plans to consider a longer stay in the property, the balloon mortgage
loan can still be a wise choice. The buyer can always refinance to a standard fixed-rate loan at
the end of the balloon term, as well as in some cases exercise a conversion option.
The main disadvantage of the balloon loan, as compared to the 30-year fixed-rate loan, is that
conforming balloon loans typically require at least 10% down payment.
Balloon Mechanics
Although the monthly payments of a balloon loan are calculated with a long-term amortization of (usually) 30
years, the balloon has a relatively short life.
At the end of the balloon's term—often called the balloon's maturity—the loan will have a large loan principal
balance still remaining. The borrower must either pay off, in full, or refinance this remaining balance. This final,
very large "balloon" payment is the origin of this program's name.
If the property is sold during the balloon's term, the loan balance is obviously paid off completely with the
proceeds of the sale.
To provide a deeper understanding of balloon loans, this article looks at three elements of balloon programs:
1. Amortization
2. Variations
3. Conversion Option
Amortization
The most important aspect of the balloon program is how its amortization differs from its term.
For example, the conforming five-year balloon has an amortization of 30 years and a term of
five years. The monthly payments are calculated with a 30-year amortization; however, at the
conclusion of the five-year term, the remaining loan balance must be paid off, converted or
refinanced.
With the five-year balloon loan itemized in the following matrix, the loan amount of $100,000
has an interest rate of 7.500%, for monthly payments of $699.21. At the conclusion of the five-
year term, the remaining loan balance will be $94,617. As you can see, the loan balance does
not decrease very quickly during the first years of a 30-year amortization. This balance must
be paid off, refinanced or, if applicable, converted.
Amortization table: 5-Year Balloon, $100,000 with an interest rate of 7.500%
Payment Total Monthly Principal Portion of Interest Portion of Current Balance

Number Payment Payment Payment
1 $699.21 $74.21 $625.00 $99,925.79
2 $699.21 $74.68 $624.54 $99,851.11
3 $699.21 $75.15 $624.07 $99,775.96
4 $699.21 $75.61 $623.60 $99,700.35
5 $699.21 $76.09 $623.13 $99,624.26
6 $699.21 $76.56 $622.65 $99,547.70
7 $699.21 $77.04 $622.17 $99,470.66
8 $699.21 $77.52 $621.69 $99,393.13
9 $699.21 $78.01 $621.21 $99,315.13
10 $699.21 $78.49 $620.72 $99,236.63
11 $699.21 $78.99 $620.23 $99,157.64
12 $699.21 $79.48 $619.74 $99,078.17
13 $699.21 $79.98 $619.24 $98,998.19
14 $699.21 $80.48 $618.74 $98,917.71
15 $699.21 $80.98 $618.24 $98,836.73
16 $699.21 $81.48 $617.73 $98,755.25
17 $699.21 $81.99 $617.22 $98,673.26
18 $699.21 $82.51 $616.71 $98,590.75
19 $699.21 $83.02 $616.19 $98,507.73
Buy-Down Programs
Strictly speaking, there are two types of buy-down programs:
● Permanent
● Temporary
Both options entail a reduction of the interest rate through prepayment of the loan's interest. At the closing, the
buyer, lender, seller or other related parties pay points in order to provide the borrower with a lower interest rate.
Permanent Buy-downs
Predictably, the permanent buy-down lowers the interest rate for the entire life of the loan. The borrower typically
accomplishes this feat by paying discount points, which are interest charges paid in advance.
By paying discount points, the borrower obtains a lower interest rate and lower monthly payments. For those
borrower who can afford it, this can actually be an advantageous tactic because of its long-term benefits:
● Reduce interest payments long-term

● Tax-deductible points
● Lower monthly payments
● Qualify for higher loan amount
For example, consider a 30-year fixed-rate $100,000 loan with a current market interest rate of 8.000%. The
monthly principal and interest (P & I) payment for this loan would be about $733.
However, by paying one discount point (in this case, $1,000), the borrower can lower the interest rate to 7.750%
for a new monthly mortgage payment of about $716. That is a savings of $17 per month, or $204 per year, or
$6,120 throughout the entire 30-year term of the loan.
Plus, the discount point/fee ($1,000 in this case) is normally tax-deductible.
The permanent buy-down program is usually not recommended for home buyers who plan to stay in the new
property for less than five years. Also, if you plan to refinance your loan within the next three years, you should
avoid paying any discount points.
As you can see from the above example, the typical mortgage borrower must wait longer than that to recoup the
buy-down cost with payment savings.
Temporary Buy-downs
The temporary buy-down program reduces the interest rate for only a short period of time, usually two years.
The most common temporary buy-down is the 2-1 and 1-1 temporary buy-down programs. The 2-1 buy-down
reduces the interest rate by two (2) percentage points during the first year of the loan and by one (1) percentage
point during the second year of the loan; the loan returns to the note rate in the third year.
By comparison, the 1-1 buy-down program reduces the interest rate by one (1) percentage point during the first
two years of the loan; it returns to the note rate in the third year.
The temporary buy-down program is advantageous for borrowers who wish to qualify for a larger loan amount,
than their income normally could with standard loans. By lowering the interest rate—and consequently the
monthly payments—during the first years of the loan, the prospective borrower can qualify for a higher loan
amount.
Many developers offer to subsidize such buy-downs to more quickly market their newly built homes. The
temporary buy-down are normally applied only to conforming fixed-rate loans. However, some lenders allow this
option on certain balloon and ARM programs as well.
The main disadvantage of the temporary buy-down program is its higher note rate. This high note rate is offset
by the low start rate. However, once the buy-down period is complete, the loan's interest rate will be relatively
higher (than standard loan programs) for the rest of its term.
For example, if the current market rate for a 30-year fixed-rate loan is 8.000%, the note rate of the same program
with a 2-1 buy-down would probably be 9.000%. During the first year, the start rate will be 7.000% (9.00% note
rate less 2-point first-year reduction). In the second year, the interest rate will increase to 8.000% (9.00% note
rate less 1-point second-year reduction).
In the third and subsequent years of the loan, the interest rate will return to the note rate of 9.000%. Fortunately,
most buy-down programs do not have prepayment penalties; so the borrower can refinance to lower rate, if
currently available.
Temporary Buy-down Requirements
The temporary buy-down programs are options that the lender may offer on select programs.
The restrictions of those specific programs guide the requirements imposed upon the borrower.
However, many 2-1 temporary buy-down programs will require that the prospective borrower
demonstrate potential for increased income. This is usually accomplished with a standard
verification form completed by the employer or documentation of steadily increasing income.
Temporary Buy-down Mechanism
Most temporary buy-downs establish an interest-subsidy escrow account for the period of the
temporary buy-down. The funds in this escrow account are essentially prepayment of the
interest during the first years of the loan.
The funds for this interest-subsidy escrow account is normally provided by either the lender or
the seller/developer. A seller or developer may provide such buy-down funds as an incentive
or assistance for the buyer. The borrower may also elect to pay these funds, as applicable,
from his or her own assets.
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Purchase Loans
The purchase mortgage loan is any financing used to finance the purchase transaction of a real estate property.
Although the typical community bank will only offer a handful of purchase mortgage programs for their
customers, there are actually hundreds of different programs available for the home or real estate investment
purchase.
Tax loopholes and benefits make mortgages and real estate properties excellent tax shelters. The interest that
homeowners pay on their mortgage loans are tax-deductible, which reduces the borrower's taxable income.
With investment properties, interest is normally not tax-deductible. However, real estate investors can deduct
certain expenses--the most profitable of which is depreciation.
This article will provide anintroduction to the purchase process that may help home buyers and real estate
investors save hundreds, perhaps thousands, of dollars. For more information about purchases, please see the
"Homebuyer Guide," "Mortgage Deed and Promissory Note" and "Closings and Transactions" articles.
Purchase Transaction
For most Americans, buying a home will probably be the most expensive investment of their lives. For many
Americans, it will be their only major investment. Luckily, real estate is still one of the best types of investments
available—and today, it is available to more Americans than ever.
The closing or settlement is the culmination of the typical purchase transaction. During the closing, the buyer
provides personal finance and mortgage loan funds to the seller. In return, the seller provides the property's title
and necessary keys to the buyer. That's the simple, easy description.
The closing is actually a hectic event for many home buyers and real estate investors, especially for rookie or
novice purchasers. The purchaser must review and sign dozens of legal documents and disclosures, the bulk of
which are required for the mortgage financing. The buyer often must also satisfy final documentary, verification
or settlement conditions, all of which are meant to satisfy all legal, lender and seller requirements.
With counsel from experienced real estate agents, attorneys and mortgage lenders, home buyers can and
should relax. However, the sheer weight of the first home purchase often does not allow much relief for the
home buyer.
For more information about closings and their documentary requirements, please see the "Closings and
Transactions" article.
Real Estate Financing

One of the most important part of the average real estate purchase is normally the mortgage financing necessary
to obtain the property.
The average home buyer does not have the assets to purchase property without some type of mortgage
financing. Even those home buyers who can afford to pay for the entire property with cash, it is sometimes not a
good idea to use mortgage loans for tax and investment purposes.
Mortgage programs typically set limits on the loan amounts available for purchases. These loan-to-value (LTV)
limits are based on the property's value, type and program.
For example, conforming programs--which normally have the best rates and terms--impose the following LTV
limits on purchase loans:
● Single-family home or condominium unit, owner-occupied: 97%

● Two-unit residential property, owner-occupied: 90%
● Three-unit residential property, owner-occupied: 80%
● Four-unit residential property, owner-occupied: 80%
● Single-family, 2nd homes: 90%
● Single-family and two-unit residential, investment (NOO): 80%
● Three-unit & four-unit residential, investment (NOO): 75%
However, home buyers and real estate investors can actually find higher LTVs with non-conforming programs.
For a detailed discussion of the many no down payment tactics available, see our No Down Payment Programs
article.
The buyer can also reduce or avoid paying for hundreds of dollars in closing costs through smart strategy. For
more information, see the No Closing Cost Options article.
Note that regardless of the buyer's credit, income and asset situation, all prospective buyers have several
options. For a discussion of these alternatives, see the Creative Financing section.
Again, for more information about purchases, please see the "Homebuyer Guide," "Mortgage Deed and
Promissory Note" and "Closings and Transactions" articles.
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Construction Loan Programs
For some home buyers, the dream home is a truly custom-made, newly constructed home. For these
construction purposes, a simple mortgage loan will not and cannot suffice—a construction loan is required. This
article
1. Overview of the Construction Loan

2. General Guidelines
3. Application Requirements
Overview of The Construction Loan

The typical construction loan will contain elements with different characteristics than found in a standard
purchase or refinance loan. Four items are of particular importance: loan commitment, rate lock, method of
disbursement, and lower LTV ratio limits.
Upon approval of the construction loan application, the borrower will receive a loan commitment from the lender.
Most lenders do levy a loan commitment fee for construction loans. This loan commitment normally lasts for nine
(9) months, though longer or shorter commitments are also used.
The interest rate is locked in for the entire term of the construction loan. Remember, however, that construction
loan itself is short-term. The rate lock is primarily for the permanent refinancing loan at the conclusion of the
construction. Four elements that require special clarifications include the following:
● Developer vs. Contractor

● Construction vs. Construction-Permanent
● Staggered Disbursements
● LTV Restrictions
Developer vs. Contractor
An important clarification must be made between two seemingly similar situations that require
two differing loan programs. A construction loan is required when the borrower's funds are
needed for the actual building of the property.
Large-scale developers usually do NOT require the buyer to obtain "construction" financing.
Instead, most developers will require that the borrower be approved for a "purchase" mortgage
loan. The actual construction of the property is funded with the developer's own cash or
assets.
The buyer's mortgage loan commitment is simply a guarantee to the developer that the buyer is
qualified and will be able to purchase the newly constructed property immediately after
construction is completed.
The home shopper will need a construction loan to build a custom home on a specifically
chosen lot. The home shopper will also need a general contractor for such construction. The
construction loan is used to actually build the home—not to purchase a newly built home.
Construction vs. Construction-Permanent
The typical construction loan is normally an interim or short-term financing that provides the
borrowers and their contractor with the funds to build a new home. They are short-term loans
in that they must be paid off or refinanced immediately after the construction is completed.
In some cases, the construction loan will only cover the actual construction of the structure, and
not the purchase of the lot on which the structure (house) will be built.
Construction loans are riskier for the lender. The lender is lending money for something that
does not yet exist, so the requirements for and structure of construction loans are slightly
different compared to those of standard purchase loans of existing (or recently built) structures.
The general procedure is for the short-term construction loan to be refinanced with a
"permanent" mortgage loan, upon completion. This permanent loan is simply any of the
various standard refinance mortgage loan programs available. However, although it is
technically a refinance, the permanent mortgage follows standard purchase guidelines.
This "permanent" refinance is usually arranged before the construction begins. Failure to
refinance a standard short-term construction loan can result in higher interest rates and more
costly payments.
Note that if the borrower has paid for the construction with personal funds—but now wishes to
be reimbursed for the costs—any new mortgage loan normally would be considered a "cash-
out" refinance.
To make the financing route easier for construction-home shoppers, many lenders now offer
the hybrid Construction-Permanent loans. This program is very similar to the permanent
refinancing of construction loans. The difference is that a construction-permanent mortgage
loan is an interim construction loan that automatically converts into a permanent mortgage
without refinancing.
To determine the maximum Loan-to-Value (LTV) ratio, construction-permanent loans should be

considered as purchase mortgages. Whether construction or construction-permanent, most
lenders require that all necessary work be completed before the final closing.
Staggered Disbursements
The loan funds are disbursed, or "paid out," in stages. A typical construction loan structures
four (4) disbursements, each of which will only come as certain stages are undertaken or
completed. With most construction loans, the four disbursements are often divided as follows:
1. Foundation
2. Under roof and enclosed to weather
3. Roughed-in and drywalls
4. Final stage
An inspection by the lender's appraiser or construction administrator is normally performed

prior to each draw request. These inspections are meant to ensure that all work required
before each particular payment is complete and finished in a satisfactory manner. The charge
for the inspections is normally billed against the disbursement.
The disbursement may come at the beginning or conclusion of each stage, depending on the
lender and contractor.
First disbursement
The first disbursement is normally for the foundation of the property. Before
proceeding to the next stage, the lender will usually send its property
inspector to ensure that the ground has been prepared and the foundation
has been poured according to the specifications indicated in the approved
blueprints and schematics.
Second disbursement
The second disbursement is for the building structure, usually including the
roof and exterior walls. Again, all work must be performed according to the
approved schematics and contract. Minor changes are often allowed;
however, major changes or adjustments require additional lender
underwriting approval.
Third disbursement
The third disbursement is for the interior elements of the structure, including
floors, drywalls, ceilings, doors and windows. The contractor's agreement will
normally indicate specific products and brands, which must be strictly met.
Some elements of this stage often overlaps with the second and fourth
stages, depending on the construction's progress.
Fourth disbursement
The final disbursement is for finishing tasks, such as painting, carpeting and
woodwork. Essentially, this final stage is responsible for preparing the house
for completion, possession and legal occupancy. In some cases, the final
disbursement may be conducted at the closing of the permanent refinance
loan.
Loan-to-Value (LTV) Restrictions
The loan-to-value ratio for single-family construction loans varies from lender to lender. Some
banks normally limited the entire construction-permanent loan to 80% of the appraised value of
the completed property. Many lenders today, however, treat the construction-permanent LTV
similarly to purchase programs, with total LTVs reaching 90%-95%.
At 80% LTV, the need for private mortgage insurance (PMI) is obviously eliminated. In such
cases, the purchase of the lot is considered the loan's down payment, as the land entails 20%
of the average property's total value.
To determine the total property value, most lenders generally use the lesser value of two
methods:
● Appraised (projected) value of the finished project, plus the original price of the lot.
● "Stick & Bricks" price of the construction, plus the original price of the lot.
General Guidelines
Most lenders issue the same basic guidelines and restrictions regarding construction loans, such as the
following:
●
Refinance Mortgages
Mortgage refinances refer to the replacement of an existing mortgage loan with another mortgage loan. The old
loan is paid and closed with the proceeds of the new loan. Moreover, this new mortgage loan also may be used
to pay off other liabilities and debts that the borrower has incurred or plans to incur.
Most refinance loans are used for at least one of the following four reasons:
● Better interest rates. When current interest rates are much lower than the rate on the borrower's
original mortgage loan, a refinance would be a wise financial investment for the borrower.
● Change of term. The term is the life of the loan and relates to the amortization of the loan. The longer
the term and amortization, the smaller the monthly payments. However, shorter terms and amortization
save money in the long run and build equity faster.
● Consolidation of debt. Refinance loans are often used to consolidate several long-term liabilities.
Credit cards charge exorbitant rates, and many installment loans are not much better. A consolidation
refinance loan rolls these debts into one mortgage loan with lower and tax-deductible interest-rates.
● Extra cash. The mortgage refinance is also a good way to raise extra cash for special purposes, such
as sending a child to college, financing a special vacation or investing in a new business.
Two Basic Types of Refinances

To mortgage lenders, there are basically two types of refinances:
1. Cash-out
2. No cash-out (rate & term)
As the names imply, the difference is whether the borrower cashes out any of the property’s equity—although
this may be too simple an explanation. Some rate & term refinances allow some cash back to the borrower.
Most cash-out refinances also allow changes to the loan's rate and terms.
Cash-Out Refinance
The main ingredient of the cash-out refinance is its option to provide the borrower with
additional cash from an increased loan amount. This privilege comes at a price. Conforming
lenders set lower limits on cash-out loans, as compared to non-cash-out refinances.
Note that if the property has no current mortgage liens on it, then any refinance would
obviously be a cash-out refinance.
For conforming programs, the maximum total Loan-to-Value (LTV) ratio for cash-out refinances
are usually as follows:
● Single-family, owner-occupied residential property: 80%
● Two-unit to four-unit, owner-occupied residential property: 75%
● All non-owner-occupied residential properties: 65%
Rate & term (No cash out) refinances, by comparison, regularly allow up to 90% of the
property’s value. Some programs actually allow LTVs of 100% and 125%.
Strictly speaking, the cash-out refinance—and its lower loan limits—applies to the following four
situations:
1. Cash back to the borrowers. The borrower can receive surplus cash from applicable
equity in the property. However, most conforming lenders limit the cash-out amount
(after all other costs and pay-offs) to only $50,000. Non-conforming lenders also often
set cash-out limits; but these limits are usually higher than those for conforming.
2. Debt consolidation. Conforming lenders classify any refinance that consolidates non-
mortgage debts, such as credit cards and other personal loans, as cash-out
refinances. Those consolidation funds are essentially cash-out of the property’s
established equity.
3. Replace a first or second mortgage that is less than one year old. If you are
refinancing a first or second mortgage loan that is less than one year old—regardless
of whether the borrower is receiving cash back—conforming lenders classify the
refinance as a cash-out.
Rate and term (no cash-out) refinance
The rate and term refinance, or "no cash-out" mortgage, deals with a straightforward refinance
of an existing loan. The loan-to-value (LTV) ratios for non-cash-out refinances are higher than
for cash-out, because cash-outs increase the lender’s risk exposure.
Strictly speaking, conforming rate and term (non-cash-out) refinances—and their higher loan-to-
value (LTV) ratios—are applied to the following situations:
1. Refinance of a first mortgage that is at least one year old. Rate and term (non-
cash-out) refinance may cover any loan that is paying off any first mortgage loan that
is at least one year old. If the existing loan is less than one year old, many lenders
consider this refinances a cash-out and apply a lower LTV ratio. [However, there are
exceptions allowed.]
2. Consolidation of multiple mortgages. Rate and term refinance may cover a
consolidation of mortgage loans. However, the junior liens must be at least one year
old.
3. Refinance that also pays closing costs and prepaid expenses. The loan amount
of a rate and term (non-cash-out) refinance mortgages may be increased to cover the
closing costs, discount points and pre-paid expenses of the refinance transaction.
4. Limited cash back. The borrower may receive a cash surplus with the rate-and-term
refinance, but the cash-out may not exceed 1% of the mortgage amount. Because it is
considered a rate & term refinance, the borrower can actually qualify for a higher loan
amount.
Refinance Requirements
Mortgage refinances tend to be more simple than purchase loans. Since 1990, refinances have also become
more commonplace.
During the 1970s and 1980s, mortgage interest rates tended to be very high. During much of the period, home
buyers had to settle for double-digit rates on their mortgage financing. This was due to the fight against high
inflation being conducted by the Federal Reserve. By increasing market rates, the Federal Reserve slowed
economic growth and inflation.
By 1992, as inflation was brought under control, interest rates started to drop. Homeowners who had purchased
the property a few years before could lower their mortgage rates to 7.00% on a 30-year fixed-rate. Since then,
rates have continued to fluctuate within a range of 5.500% to 9.000% for conforming 30-year fixed-rate loans.
It has now become common practice among home buyers to take future refinances into consideration when
buying a home. During periods of relatively higher interest rates, home buyers now often select ARM loans.
ARMs have lower initial rates; and most home buyers figure wisely that they can always refinance to a long-term
fixed-rate loan when interest rates have cycled back down to more attractive levels.
As many homeowners have found, refinances have slightly differing requirements than do purchases for a few
items:
● Investment consideration
● Appraised value
● Payoff statement
● Refinancing when there are 2 current liens
Investment consideration
Although a refinance can lower your monthly payments, it may not always be a good idea.
A homeowner who has already paid off ten (10) years of a 30-year loan, would be unwise to
refinance to another 30-year loan--even if the rate were lowered. It may even be unwise to
refinance to a 20-year or 15-year loan.
For example, consider the following scenario:
● Background. Lisa & Larry bought their home ten years ago with a 30-year $100,000
loan at an interest rate of 9.0%. Their bank is now offering them a new 30-year fixed-
rate at 7.50% or a 15-year fixed-rate at 6.75%.
● Staying put. Keeping the current 30-year loan would mean total interest charges of
$103,679 for the next 20 years.
● Refinancing to another 30-year is a bad idea. The balance after 10 years would be
$89,400. Even for that lower amount, the total interest charge with the 30-year at
7.50% would be $201,150. This would be an additional cost of $97,471. Bad move.
● Refinancing to a 15-year loan would be an excellent idea! The $89,400 loan at
6.75% would have total interest charges over the entire 15-year term of $53,000. That
would be a saving of $50,679 over the keeping the current loan.
Appraisal value
Most residential lenders require appraisal reports to be no more than three months old at the
time of closing. Many will accept appraisals that are up to one year old; however, the appraiser
will have to issue a recertification letter that confirms the applicability of the report's value
estimate.
Often, however, it is in the borrower's best interest to obtain a new appraisal. The new
appraisal could include value appreciation to provide a higher appraisal value. A higher value
could lower the LTV ratio, which can affect the mortgage insurance and available equity.
For example, Larry and Lisa bought a house for $200,000 three years ago, with a $180,000
(90% LTV) loan. Because of value increases in the area, they have the property reappraised.
The appraisal report estimates their current value at $225,000. By this time, their loan balance
is now $178,000. With this new appraisal, they can refinance their current loan at an LTV of
79%. This could eliminate their $95/month PMI payments. They could also opt to take out a
home equity loan against their increased equity to consolidate debt or make improvements.
In the preceding example, the property has appreciated 13% in three years. That is slightly
higher than normal, but not unheard of. Appreciation of more than 4% per year often raises a
red flag with underwriters.
All appraisals are automatically reviewed by the underwriter. Whenever there is any significant
appreciation in value, the underwriters will have a third party review the new appraisal report.
The appraisal review can reject the appraisal, accept it or require additional information or
comparables to support the valuation.
Note that during the first year after a purchase, the value used in applying LTV limits is the
lower of the appraisal value or price. For example, Beverly purchased a house for $100,000.
Six months later she wants to refinance it and has appraised the property at $150,000.
Unfortunately, that appraisal is essentially meaningless, because all conforming and most non-
conforming lenders will use the $100,000 price when applying the LTV.
Payoff statement
An additional processing step required by refinances is that the loan officer or processor must
acquire a payoff statement from all institutions and lenders who will be paid by the proceeds of
the refinance loan. The payoff statement will indicate how much the borrower owes the
creditor.
In most situations, the most important payoff statement required will be from the current
mortgage lender. If the new loan is a first mortgage, that new first mortgage lender wants to
ensure that the current mortgages on the property are all paid off and removed.
Payoff statements will indicate the current principal balance for the mortgage. The payoff letter
will also add any late charges, administrative fees and interest due for the projected closing
date. In addition, the payoff letter will also indicate a per diem—which is the daily interest
charge—just in case the refinance does not close by the projected closing date.
If the borrower has an escrow account with the current lender being refinanced, that escrow
account will be handled one of two ways:
1. Amount will be deducted from the payoff statement's gross balance.

2. Amount will be refunded to the borrowers after the closing, usually one to four weeks
after.
Refinancing when you have two mortgages
If the borrower in a refinance has at least two mortgages—both a first mortgage and a second
mortgage—on the subject property, that borrower will have three refinancing options, which
have different challenges:
● Consolidation. The borrower may choose to pay off both loans with a new refinance
loan. This refinance loan in effect consolidates the primary and junior mortgage
loans. If the second mortgage is at least one years old, then this would be considered
a rate and term (non-cash-out) refinance and have higher loan-to-value (LTV) ratios.
● Refinance the second mortgage only. The borrower may choose to refinance only
the junior mortgage and leave the primary mortgage as it is. The new loan will have to
be a second mortgage loan.
● Refinance the first mortgage only. The borrower may elect to refinance only the
primary mortgage and leave the junior mortgage as it is. However, this requires
subordination of the existing second mortgage. [Remember that liens are recorded
chronologically. The new first mortgage loan wants to have first lien. The lender on
the second mortgage loan must agree in writing that the new first mortgage will
assume priority lien over that existing second mortgage. The existing second
mortgage “subordinates” itself to the new first mortgage.]
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Non-Conforming Loans
Mortgage loans can normally be categorized according to three categories, depending on how they are handled
by the lender after closing:
● Portfolio
● Conforming
● Non-conforming
A portfolio loan is kept by the lender in its "portfolio" rather than sold to the secondary mortgage market.
Conforming loans, which normally have the best rates and terms are sold to the secondary mortgage market
through agencies such as Fannie Mae (FNMA), Freddie Mac (FHLMC) or Ginnie Mae (GNMA); they are called
conforming because for a loan to be sold to these agencies, they must satisfy or "conform" to the more stringent
guidelines established by these government-chartered agencies. For more details, see the "Conforming Loan
Programs" article.
A non-conforming loan is also sold to the secondary mortgage market; however, it is sold through private
conduits because such loans do not conform to Fannie Mae, Freddie Mac or Ginnie Mae guidelines. This article
provides an overview of the non-conforming industry and a review of the different types of non-conforming
programs.
Overview of Non-Conforming Mortgages

The American free market economy is vibrant, dynamic and always looking for additional, more profitable
business opportunities. The non-conforming is one such market for financial investors and lenders.
Fannie Mae, Freddie Mac and Ginnie Mae only serve A-credit borrowers, who meet those agencies' strict
guidelines regarding income, employment, assets, property, etc. For a long period, this situation ignored a huge
market of people falling outside these "conforming" guidelines.
When financial investors and lenders realized the opportunities available in the non-conforming market, they
followed Fannie Mae's lead and created mortgage-backed securities for this underserved market.
Today, the non-conforming market is one of the fastest growing segments of the mortgage industry.
The non-conforming market essentially serves those borrowers who are unable to qualify for conforming loans.
These borrowers are considered higher risk, but many investors still see these loans as great investments. The
higher risk levels are offset by the higher interest and the fact that the loan is secured by real estate property—if
the borrower defaults, the property is foreclosed and sold to pay off the loan.
As mentioned, non-conforming loans are sold to the secondary market in much the same way as conforming
loans are sold through Fannie Mae and Freddie Mac.
Private financial institutions purchase from lenders across the nation those non-conforming loans that meet the
specific institution's guidelines. That private company then packages multi-million dollar blocks of loans into
securities, which are then sold to investors on Wall Street and the financial markets.
will have a more limited supply of mortgage funds. Again, this abundant supply means relatively lower pricing or
interest rates.
Through this process, private financial corporations mimic federally chartered agencies, such as Fannie Mae, to
reduce the lender's risk exposure. If one borrower defaults, the losses are diffused among all the parties.
For the Wall Street investors who buy such mortgage securities, they do not bet on a single loan; instead they
invest in a piece of thousands of loans (used to create this block of mortgage securities).
funds. In such scenarios, banks were especially hesitant to lend funds to high-risk borrowers.
Common Non-conforming Programs

Whereas there may be dozens of conforming loan programs available at any given time, there are probably
thousands of different non-conforming programs. Non-conforming lenders design loans for specific conforming
guideline restrictions--or rather for the borrowers and situations that fail to meet those conforming restrictions.
Most non-conforming programs tend to fall within the following six categories:
● Second mortgages
● Jumbo loan amounts
● Damaged credit
● Loan-to-Value (LTV) ratios
● Income qualification
● Asset verification
In addition or related to the above, a number of non-conforming scenarios also steer many borrowers toward non-
conforming programs. Wherever the conforming loan proves too restrictive, chances are that a non-conforming
loan exists to serve that niche market.
Second mortgages
The second mortgage market has been an increasingly active industry during the past two
decades, especially as homeowners discover their uses and cost-effectiveness. Fannie Mae
and Freddie Mac normally do not purchase home equity loans and home equity lines of credit.
In fact, credit lines are usually either portfolio, with the originating lender keeping the loan and
servicing rights.
For more information about second mortgages, home equity loans and home equity lines of
credit, please consult the "Second Mortgages" article.
Jumbo loans
A jumbo loan is any loan that exceeds conforming guidelines. Since Fannie Mae and Freddie
Mac's charter are focused on servicing America's low, moderate and middle income home
buyers, loan amount limits filter high-income borrowers.
FHA loans institute even lower loan amount limits than does Fannie Mae and Freddie Mac. As
of January 2000, the maximum loan amount limits for conforming loan programs are as follows:
● Single-unit home or condominium unit: $240,000

● Two-unit residential properties: $207,000
● Three-unit residential properties: $371,200
● Four-unit residential properties: $461,350
Both Fannie Mae and Freddie Mac adjust their conforming limits—usually in cooperation with
each other—to reflect increases in average home prices and mortgage loan amounts. These
are the conforming (Fannie Mae and Freddie Mac) conventional loan limits. For more
information, please see the "Jumbo Loan Programs" article.
Damaged credit
Seriously damaged credit is normally unacceptable for conforming programs, although

occasional exceptions are allowed. Conforming loans must have grade-A credit, although A-
minus credit is acceptable when compensating factors are present.
For all other applicants, non-conforming loan programs are available with a variety of
alternative financing opportunities. It is even possible to provide refinance a home from
foreclosure, as well as providing motgage financing for borrowers with recent bankruptcies.
Damaged credit borrowers face even higher interest rates than other non-conforming
programs. Remember, however, that you should always view high interest rates as short-term.
As your credit grade improves, you will be able to refinance to lower rates and better terms.
Please consult the "Damaged Credit Options" and "Repairing Damaged Credit" articles for
more information. Specific articles on borrowers with bankruptcies or foreclosures are also
available.
Loan-to-Value (LTV) ratios

Many borrowers who normally qualify for conforming programs, opt for the higher loan-to-value
(LTV) ratio limits of non-conforming loans. Higher LTV ratios mean higher loan amount limits.
First of all, note that conforming loans have the following restrictively low LTV ratio limits for
most of their loan programs:
● Single-family purchase or No-cash-out refinance: 90%-95%

● Two-unit purchase or No-cash-out refinance: 90%
● Three- & four-unit purchase or No-cash-out refinance: 80%
● Investor (non-owner-occupied property) purchase or No-cash-out refinance: 70%
● Cash-out refinance (owner-occupied property): 75%
● Cash-out refinance (investor: Non-owner-occupied property): 65%
If a property owner or investor wishes to purchase a property with lower down payment or
refinance with a higher loan-to-value ratio, then a non-conforming loan program becomes the
only option.
Perhaps the best programs that non-conforming lenders offer are zero or no down payment
loans, which allow the purchase of both owner-occupied and investment properties with nothing
down.
For more information about specific LTV ratio limits, please consult the "Loan-to-Value (LTV)
ratios" and "No Down Payment Programs" articles.
Income qualification
Conforming programs require the applicant to show sufficient income, fully documented and
verified. If a homeowner or buyer has low documented income, a non-conforming program
may be the only recourse.
Some non-conforming programs allow for high debt-to-income ratios. For example, conforming
programs limit total housing and long-term debts to only 36% of the borrower's gross income.
Non-conforming programs, however, allow the borrower to qualify with up to 55% of gross
income targe
Jumbo Loans
A jumbo loan is any loan whose amount exceeds conforming guidelines. Conforming loans, which typically have
the best interest rates and loan terms in the market, are loans sold to federally chartered agencies—such as
Fannie Mae and Freddie Mac. Such loan must satisfy or "conform" to these agencies' guidelines in order to be
purchased.
For a discussion on conforming and non-conforming loans, please see the Conforming Loan Programs and Non-
conforming Loan Programs articles in this section.
This article will review the current conforming limits, as well as discuss their mechanics and money-saving
alternatives.
Conforming Loan Limits

The current definition of jumbo loans depend on the current conforming loan limits. In turn, loan limits will are
adjusted by Fannie Mae and Freddie Mac, as well as vary according on the number of units in the subject
property. Each unit refers to one legal apartment.
As of January 2000, the maximum loan amount limits for conforming loan programs are as follows:
● Single-unit home or condominium unit: $240,000

● Two-unit residential properties: $207,000
● Three-unit residential properties: $371,200
● Four-unit residential properties: $461,350
Both Fannie Mae and Freddie Mac adjust their conforming limits—usually in cooperation with each other—to
reflect increases in average home prices and mortgage loan amounts. These are the conforming (Fannie Mae
and Freddie Mac) conventional loan limits.
Cost of Jumbo Loans

Because jumbo loans are non-conforming, they charge relatively higher interest rates than similar conforming
programs. It is not so much that jumbo loans have higher interest rates; it is more the issue that conforming
programs have lower rates.
Although Fannie Mae and Freddie Mac are private corporations, wholly owned by their shareholders, they still
maintain a close working relationship with the federal government.
This working relationship often implies a sense of government backing in the eyes of many financial investors.
Although such government backing is not part of their charters, the implication of such on the guarantees offered
by Fannie Mae's and Freddie Mac's lowers the perception of risk.
Lower risk—or its perception—translates into lower interest rates.
The congressional charter granted to Fannie Mae and Freddie Mac requires them to concentrate on servicing
America's low-, moderate- and middle-income home buyers. Therefore, these loan amount limits are used to
filter high-income borrowers. Moreover, FHA loans institute lower loan amount limits than do Fannie Mae and
Freddie Mac.
Sold to the Secondary Market

Non-conforming loans such as jumbo programs are usually sold to the secondary mortgage market in much the
same way as conforming loans are sold through Fannie Mae and Freddie Mac.
Instead, it is usually private financial institutions who purchase from lenders across the nation those non-
conforming loans that meet each institution's guidelines. That private company then packages multi-million
dollar blocks of loans into securities, which are then sold to investors on Wall Street and the financial markets.
will have a more limited supply of mortgage funds. Again, this abundant supply means relatively lower pricing or
interest rates.
Through this process, private financial corporations mimic federally chartered agencies, such as Fannie Mae, to
reduce the lender's risk exposure. If one borrower defaults, the losses are diffused among all the parties. For
the Wall Street investors who buy such mortgage securities, they do not bet on a single loan; instead they bet on
a piece of thousands of loans (used to create this block of mortgage securities).
funds. In such scenarios, banks were especially hesitant to lend funds to high-risk borrowers.
Alternative Option: Jumbo Loans Without Jumbo

Pricing
There are ways to minimize the higher interest rates of jumbo loans. Unfortunately, most lenders prefer to keep
this a profitable secret.
Obviously, the buyer can always make a larger down payment so that the loan amount finally required fits within
the conforming limit. Depending on the sales price of the home, however, this can prove to be a very expensive
approach.
A more advantageous approach is to purchase the property with two mortgages: a standard conforming first
mortgage and a second mortgage loan. This is a perfectly legal method in every state that allows home equity
loans.
In this scenario, the first mortgage is a standard conforming program with a loan amount at the maximum limit.
The second mortgage is for whatever amount the buyer needs to cover the difference required for financing.
For example, consider that Ivana wants to buy a $500,000 property, and she only wants to make a down
payment of 20%, or $100,000. She could obtain a jumbo loan, but their interest rates are typically 0.25 to 1.00
percentage points higher than conforming loan programs. If the jumbo rate on that $400,000 loan was 8.75%,
her monthly payment would be $3,146.80.
Instead, she obtains a conforming first mortgage of $240,000. She then obtains a purchase second mortgage of
$160,000; the two mortgages combine for necessary $400,000 in mortgage financing.
If the conforming rate were only 8.00%, the monthly payment would be $1,763.98; and if the second mortgage
were a 30-year at 8.50%, that monthly payment would be $1,232.92. Thus, her total combined mortgage
payment would only be $2,996.90.
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FHA & VA Loans
Non-conventional mortgage loans are basically government loans: VA (Veterans Administration), FHA (Federal
Housing Administration) and FmHA (Farm Housing Agency)—now RHS Rural Housing Service—loans.
This article will discuss two specific non-conventional programs in more detail below:
1. VA
2. FHA
Ginnie Mae, the Government National Mortgage Association, is the agency responsible for securitizing much
these non-conventional, government loans. All other types of primary mortgage loans provided by private
lenders and not guaranteed by the government are considered conventional loans.
Contrary to what many people may believe, the VA and FHA normally do not fund loans.
These two governmental agencies only guarantee certain portions of a mortgage loan. But these are powerful
and effective guarantees. These guarantees are reassuring to lenders in that they lower the lender's overall risk
exposure.
VA Loans
The Veterans Administration (VA) was created in 1930 to aid military veterans and current military personnel.
The VA loan soon followed to aid veterans and military personnel in finding affordable mortgage loans. The VA
office acts as a co-signer by guaranteeing a portion of the loan. Standard banks and lenders will originate, fund
and service the loan. When the borrower defaults, the VA will reimburse bank losses.
Most veterans and current members (both active and reserve) of the United States armed services are qualified
for the loan. However, a minimum requirement of six full and continuous months of active duty must be
satisfied. The veteran applicant must present a copy of his or her DD Form 214, which is provided to the veteran
when military service ends.
There is no down payment requirement for VA loans, unless the lender establishes one as a condition for the
loan. Providing a down payment will often improve the conditions of the loan, so many borrowers do choose to
pay some down payment.
Although the Department of Veterans Affairs does not limit the size of VA loans, most lenders usually establish a
limit of about $184,000 on the loan amount. VA loans do not allow balloon programs.
The way in which VA loans are guaranteed is through the use of entitlements. The entitlement refers to the
amount that the VA will repay if the borrower defaults on his or her loan. Today, the entitlement amount is
$36,000 for the average loan. For loan amounts less than or equal to $144,000, the VA guarantees the full
$36,000 entitlement.
Generally, lenders want the entitlement amount to cover at least one-fourth (1/4) of the total loan amount. For
loan amounts greater than $144,000 but less than $184,000, the VA will guarantee an additional 25% of the loan
amount above the $144,000 level. The $184,000 limit is set by Ginnie Mae.
The VA loan guarantee tends to operate as an insurance policy. Instead of paying a premium, however, the
applicant must pay a funding fee to the Veterans Administration office. The funding fee is based on the amount
of down payment that the borrower makes.
● For down payments less than 5%, the funding fee is 1.25 percent of the loan value.
● With down payments at or more than 5% but less than 10%, the funding fee is normally 0.75 percent of
the loan amount. With at least 10% down, the funding fee drops to 0.50 percent.
● With refinances, the funding fee is normally a flat 0.50% of the loan amount.
Applicants for VA loans must have the subject property appraised by a VA appraiser, who will issue a Certificate
of Reasonable Value (CRV). The Veterans Administration office will use the CRV amount as the working sales
price or market value of the property. If the official sales price is higher than the CRV amount, the borrower must
provide for the difference.
FHA Loans
The Federal Housing Agency (FHA) is an agency of the U.S. Department of Housing and Urban Development
(HUD). Unlike the VA, however, FHA loans do require some down payment. Also, the FHA loan has the
additional advantage of allowing much of the closing costs to be financed by the mortgage loan.
FHA loans are geared to provide financing opportunities to home buyers with lower income or more debts.
However, the FHA has suffered heavy losses in recent decades, because they tend to cover riskier applicants.
FHA loan applicants have slightly higher income qualification ratios. Most FHA borrowers, in fact, would have a
difficult time qualifying for a standard loan.
FHA guarantees or insures mortgage loans, at a price. Borrowers must pay the FHA's mortgage insurance
premium. The annual mortgage insurance premium is 0.5% of the outstanding loan amount, paid in monthly
installments. Obviously, this monthly fee decreases as the loan balance decreases. The FHA will also charge a
one-time fee, in addition to the monthly premium, for mortgage insurance.
Appraisals must be performed by an FHA-approved appraiser. FHA loans are also no longer freely assumable
Loan amounts are limited according to regional economics. Across the country, the maximum loan amount for
FHA loans is $151,725 for a single-family property in the most expensive areas.
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Bi-Weekly Loan Programs
A Biweekly payment plan, when available and affordable, is a highly recommended option that all homeowners
should consider. This loan repayment strategy can save the borrower thousands of dollars, shorten the
mortgage term and more quickly increase available equity.
The key element of the biweekly plan is that the borrower essentially pays an additional monthly payment every
year. This additional payment is prepayment toward principal; it is not an advanced monthly (Principal &
Interest) payment that was regularly scheduled.
With the biweekly plan, instead of one monthly payment, the borrower will pay half (1/2) of a monthly payment
every two weeks. Of course, there are more than four weeks every month. Since there are 52 weeks in a year,
the borrower ends up paying 13 months of payments each year—resulting in an additional full monthly payment
every year:
● 1/2 of a regular monthly payment every 2 weeks.

● 52 weeks in a year.
● 26 biweekly payments (52 / 2) in a year.
● 26 biweekly payments equal 13 monthly payments (26/2 = 13).
This prepayment results in a marked decrease of the loan term, as demonstrated below. This prepayment also
means that the borrower will pay much less in interest charges and will be increasing the equity in his or her
home more quickly.
Example of Biweekly Savings
The best way to demonstrate the advantages of the biweekly payment plan is by comparing the
biweekly plan with a standard 30-year fixed-rate loan.
For comparison's sake, consider a $100,000 loan at 7.500%. For a standard 30-year fixed-rate
loan, the monthly mortgage loan principal & interest (P & I) payment would be $699.21.
With a biweekly plan, the borrower would pay $349.03 every two weeks. However, because of
this design, the 30-year loan is paid in full in only 22 years, shaving almost eight years from the
standard loan term.
The borrower also saves about $49,000 in interest charges with this scenario.
With the standard 30-year fixed-rate loan, the borrower will end up paying more than $251,000
in interest throughout the life of the loan. But with the biweekly plan, the borrower will only pay
about $202,000 in total interest over the reduced loan term.
Again, the biweekly program is a form of prepayments to principal. For more details and
spreadsheet comparisons of how prepayments reduce interest, see the "Prepayments to
Principal" article.
Avoid Independent Biweekly Services
Many lenders will offer the biweekly payment plan to their borrowers. All you have to do is call the lender's
customer service department—even after the closing—and request a change in payment plan.
If the lender does not provide for a biweekly payment plan, you can accomplish these same results by merely
paying an extra monthly payment each year.
However, mortgage loan borrowers should generally avoid any biweekly plans offered by an outside,
independent service. There are companies who will set-up a biweekly payment plan for homeowners. But they
are unnecessary, expensive and dangerous.
These biweekly service companies are unnecessary because they simply set up a payment plan by which the
borrower pays an extra monthly payment each year. This is a payment plan that borrowers can set up
themselves.
These companies normally operate by first obtaining a two-month deposit (sometimes more) from the borrower.
The borrower then makes biweekly payment to the company. The company, however, simply makes monthly
payment to the lender—with an extra month's payment each year.
Meanwhile, the service company will usually charge the borrower an application and maintenance fee (in
addition to the deposit) and reap the interest earnings from the deposit accounts.
They are also very risky because if the company goes under—as many have already done—participating
borrowers can lose all of their deposits and throws their mortgage payments (and credit record) into confusion.
Disadvantages
The biweekly program is not for all homeowners. In fact, there are disadvantages to this program. A question
many financial analysts will point out is that why should you pay off future debt with current dollars.
Remember that every dollar you pay today will be worth about 50 cents (or less) in twenty years. With a typical
30-year loan, biweekly payments will trade each solid dollar today for 50 cents in the future. You are often better
off using prepayment funds to pay off non-deductible, higher-rate debts—such as credit cards and personal
loans.
The peace of mind of paying off your mortgage early and having fewer burdens in your later years is a big
positive. But on a purely financial basis, the biweekly payment may not always be the best program for you.
You have to calculate the potential savings--and non-monetary benefits--against the probable costs.
Term Reduction Alternatives

The biweekly plan is actually just another way of saving money by reducing the loan's term. In addition to the
biweekly plan, consider these three additional options:
● Extra principal payments

● Refinance to a shorter term
● Graduated payment plan
Extra principal payment plan
As mentioned above, the extra principal payment program pays a little extra toward the
principal balance of the loan, over and above the regular monthly requirements. By paying a
little extra each month or once in a while, the borrower can dramatically lower the term of the
loan.
For example, a 30-year $100,000 loan with an interest rate of 7.75% has a monthly payment of
$716.41. If the borrowers were to make a monthly payment of $816.41 (an extra $100 toward
principal), the loan would be paid off in about 24 years, for a total savings of about $50,000.
For more information, please consult the "Prepayments to the Principal" article in the "Mortgage
Industry" section.
Refinance to a shorter term
If you can afford the commitment to a slightly higher monthly payment, refinance your 30-year
mortgage into a 10-year, 15-year or 20-year mortgage loan.
The monthly payments will be higher because of the shorter amortization; however the interest
rate is lower and the overall interest charges are dramatically less.
For more information, please consult the "Refinance Loans" article.
Graduated payment plan
Sometimes referred to as the graduated equity mortgage or growing equity mortgage, the
graduated payment plan also shortens the loan's term and reduces total interest cost.
Although many variations exist, the basic pattern is to increase the payment amount at the
beginning of each year. The extra payment earn interest income and is then applied toward
repayment of the loan principal.
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Graduated Payment Mortgages
Initially introduced by the Federal Housing Administration (FHA), the graduated payment mortgage (GPM) has
lost much of its popularity. However, related programs have been developed to better apply the GPM's basic
objective.
The GPM was designed for borrowers and home buyers who anticipated future increases in their income. This
program allowed such applicants to qualify for a larger mortgage loan and, thus, a bigger home purchase.
The most common program with a similar objective today is the Temporary Buy-Down program, which lowers the
interest rates during the first one-to-three years of the loan. The applicant would then be qualified and
underwritten based on the lower interest rate and monthly payment of the first year.
However, unlike the Buy-Down program, the GPM loan lowered the monthly payment but not the interest rate.
Instead the GPM adjusts the monthly payments so that the borrower pays slightly less during the first years but
slightly more in later years.
Rising Payments
The monthly payments would be initially lower than conventional fixed-rate loans. These payments rise during
the first few years of the loan, until they reaching a full amortization level.
With an initially lower monthly mortgage payment, the buyer can qualify for a loan with a lower income or be able
to buy a larger house.
Because of the lower initial monthly payments, there may be negative amortization during the first year(s) of the
loan. Negative amortization occurs when the scheduled payment does not cover the entire interest rate charge.
The unpaid interest is added to the principal balance, creating negative amortization.
GPM loans are rarely available today, because their benefits and advantages do not really offset their costs and
disadvantages. Again, most home buyers will discover that they are better off with a Temporary Buy-Down
program or a standard 30-year fixed-rate loan, rather than the GPM.
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No Income Verification Loans
One of the most common non-conforming loan programs is the No Income Verification (NIV) loan.
A non-conforming loan refers to any loans that are sold to the secondary mortgage market, but NOT through
Fannie Mae, Freddie Mac or Ginnie Mae. Non-conforming loans are sold through more expensive private
conduits because they do not satisfy or "conform" to the guidelines established by Fannie Mae, Freddie Mac and
Ginnie Mae.
The NIV program allows the borrower to qualify for mortgage financing, regardless of their income. This article
provides a review of the different types of NIV programs, as well as a discussion of costs and practical
applications.
NIV Overview
Various lenders have different interpretations and application of the No Income Verification (NIV) option. The
basic element is that the borrower's income, as reflected on the application, does not require verification.
The No Income Verification (NIV) loan merely accepts the applicant's stated claim about his or her
income—within reason.
Although the NIV program will not verify the applicant's income, it will require that the stated income makes
sense: it is acceptable for a doctor, lawyer or other professional to state that he or she makes $100,000 a year;
however, it is not acceptable for a janitor or clerical employee to state the same thing.
Most NIV loans will still insist on verifying employment, especially if the borrower is not self-employed. If the
borrower is self-employed, the self-employment must be documented with a business license, past receipts
and/or advertisements. Some lenders only offer NIV loans to self-employed borrowers.
In fact, the NIV loan was initially developed primarily for self-employed borrowers, who had a difficult time
documenting their income.
Until recently, practically all NIV programs were non-conforming loans. In recent years, however, some
conforming programs have started to offer a limited NIV option for borrowers with very good credit. The interest
rates on such conforming NIV programs are much better than standard non-conforming NIV loans.
Types of NIV
Although the No Income Verification loan has taken any many shades of interpretations and different titles, most
of the NIV programs available today can be categorized according to four classes:
● Lite Documentation
● Stated Income
● No Ratio
● No Documentation
Lite documentation
The Lite Documentation is useful for borrowers who cannot document their income through
standard means, i.e., pay stubs and tax returns. With Lite Doc programs, the borrower
provides six to 12 months of bank statements.
The lender's underwriter will then track the deposits into that account to determine an average
monthly revenue. As you can see, this is not a full NIV program—but it is often cheaper than
full NIV loans.
The Lite documentation program is more of a compromise between full documentation and No
documentation programs. It is sometimes called Alternative Documentation program.
Stated income programs
Stated Income programs accepts whatever income is stated by the borrower on the
application—within reason. Some people may find this difficult to believe: but it is true.
This is the essential No Income Verification program. The applicant must indicate a qualified
income on the application; and the lender will use that income figure to underwrite the
borrower’s income qualification.
The lender will still perform a Debt-to-Income (DTI) qualification, but the income used will be
the income stated. Again, the lender will still verify the borrower’s employment or self-
employment, but no income verification or documentation will be performed.
No ratio programs
The No Ratio option is offered by some lenders, instead of a stated income program. The No
Ratio loan essentially eliminates the lender's income qualification analysis of the borrower.
The applicant will indicate no income figure in the application. With this program, the lender will
still verify the applicant’s employment. However, no debt-to-income ratio qualification will be
performed.
No Doc
The no documentation (No Doc) loan is essentially one of the above No Income Verification
programs—with a no asset verification (NAV) element.
In addition to not verifying the income, the No Doc loan also does not verify the source of the
assets and funds used for the transaction. For more information, please consult the "No
Documentatio Loans" article.
Applicable Situations
The No Income Verification loan is ideal for self-employed applicants and for borrowers who have unstable
income, such as commissioned employees, recently employed borrowers and applicants who receive a large
amount of cash (undocumented) income.
However, the NIV program is also used by salaried borrowers who cannot qualify for a loan, based on their
documented income.
The NIV options is available—at a cost (see below)—to borrowers with a wide range of credit and employment
situations. Thus, applicants with D-credit in the middle of a bankruptcy or foreclosure can still qualify for a No
Income Verification loan.
A note of caution: just becase you can qualify for a no income verification loan doesn't mean you should go
through with financing. The no income verification programs allows borrowers unable to document sufficient
income to obain financing. But, applicants and borrowers should not overlook the question of whether he or she
can actually afford the loan. The whole purpose of income qualification is to project the applicant's ability to repay
the loan. You may be qualified to receive a $500,000 NIV loan, but if you're only earning a $30,000 annual salary
(with no other income), then this loan is probably a bad idea.
Excellent option for self-employed
The NIV option is most commonly exercised by self-employed borrowers. Because of the
nature of entrepreneurship, most self-employed people tend to earn very little income during
the first years of their business. Yet even more established and profitable entrepreneurs still
report little income on their personal tax returns, as they apply loopholes in corporation tax
laws.
However, such low reported incomes—although they save on tax dollars and are legal—haunt
that borrower when it comes time to obtain a mortgage. With a higher down payment and
slightly higher interest rate, that borrower can still obtain mortgage financing.
Undocumented (cash) income
The NIV option is also advantageous for borrowers with unacceptable income. For example, a
borrower may have a live-in roommate who pays rent for a bedroom. But such "boarding" rents
are not acceptable with most lenders, as they are not legal apartments.
An NIV program would allow that borrower to qualify for the mortgage, even at a lower income
level than normally required.
The NIV program is also often used by borrowers with undocumented income. Many jobs,
such as servers, valets, door attendants, bartenders and massage therapists, are still
predominantly cash-based. There is often a temptation in those instances to under-report the
actual amount of gratuities earned in such employment.
Putting aside the morality of under-reporting income, the NIV programs allow such borrowers to
qualify for a larger mortgage loan than their documented income would normally allow.
Cost of NIV Programs

The NIV loan is more risky for the lender than standard "Full Documentation" loans, because the income
calculation provides the lender with a statistical analysis of the borrower's ability to repay the loan.
Without the income qualification of Full Doc loans, lenders are assuming a higher level of risk. To offset these
risks, NIV loans charge higher prices and require larger down payments than comparable Full Doc programs.
Most NIV programs charge interest rates that are 1.50 to 4.00 percentage points higher than comparable Full
Documentation loans. For example, if a conforming ARM loan was currently at 6.00%, an A-credit NIV ARM loan
would probably be around 7.50%-10.00%.
The most serious cost of the NIV option, however, is the down payment requirement. Most NIV programs
require at least 20%-25% down payment for A-credit borrowers; C-credit and D-credit borrowers should expect to
make at least 30%-40% down payments.
As you can see, there is no such thing as a free lunch. However, for many investors, the NIV program is an
intelligent option. They often find that the loan payments—though at relatively higher rates—are still affordable,
and the down payment is merely an investment that they can always recoup with a second mortgage or a sale.
Remember also that you should always view higher rates as short-term. As soon as you are able to qualify for a
full documentation loan, you can always refinance to that better rate.
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No Doc Loans
For borrowers who have money or equity but have problems documenting their income or source of their assets,
the No Documentation—or No Doc—program is the ideal alternative.
The No Doc loan is actually another variation of the no income verification (NIV) program, with a twist. The No
Doc combines the NIV option with a no asset verification (NAV) option.
This article provides an overview of the No Doc program, as well as a discussion of the practical applications and
costs of the No Doc.
No Doc program overview

Because of its NIV origins, the No Doc loan is also a non-conforming program. A non-conforming loan refers to
any loans that are sold to the secondary mortgage market, but NOT through Fannie Mae, Freddie Mac and
Ginnie Mae.
Non-conforming loans are sold through more expensive private conduits because they do not satisfy or
"conform" to the guidelines established by Fannie Mae, Freddie Mac and Ginnie Mae.
As indicated above, the No Doc program merely combines the NIV option with a no asset verification (NAV)
option. The no income verification (NIV) option merely accepts the applicant's stated claim about his or her
income—within reason.
Although the NIV program will not verify the applicant's income, it usually will require that the stated income
makes sense: it is acceptable for a doctor, lawyer or other professional to state that he or she makes $100,000 a
year; however, it is not acceptable for a janitor or clerical employee to state the same income level.
By the same token, the NAV option ignores verification of the source of the funds that the borrower will be using
for the closing. Conforming loans require that assets used for the loan transaction must be verified and
documented. Some borrowers are unable to document the source of their assets, particularly with down
payments and savings.
The no asset verification loan still does verify that the indicated and required assets do exist. However, NAV
programs simply will not inquire about the source of those funds.
Practical Applications
As with the no income verification loan, the No Doc program is ideal for self-employed applicants and for
borrowers who have unstable income, such as commissioned employees, recently employed borrowers and
applicants who receive a large amount of cash (undocumented) income.
However, the No Doc program is also used by salaried borrowers who cannot qualify for a loan, based on their
documented income. It is also available to borrowers with damaged credit, at a price.
The additional advantage of the No Doc program—over the NIV loan—is the no asset verification (NAV)
element. With a No Doc program, borrowers with "mattress money" or other undocumented cash can still use
those funds to qualify for the loan.
The No Doc program is most commonly used by self-employed borrowers. Because of the nature of
entrepreneurship, most self-employed people tend to earn very little income during the first years of their
business. Yet even more established and profitable entrepreneurs still report little income on their personal tax
returns, as they apply loopholes in corporation tax laws.
However, such low reported incomes—although they save on tax dollars and are legal—haunt that borrower
when it comes time to obtain a mortgage. With a higher down payment and slightly higher interest rate, that
borrower can still obtain mortgage financing.
The No Doc program is also often used by borrowers with undocumented income, which often become cash
(undocumented) assets. Many jobs, such as servers, valets, door attendants, bartenders and massage
therapists, are still predominantly cash-based. There is often a temptation in those instances to under-report the
actual amount of gratuities earned in such jobs.
Putting aside the morality of under-reporting income, the No Doc program allows such borrowers to qualify for a
larger mortgage loan than their documented income and assets would normally allow.
Cost of No Doc Loans

As with the NIV loan, the No Doc program is more risky for the lender than standard "Full Documentation" loans,
because the income calculation provides the lender with a statistical analysis of the borrower's ability to repay
the loan.
Moreover, undocumented assets could come from borrowed funds—so the borrower's actual debt load is even
higher.
Without the income qualification of standard loans, lenders are assuming a higher level of risk. To offset these
risks, No Documentation loans charge higher prices and require larger down payments than comparable full
documentation programs.
Most No Doc programs charge interest rates that are 1.50 to 4.00 percentage points higher than comparable full
documentation loans. For example, if a conforming ARM loan was currently at 6.00%, an A-credit No Doc ARM
loan would probably be around 7.50%-10.00%.
The most serious cost of the No Doc program, however, is the down payment requirement. Most No Doc
programs require at least 20%-25% down payment for A-credit borrowers; C-credit and D-credit borrowers
should expect to make at least 30%-40% down payments.
As you can see, there is no such thing as a free lunch. However, for many investors, the No Doc program is an
intelligent option. They often find that the loan payments—though at relatively higher rates—are still affordable,
and the down payment is merely an investment that they can always recoup with a second mortgage or a sale.
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Debt Consolidation Loans
One of the financial opportunities that homeowners enjoy is the ability to tap into their property’s equity for funds.
For most homeowners, the most popular and beneficial use of such equity cash-outs is for a debt consolidation.
Homeowners seeking to consolidate debt normally have four basic mortgage instruments available:
1. Home Equity Loan

2. 125% LTV Second Mortgage
3. Home Equity Line of Credit (HELOC)
4. Refinance
Non-homeowners can sometimes still obtain debt consolidation loans, but these loans are often for low amounts
and much higher interest rates. This is unavoidable, for the simple reason that these debt consolidation loans
are unsecured.
Pros & Cons
In most cases, using the property’s available equity to consolidate can be a wise choice. But
this is not a blanket advantage.
Using your property’s equity for debt consolidation is ideal for debts with high interest rates and
long repayment periods. For example, most personal and unsecured loans charge interest
rates in excess of 20.00%. Also, with the exception of low teaser rates, most credit cards
charge interest rates of 16.00% to 23.00%.
A debt consolidation loan can cut in half the interest rates the borrower is paying on those
debts. Moreover, mortgage interest rates are often tax-deductible.
However, debt consolidation loans are not always the best choice for debts with relatively low
interest rates, such as student loans and car loans. A debt consolidation loan can still be
advantageous for borrowers who need to lower their overall monthly debt payments.
Some borrowers may consider the idea of lengthening the life of a debt to be a horrendous
plan. However, it depends on the overall cost of the loan. Although you will be paying off the
loan for a longer period, you will actually be paying the debt with less money.
To clarify, remember that your future dollars will probably be worth much less than your current
funds. For example, a 1998 dollar is worth only a fraction of what the dollar was worth in 1968.
Apply that to a 10-year or 15-year debt consolidation loan, and you see that it can actually pay
to stretch out your payments.
Home Equity Loan

A home equity loan is a mortgage loan that converts your property’s equity into cash. The home equity loan is
usually a second mortgage loan, whose lien is recorded after an existing first mortgage loan.
For example, Adam’s home is worth $200,000. He currently has a mortgage of $120,000; this means that he
has available equity of $80,000 ($200,000 - $120,000). If Adam is qualified, he can obtain a home equity loan of
up to $80,000.
Most home equity loans are limited to 10-year, 15-year or 20-year terms. Interest rates on home equity loans
tend to be higher than standard first mortgage loans, because home equity loans tend to be riskier for the
lender. In the case of a default and foreclosure, the auction funds first go to pay off the first mortgage loan and
all applicable legal, administrative, tax and court fees. Only the surplus will then be applied to paying off the
second mortgage.
For more information, please review the "Second Mortgages" articles in this section.
125% LTV program

Another type of home equity loan is the 125% Loan-to-Value (LTV) program, which is essentially an unsecured
loan. The “125%” refers to the fact that this loan brings the mortgage liens against the property to 125% of the
property’s value.
For example, Nora’s home is valued at $400,000. Her first mortgage balance is currently at $300,000. However,
Nora needs $200,000 for a short-term investment into a business venture.
Nora can use the 125% LTV program to obtain a home equity loan of $200,000. This would bring her total
mortgage liens to $500,000 ($300,000 + $200,000). Because her home is only worth $400,000, her mortgage
liens are 125% of the property’s value: that last $100,000 is essentially unsecured.
This is still a home equity loan, in that it is a mortgage lien against the property. However, this 125% LTV
mortgage loan is very high-risk for the lender in that the lender has no hope of ever regaining the loans fund if
the borrower ever defaults.
Fore more information, please review the "125% LTV Second Mortgage" article in this section.
Home Equity Line Of Credit (HELOC)

The home equity line of credit is similar to the home equity loan. The primary difference is that the line of credit
provides the borrower with a checkbook, instead of one lump-sum check.
The borrower can use the home equity credit line checkbook to withdraw funds for any purpose. The main
advantage of the credit line is its flexibility and potential savings. The borrower can "disburse" loan funds as he
or she needs them, and the borrower is only charged interest on the current balance.
For example, if Nora (in the preceding example) obtained a home equity line of credit for the $200,000, she can
space out her withdrawals to fit her business needs and minimize interest charges. She can take out $50,000
now and perhaps $100,000 a couple of months later. She will only be charged interest on her current balance.
The home equity credit line has slowly become a popular financial planning tool. Homeowners can store the
checkbook away for emergency purposes and will only pay interest on whatever balance they maintain.
For more information, please review the "Home Equity Lines of Credit" article in this section.
Refinance
In most cases, a refinance of the first mortgage loan can be the best way to cash out the property’s equity for
debt consolidation.
Interest rates for first mortgage loans normally have lower interest rates than home equity and second mortgage
loans. The borrower also receives the advantage of only one mortgage payment, instead of two.
However, conforming programs limit cash-out refinances to only 75%-80% of the property’s value. Non-
conforming programs do allow cash-out refinances to 100% of the property’s value—at higher interest rates. For
more information, please review the "Refinance Loans" article in this section.
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Second Mortgages
Second and junior mortgages are any mortgage liens recorded behind the first mortgage lien. These types of
loans are sometimes referred to as junior mortgages, because it is possible to have a third and additional
mortgage lien--behind the actual second mortgage.
Second mortgages are often called home equity loans, since they are normally secured by the property's
available equity. They have become an ever more popular financial tool for homeowners, with the added benefit
that in many cases, the interest rates on home equity loans are tax-deductible.
This article will review three second mortgage elements:
1. Using the Second Mortgage Loans

2. Cost of Second Mortgage Loans
3. Types of Home Equity Financing
Using Second Mortgage Loans

Home equity loans and credit lines, as second mortgage loans are often called, are used for a variety of different
purposes. The most popular uses include one or more of the following:
● Debt consolidation
● Home improvement
● Cash-out for personal use
● Cash-out for investment
● Avoiding mortgage insurance
Debt consolidation
Home equity loans and credit lines are often used to consolidate debt. A consolidation loan
combines several debts into one, usually lower payment.
In addition, homeowners are often able to deduct the interest that they pay on their home
equity loan—unlike regular consumer debts that charge non-deductible, exorbitantly high rates.
For example, a small second mortgage may be around 8.500%. Compare that to the
exorbitantly high interest rates of 16.00% to 25.99% on most credit cards and personal loans.
Moreover, the lower interest rates on home equity second mortgages are usually tax-
deductible. For more information, see the "Debt Consolidation Programs" article.
Home improvement
Homeowners wishing to remodel their kitchens, build an addition or make any other (relatively)
small improvements to their home find home equity loans and credit lines to be handy financing
options.
Strictly speaking, home improvement loans are technically different from standard second
mortgages. Home improvement loans take into account the projected value of the property,
after the improvement.
For example, Bill and Hillary need $50,000 to build an addition to their home. Their home is
currently worth $400,000 and they have a mortgage of $360,000. As such, they don't have the
equity for a simple home equity loan. However, if they take out a home improvement loan, the
lender will look at the property's value after the addition. Assuming that the addition adds
$40,000 to property, Bill & Hillary's home would be worth $440,000 after the construction. This
home improvement loan is much like a construction loan, in that it depends on the value of the
completed project. Likewise, the contractor and specs must be pre-approved, and the work
must be monitored before final disbursement.
Cash-out for personal use
Similar to a cash-out refinances and the preceding cash-out for capital, many homeowners use
home equity loans or credit lines to obtain cash-out for personal use. Such personal uses may
include a long-sought vacation, new car or for education.
As long as your income is qualified for the second mortgage loan, the lender will not care what
you do with the home equity loan funds after the closing.
Cash-out for investments
Many entrepreneurs and investors will often use their property's available equity to provide
them with capital for investment. A real estate investor can take out a home equity loan or
credit line on a currently owned property, and then use those proceeds as down payment on
another property.
Entrepreneurs will often "mortgage" their home's equity with a second mortgage loan to provide
them with start-up or operating capital for the business.
Avoiding mortgage insurance
Home buyers may also use second mortgages to eliminate mortgage insurance. For example,
consider that you want to buy a house with 5% down payment: you will therefore need
financing for the other 95% of the purchase price.
At that level, private mortgage insurance (PMI) is normally required.
If you limit your first mortgage to only 80% of the price, you will avoid paying mortgage
insurance. You can then make up the 15% difference with a second mortgage. The two
mortgage loans add up to the 95% (80%+15%) financing you need.
Thus, if the purchase price was $100,000, the buyer can obtain a conforming first mortgage of
$80,000. Because this is at 80% Loan-to-Value (LTV) ratio, there will be no PMI required. The
buyer then obtains an additional second mortgage of $15,000 (15% LTV) for the difference.
For more information, please review the "Mortgage Insurance" article in the "Mortgage
Industry" section.
Cost of Second Mortgages

Home equity loans and credit lines rarely have the amount of closing costs that first mortgage loans normally
entail. In fact, most lenders waive their usual closing costs for current borrowers.
However, second mortgages do have higher risk exposure than first mortgage—so they have higher rates.
Remember that if the property is ever foreclosed and sold, the sale proceeds must first completely pay off the
real estate tax, closing costs and first mortgage liens. The second mortgage is paid from any proceeds
remaining after practically everyone else is paid.
The interest rate will normally vary depending on how much of the property's equity is being used by the home
equity loan. The less equity remaining after the second mortgage is recorded, the higher the interest rate.
Higher Risk For Lender
The primary reason for the higher interest rate is the level of risk exposure that the second
mortgage creates for the lender—because of its lien position.
A lien is any legal claim or attachment, filed on record, against a property. The lien is usually a
security for the payment of an obligation, such as real estate taxes, contractors' services and
mortgage loans.
It may help to think of liens as a line of people who want a piece of your property. If the
property is ever sold, the proceeds must first completely pay off the first lien. Whatever
remains is then used to completely pay the next lien; this process continues until all liens have
been paid.
If there is any money remaining after all of this, the seller/owner receives the net surplus.
Real estate taxes automatically take a priority lien position ahead of all other claims. This is
simply the federal government exercising its prerogative and cutting in front of all other liens.
All other commercial or private liens are normally recorded in chronological order. First one in
line gets priority. If a lien is paid, that person, agency or company will issue a release of lien,
which formally removes that specific lien claim from the property's title.
Thus, when a mortgage loan is paid in full (either from a refinance, sale or regular amortization
payments), that lender will issue a release of lien to remove that specific mortgage lien.
When a property is sold, the first mortgage is paid in full before any funds can be directed
toward the second mortgage. In a foreclosure, the second mortgage loan may receive little if
any funds from the auction proceeds.
Subordination
It is possible for a private or commercial lien to cut in line, ahead of existing liens on the
property. The method used to accomplish this lien reshuffling is the "subordination"
agreement.
A new lien can take a primary position—ahead of existing liens on the subject property—if
those existing liens accept and sign a subordination agreement. With a subordination
agreement, an existing lien "subordinates" itself to the new lien. Subordination agreements are
sometimes used with refinances.
For example, consider the case of the Zena who has both a first and second mortgage on her
home. She wants to refinance only the first mortgage, but leave alone the second mortgage
home equity loan. Her first mortgage refinance is approved, but a subordination agreement is
required.
Remember that a first mortgage loan must take a first mortgage lien position. Chronologically,
the refinance would come after the current second mortgage home equity loan Zena already
has on the property. So she contacts her second mortgage lender. and they agree to the
subordination agreement (after reviewing her refinance terms).
At the closing, the new refinance loan assumes first mortgage lien, while the current second
mortgage "subordinates" itself to the new first mortgage loan.
Types of Home Equity Financing

Most home equity loans have shorter terms than standard first mortgage loans. The typical home equity loans
commonly have terms of five to 20 years. As mentioned earlier, their interest rates tend to be 1.00 to 3.00
percentage points higher than comparable first mortgage loans.
First mortgage refinances are also often referred to as home equity loan. However, the real estate and mortgage
industry tend to differentiate between the first mortgage refinances and second mortgage equity loans.
During the 1990s, the banking and mortgage industry developed two alternative types of home equity financing
that have become increasingly popular:
● 125% LTV second mortgages

● Home equity line of credit (HELOC)
125% LTV second mortgages
A growing development in the second mortgage market is the 125% program. Unlike
traditional home equity loans, which limit the loan amount to the property's available equity,
these new 125% programs will allow the homeowner to obtain funds up to 125% of the
property's value.
These loans are normally restricted for debt consolidation purposes, although programs do
vary. Because these loans are essentially over-leveraged or under-secured, they have very
high risk exposure. If the homeowner ever defaults, these loans have no reasonable
expectation of getting paid.
Because of this risk exposure, the interest rates for 125% programs often approach some
credit card rates. Interest rates for these 125% loans tend to average about four to seven
percentage points higher than comparable home equity loans. Moreover, their tax deduction is
not guaranteed.
Although these 125% programs can be helpful for some homeowners, especially those mired in
debt, they are not for everyone. They are especially not for people who plan to sell their home
anytime soon. The sales price will normally not be enough to release all of the liens, so the
seller will not be able to provide the buyer with a clear title.
For more information, please review the "125% LTV Second Mortgage" article.
Home Equity Lines of Credit
You may have noticed that I referred to home equity lines of credit, as well as home equity
loans, in the course of this article. A home equity or second mortgage loan is a regular
mortgage loan.
A line of credit is a cross between a loan and a credit card. Instead of providing the borrower
with a check for the loan sum, the line of credit provides the borrower with a check book.
The homeowner with a line of credit can write checks against the credit line established by this
type of financing. This credit line is still a legally recorded mortgage lien. However, the actual
balance can increase or decrease according to how much the homeowner takes out or pays
back.
The line of credit is an excellent safety net for the homeowner, as well as an unparalleled
financing tool for investors. If the homeowner is faced with an emergency and needs funds, the
line of credit can provide it. If the investor or entrepreneur sees an investment opportunity, the
line of credit can provide quick capitalization.
Unlike home equity loans, the credit line borrower only pays interest on the current principal
balance. If the borrower maintains zero balance on the credit line, no interest payments are
due. As with home equity loans, the home equity credit line interest rates are lower than credit
cards and are often tax-deductible.
For more information, please consult the "Home Equity Lines of Credit" article.
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Home Equity Lines of Credit
Your Home's Hidden Financial Planning Tool

The Home Equity Line of Credit, sometimes referred to by its acronym HELOC, is a variation of the home equity
loan. In most cases, both the HELOC and home equity loan are typically second mortgages.
The line of credit is a cross between a mortgage loan and a credit card. Instead of providing the borrower with a
check for the loan sum, the line of credit provides the borrower with a check book, which taps into a mortgage
loan. This article explores the two opportunities that HELOCs offer to homeowners:
● Financial Planning Tool

● Investment Tool
After the closing, the homeowner with a line of credit can write checks against the credit line established by this
type of financing. There is usually no restrictions on the usage of the funds. As long as the borrower is not in
default with his or her HELOC, the borrower will not have to obtain any lender approval before writing a check.
This credit line is still a legally recorded mortgage lien. However, the actual principal balance will increase or
decrease according to how much the homeowner takes out or pays back.
Financial Planning Tool

The line of credit is an excellent safety net for the homeowner, as well as an unparalleled financing tool for
investors. If the homeowner is faced with an emergency and needs funds, the line of credit can provide the
needed money. If the investor or entrepreneur discovers an investment opportunity, the line of credit can provide
quick capitalization.
By contrast, the unprepared homeowner would have to apply for a second mortgage, which could take 4-6
weeks to close. If the homeowner is already in an emergency situation, because of a job lay-off or sudden
medical crisis, the lender may reject or severely restrict that borrower’s application.
Unlike home equity loans, the credit line borrower only pays interest on the current principal balance used. If the
borrower maintains zero balance on the credit line, no interest payments are due. Homeowners who wish to
have this home equity safety net can simply put aside their HELOC checkbook in a safety deposit box. If the
homeowners never use it, they are never charged any interest. But if an emergency ever arises, they will be
able to feel more secure.
As with home equity loans, the home equity credit line interest rates are lower than credit cards and are often tax-
deductible.
Homeowners who wish to consider the HELOC should understand three important elements of the typical line of
credit.
1. Cost
2. Mechanics
3. Interest Rate
Cost
As mentioned above, the borrower only pays interest on the balance that the borrower
maintains on their home equity credit line account. That interest is usually tax-deductible for
most homeowners.
The cost to obtain a home equity line of credit will be the same as the closing costs required to
obtain a standard home equity loan. Most homeowners can expect a flat fee of $500-$800
dollars, some of which may be tax-deductible.
Most lenders will charge an annual fee of $25-$50, especially if the borrower does not use the
credit line. Some banks are willing to waive this fee for its favored borrowers. Also, this fee
may be tax-deductible: please consult your tax preparer or accountant.
Mechanics
The home equity line of credit is similar to the home equity loan. The primary difference is that
the line of credit provides the borrower with a checkbook, instead of one lump-sum check. The
borrower can use the home equity credit line checkbook to withdraw funds for any purpose.
Most home equity line of credit will divide the credit line’s term into two phases:
● Revolving
● Amortized
During the revolving phase, the borrower can withdraw funds from the credit line, until the credit
limit is reached. Some lenders may extend this credit limit, especially as the property
appreciates.
This revolving stage usually lasts five to 10 years, with seven (7) years being the most common
norm. The minimum payments due each month is usually the interest due for that particular
month. As such, the HELOC is essentially an interest-only balloon during the revolving state.
If the borrower wishes to reduce the principal balance during this interest-only phase, the
borrower would have to increase their payments above the minimum.
When the revolving period is complete, the lender provides the borrower with an option to
convert the current balance into a standard fully amortizing loan.
During the amortized period, the home equity credit line is essentially converted into a home
equity loan. Most of these loans are usually for 15-year terms, with the monthly payments
paying down the principal balance, as well as paying the interest due.
However, some lenders will allow positive borrowers to renew their home equity line of credit by
simply refinancing it with a new credit line.
Interest Rate
Although some credit lines are fixed-rate, most are adjustable-rate mortgage (ARM) financing.
These ARM programs also tend to be tied to the Prime Rate, which is the rate charged by
commercial banks to their best customer.
Note, however, that the borrower’s actual interest rate is normally higher than the prime rate,
depending on the borrower’s available equity and credit grade.
For example, Bart has good credit and plenty of equity. If his home equity credit line and his
first mortgage account for only 80% of the property’s value (80% LTV), then his interest rate will
probably be set at the prime rate.
On the other hand, if Bart’s home equity line of credit takes up all of the property’s available
equity, his interest rate will probably two to three percentage points over the prime rate. If
Bart’s particular credit line stipulates an interest rate two (2.00) percentage points over the
prime rate index—and if the prime rate is currently at 8.50%--this interest rate would be
10.500% (index 8.50 + constant 2.00).
Investment Tool
For entrepreneurs and fledgling real estate investors, the home equity line of credit can be one of their best
financing weapons. It provides them with liquidity, through a low-cost source of funds.
For example, Nora has is starting a bakery. She has found the perfect place to put her strong business plan and
experience to good use. Nora has already saved just about enough money to get this business started; but she
is worried about how tight her finances will be.
So, Nora obtains a home equity line of credit of $100,000 against her home. She can use these funds for the
actual capitalization or simply as a safety net to help her through the initially dry months she anticipates. She
knows that this business venture will be a success, but she does not want to endanger her credit rating, home
mortgage payments and overall financial situation. This line of credit will provide Nora wi
125% LTV Loans
An increasingly popular mortgage financing opportunity for homeowners today is the 125% Loan-to-Value (LTV)
ratio second mortgage. This home equity loan provides financing to up to 125% of the property’s value.
That excess 25% is essentially over-leveraged, making this an unsecured loan.
Remember that the mortgage loan is financing secured by the property’s value. The basic idea behind mortgage
loans had always been that if the borrower defaults, the property could be foreclosed and sold to pay off the loan
balance.
With the 125% LTV program, the second mortgage lender can expect no funds back in case of a default and
foreclosure .
Second & Third Liens

The attractive element about 125% LTV second mortgages is that they can sometimes be placed third lien—or
third in line behind two other mortgages.
Most lenders prefer to be second lien. However, many lenders with this program are willing to place themselves
in third lien behind first and second mortgages.
A lien is any legal claim or attachment, filed on record, against a property. The lien is usually a security for the
payment of an obligation, such as real estate taxes, contractors' services and mortgage loans.
It may help to think of liens as a line of people who want a piece of your property. If the property is ever sold, the
proceeds must first completely pay off the first lien. Whatever remains is then used to completely pay the next
lien; this process continues until all liens have been paid.
If there is any money remaining after all of this, the seller/owner receives the net surplus.
Real estate taxes automatically take a priority lien position ahead of all other claims. This is simply the federal
government exercising its prerogative and cutting in front of all other liens.
Mechanics & Limitations

These loans are normally restricted for debt consolidation purposes, although programs do vary. Because these
loans are essentially over-leveraged or under-secured, they have very high risk exposure. If the homeowner
ever defaults, these loans have no reasonable expectation of getting paid.
Because of this risk exposure, the interest rates for 125% programs often approach some credit card rates. For
example, as of 1997, current rates for these 125% loans average 14.50%-16.60%.
The interest rates for these programs are often tax-deductible; but these tax deductions are limited by the
property's original price and equity. Please check with a tax preparer or accountant for your specific situation.
Although these 125% programs can be helpful for some homeowners, especially those mired in debt, they are
not for everyone. They are especially not for people who plan to sell their home anytime soon.
Because of the high-risk nature of this loan program, mortgage lenders limit the 125% LTV second mortgage to
borrowers with proven credit, income and employment.
First-time home buyers are normally required to wait at least six to 12 months, in order to demonstrate minimal
homeownership and mortgage-management skills.
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Reverse Mortgages
The reverse mortgage is a relatively recent
mortgage loan program that provides a different
twist to the typical refinance loan.
Mortgage
Calculator & The big twists is that the borrower does NOT
Amortization Table make any monthly payments to the lender.
Instead, the lender usually provides monthly
payments to the borrower. However, the
● Calculate borrower often has an option to receive the
payments cash-out in one lump sum.
● Review
amortization
table The reverse mortgage is an increasingly
attractive loan program for senior citizens who
● Consider
have plenty of equity in their property. This
prepayment
options allows those senior citizens to use the
investment they have made in their home to
help them with their daily expenses in their later
years.
Through a reverse mortgage, the increased

value of the home may be used without the
owner being forced to sell the property.
Unlike standard mortgage loans, the reverse

mortgage is built on negative amortization. The
interest charges that the borrower would
normally pay is instead added to the principal
amount. The loan basically requires only one
payment—the final one when the property is
sold or the loan refinanced.
In 1989, HUD introduced an experimental

reverse mortgage program, and both Fannie
Mae and Freddie Mac both agreed to purchase
them for their own portfolio investments.
Several different repayment plans are offered,
including the sale of the house at the time of
the borrower's death.
Better than a
Refinance
The reverse mortgage is a type of refinance,
but it is better than the standard refinance.
First of all, the reverse mortgage does not
require any monthly payments from the
borrower. This is often a big problem for many
older refinance borrowers, who need the cash-
out but cannot afford the monthly payment that
will be required.
The reverse mortgage does not require any

monthly payments from the borrower. The
lender's disbursements to the borrower is
usually for a preset period—anywhere from one
month to 30 years. If the borrower is still alive
after the lender's disbursement ends, the
borrower still does not have to make any
payments. The lender normally does not
expect repayment of the reverse mortgage loan
until the property is sold or the borrower dies.
Once the borrower dies, the lender will sell the

property to pay off the reverse mortgage
balance, which will include all the unpaid
interest on the loan. If there is any surplus, that
extra cash will normally be provided to the
former borrower’s inheritors.
Most reverse mortgage lenders will also give

the borrower’s inheritors the chance to keep the
house with a simple refinance of the existing
mortgage.
It is important that married couples are

recorded as co-borrowers on a reverse
mortgage loan. Otherwise, if only one of
spouses is listed as a borrower and that spouse
dies, the surviving spouse could be forced to
pay off the loan or sell the house.
Requirements
The basic requirement is age. The borrower
has to be at least 65 years old, in order to
qualify for most reverse mortgage programs.
Income is not an issue, since the loan will not
be paid back by the borrower.
The loan size itself will be based on the

property's available equity and the borrower's
age. Actuarial tables are used to project
estimated life spans, and the loan costs are
calculated against that projection and the
interest rate.
Note that senior citizens with current loan

balances on their homes may be able to
refinance their existing loan, plus some cash-
out, with a reverse mortgage. This has the
effect of eliminating any future mortgage
payments.


Mortgage


Mortgage Options During Divorce
A divorce is always difficult, and this discussion of some its financial aspects is not much easier. However, it is
an important and necessary consideration.
Divorce varies from state to state. In Oklahoma, the primary residence and other properties procured during the
marriage are subject to division. But how do you split a house?
In many cases, there are only two options:
● The house is sold, and the profits are split between the spouses.
● One spouse keeps the house; the other spouse is removed from the title and mortgage.
The easiest option would be selling the house—unless the housing market is currently depressed. In shaky
markets, the spouses may not be able to sell the home at the right price or soon enough, if at all.
Keeping the House

If one of the spouses wishes to keep the house and is allowed to do so by the divorce agreement or judgment,
the other spouse must be removed from both the mortgage and title.
Removing someone from title is relatively simple. A quitclaim deed signed by both spouses or a court order can
quickly change the ownership of the property to remove one or more parties.
Unfortunately, it is nearly impossible for a co-borrower to be removed from a mortgage loan. The only option if
there is a mortgage loan on the divorcing couple's property would be a refinance by the spouse keeping the
property.
Refinance Solutions
Many lenders such as Atlas Mortgage do provide cash-out refinances that can provide cash-back from the
property's available equity while removing one of the parties from the mortgage loan. This cash-out refinance
can also be used to consolidate debt.
Thus, if one person surrenders ownership of the home for half of the equity in the property, the other person can
refinance the property to cash-out half of the equity and leave only the remaining homeowner on the mortgage
loan.
For example, Romeo and Juliet are getting divorced. Romeo gets to keep the house, but must compensate
Juliet for half of the equity. The property is worth $100,000 and it currently has a $60,000 mortgage on it—which
translates into a $40,000 net equity, of which Juliet is to receive $20,000.
Romeo will refinance the $60,000 mortgage with a new $80,000 cash-out mortgage loan. The $20,000 cash-out
will be given to Juliet and the new refinance loan will list only Romeo as the borrower and property owner. In
exchange, Juliet quitclaims from the title, so that Romeo entirely owns the house.
● $100,000: Value of property
● $60,000: Current mortgage balance
● $40,000: Current equity in property
● $20,000: Each spouse’s individual share of property’s equity
The challenge of this program is that Romeo must qualify for and maintain payments on the new mortgage with
his own income and credit. This might be a problem if the original loan was obtained with the incomes and credit
of both spouses. However, Rome will still have options with No Income Verification and non-conforming loan
programs.
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Creative Financing Programs
This section offers information and tools about different creative financing methods that you can use to obtain
and invest in real estate. The articles and items in this section include the following:
● How to Buy Property with NO Down Payment

● How to Lower or Eliminate Closing Costs
● How to Buy Foreclosure Properties
● How to Buy Properties from Tax Auctions/Sales
● How to Buy For-Sale-By-Owner (FSBO) Properties
● How to Buy with Option Contracts

● How to Buy Properties with installment Contracts
● How to Arrange a Purchase Option with Your Lease
● How to Buy Properties Through Loan Assumptions
● How to Use Seller Financing to Grow Your Portfolio
Disclaimer. The following samples are provided to familiarize yourself with proposals and approaches you may
consider taking. We do not warranty or recommend usage of any of these forms. You must consult a real estate
attorney or professional to prepare and/or approve specific contracts or documents you intend to use.
● Sample: Offer Letter to FSBO Seller. An example purchase offer on a for-sale-by-owner (FSBO)
property.
● Sample: Purchase-Sale Agreement.
● Sample: Offer Letter to Seller for Installment Contract
● Sample Form: Installment Contract
● Sample: Offer Letter to Seller for Lease-Purchase Option.
● Sample Form: Lease Purchase Option Clause.
● Sample: Offer Letter to Seller for Assumption Option. An example letter that can be used to request the
seller's cooperation in allowing you to exercise the assumption option in the seller's current mortgage
loan.
● Sample: Offer Letter to Seller for Seller-Held Financing.
● Sample Form: Loan Promissory Note.
● Sample Form: Mortgage Deed
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No Down Payment Programs
Although neither widely taught among real estate agents nor openly advertised by most lenders, there are
several no down payment programs and options available for the smart property investor. However, as with
most if not all short-cuts, there is always a price—usually either in pricing, restrictions or time.
In this discussion of No Down Payment programs, the focus will be on non-conforming, but conventional
financing methods for obtaining a property with no down payment. The methods reviewed below are applicable
to purchases of single-family homes and condominiums, as well as of multi-unit apartment or commercial
buildings.
Most down payment programs can be roughly divided into two groups:
1. Lender-arranged programs
2. Creative transaction plans
Note that if you are serious about acquring investment properties with no down payment, please take the time to
review the "Creative Real Estate Investment Guide" in the "Real Estate Investing" section.
Consider These Programs as Short-Term Plans
Regardless of which approach you choose, you should always look at the No Down Payment
approach as a short-term method used to obtain long-term gain.
This is especially true when you consider the initially higher interest rates of most No Down
Payment programs. But don't let that scare you. It is crucial for the savvy buyer to see those
higher interest rates as SHORT-TERM.
Always remember that the No Down Payment program is only used to get you into the
property. Once you obtain the right property, you will soon be able to refinance to a lower,
more affordable rate.
For example, consider the investor with damaged credit and no money who purchases a
property for $100,000—with no down payment. The initial interest rate could be very high,
because of that investor's high-risk situation. However, that same investor can refinance to a
lower rate once the investor's credit improves or a subsequent appraisal shows some
appreciation.
The investor can do this because of the property's appreciation or equity. At the time of
purchase, the no down payment program's Loan-to-Value (LTV) ratio is 100%; the inverse of
the LTV ratio is the down payment, which in this case is zero.
But if the property is subsequently re-appraised at $111,000, a refinance to another $100,000

loan would be at an LTV ratio of 90% ($100,000/$111,000). Thus, the refinance could replace
the No Down Payment loan with a conforming, lower rate, conventional mortgage loan.
● A $100,000 loan on a $100,000 purchase is an expensive 100% Loan-to-Value (LTV)

mortgage loan.
● A $100,000 loan on a $110,000 appraisal value is lower-rate 90% LTV refinance.
Lender-Arranged Programs
A handful of lenders have begun offering various No Down Payment programs, especially through brokers such
as Atlas Mortgage. Most of these programs fall into four categories:
1. Pledged account programs

2. Two-part mortgages
3. Seller second mortgage
4. Gift equity programs
Pledged account
With a pledged account, the borrowers or relatives pledge CDs (certificates of deposit) to the
lender as security for the no down payment program. The CD’s principal and interest returns
still belong to the borrower or relatives. However, the pledged account secures the no down
payment program, thus lowering the lender's risk exposure.
If the borrower defaults, the pledge acts as a mortgage insurance. In fact, the mortgage
insurance requirement is usually waived, thus saving more money by lowering the overall
monthly payment. After a few years of property value appreciation or if the borrower refinances
to a standard loan, the pledge’s hold on the CD is released.
This program is primarily available as a low-cost ARM loan. For borrowers afraid or unsure of
the benefits of the ARM loan, remember that it can always be refinanced into a fixed-rate
program.
The main challenge of the pledged account approach is gathering the funds for the CDs to be
pledged. The CDs are usually purchased from the lender, though at competitive market rates.
However, the borrower can gather these funds from a number of sources—but most lenders of
these program require that the pledgers must be related to the borrower.
Two-part mortgage
The two-part mortgage is actually the easiest to arrange—especially if you are unable to obtain
the money for a pledge. In this program, the buyer purchases the property with two mortgages:
the first mortgage is for 70%-80% of the purchase price, while the second mortgage is for the
remaining 30%-20%.
The most common example of this approach is the 75-25 program. The first mortgage is for
75% of the purchase price, while the second mortgage covers the remaining 25% of the price.
● Example purchase price of $200,000.

● A first mortgage of $150,000 would be a 75% loan-to-value (LTV) loan.
● A second mortgage of $50,000 would be a 25% LTV loan.
The first mortgage loan in this two-part plan must be a non-conforming program, because
conforming programs require some down payment to come from the borrower. Because the
75% first mortgage is non-conforming, its interest rates will be about 2.00% to 3.00% higher
than market rates.
The second mortgage will always have a higher interest rate—especially when they absorb all
of the property's equity. You should routinely count on the second mortgage's interest rates to
be at least 1% to 3% higher than the non-conforming first mortgage.
However, remember that the borrower can subsequently consolidate both mortgages into one
loan—at a lower, market-level rate. Thus, the borrower fulfills both the short-term and long-
term goal indicated earlier: purchase the property with no down payment, then refinance to a
more cost-effective, profitable loan.
Seller-second mortgage
A variation of the previous two-part mortgage approach is the seller-second program. In this
approach, the seller would be the source of the second mortgage loan used for the purchase.
This is sometimes referred to as seller-financing or a seller-held second. Essentially, the seller

lends a portion of the property's sale price to the buyer. The seller does not really provide any
funds, as the loan amount is taken out of the property's equity, making it a cash-less
transaction. However, this second mortgage is considered an actual loan.
Consider the example of Joan who wishes to purchase an undervalued $100,000 home with no
down payment. She obtains a non-conforming first mortgage of $80,000, that can be used in a
No Down Payment approach. The seller agrees to hold a second mortgage of $20,000.
$100,000 Purchase price

$80,000 First mortgage loan amount
$20,000 Seller holds a second mortgage for a limited term
Joan can then refinance the following year to consolidate both mortgages into one loan. Thus,
the seller receives the rest of the sales proceeds. This is actually better for many sellers,
because this approach offers some advantageous tax benefits. For more details about this
approach, consult the Seller Financing Options section.
This seller-second approach can also be used by investors with low- or no-documented
income—so low that they cannot qualify for the first mortgage. This approach can be used with
a No Income Verification (NIV) first mortgage, which basically overlooks the borrower's income
qualification.
Gift equity programs
The gift equity approach is similar to the preceding seller-second option, except that the
transaction is between relatives and the down payment is completely waived.
The sales transaction will only require a first mortgage from the lender. The remaining equity
will be gifted from the seller to the borrower.
To adapt the preceding example with Joan, consider that the seller is her father Don, who
wants to unload the house for only $80,000, even though it is worth a lot more. Joan still
obtains the mortgage loan of $80,000. But instead of a second mortgage, Don gifts the
remaining $20,000 in available equity to Joan. This allows Joan to buy the property from a
relative with absolutely no down payment.
$100,000 Actual appraisal value of property

$80,000 Purchase price between Joan and her father Don
$80,000 First mortgage loan amount, based on appraisal value of property
$20,000 Seller holds a second mortgage for a limited term
Creative Transactions
If the borrower is unable to qualify for or obtain an affordable mortgage loan, there are still legal methods
available to purchase the property with no down payment.
The common elements required by all of these creative transaction methods are time and seller cooperation.
These methods are legal, applicable and common; however, they require a seller and a lender willing to work
with you. Atlas Mortgage is that lender, and (fortunately) many sellers are willing to help, especially when they
are under pressure to sell.
Four main types of creative transactions are available for prospective home buyers or real estate investors who
cannot immediately qualify for a sufficient mortgage loan:
● Installment contract
● Assumption
● Lease-to-own option
● Seller financing program
All of the above four options are discussed briefly below. Atlas Mortgage has also prepared more detailed
reviews of these four creative approaches to buying with little or no down payment. Just select the appropriate
link to jump to the specific section you would like to explore further.
Installment Contract
The installment contract purchases the property with a "lay-away" plan. The buyer obtains
immediate use of the property, but the seller retains possession of the title until full payment.
The buyer can subsequently obtain a refinance from a regular lender to pay off the seller—all
with no down payment. For a detailed discussion of this approach, see the "Installment
Contract Purchases" article.
Assumption
The assumption option should never be overlooked. In addition to providing a method for
decreasing or eliminating down payments, the assumption also drastically lowers interest
charges and total payments. The assumption approach does this by foregoing a standard
purchase loan and legally taking over the seller's existing loan. For a detailed discussion of
this approach, see the "Buying with Loan Assumptions" article.
Lease with Purchase Option
For current renters who are not quite sure about purchasing or investing in real estate, the
"lease with purchase option" approach may be too valuable to overlook. This lease agreement
provides the renter with an option to buy the property at a later date with a pre-fixed price.
Moreover, this lease agreement will credit a portion of the monthly rental payments toward the
eventual down payment. For a detailed discussion of this option, see the "Lease With
Purchase Option" article.
Seller financing program
Closely related to and more beneficial than the seller-second mortgage discussed above is a
full seller financing.
If the seller is willing, the buyer can arrange to purchase the property with the seller carrying
the entire mortgage, usually in the form of a balloon loan. After 12 months of seasoning, and
sometimes even sooner than that, the buyer can then refinance the seller's mortgage with a
new, conventional mortgage loan.
The seller gets the proceeds; the buyer is able to purchase the property with practically no
down payment. For more information, please consult the "Seller Financing Options" article.
Getting Started
You have probably ascertained that all of these creative approaches, although useful and profitable, can be very
complex. An experienced real estate attorney will be necessary.
If you are interested in testing the water to determine for what type of mortgage loan you can qualify, please
complete the Preapproval Application.
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No Closing Cost Tactics
Whether you like it or not, there will always be closing costs to be paid with every mortgage financing: your
attorney, insurance agent, local municipality, county, state, lender and title company must all be paid. However,
there are ways to minimize their burden, as well as avoid some of the misrepresentations that are often
advertised.
This review will discuss the different (completely legal) and cost-efficient ways for buyers to minimize and
sometimes eliminate their closing costs. This review will also discuss some of the traps and tricks of the trade to
be avoided:
1. Lender-Advertised Programs
2. Minimizing Closing Costs
3. Seller Subsidies
4. Lender-Paid Closing Costs
Lender-Advertised No-Closing Cost Programs

Many lenders advertise no closing cost loans. However, the truth is that the closing costs are still there, and they
are paid by the borrower—one way or another. If they are not paid outright, closing costs are paid through the
loan's interest rates, annual fees or restrictions.
With many lenders, "no closing costs" means no "lender" closing costs. However, lender closing costs only
apply to application, appraisal, credit reporting, processing or underwriting fees, as well as origination and
discount points. Lender closing costs are only those settlement charges assessed by the mortgage lender. In
fact, lender closing costs normally account for only a quarter of the total closing costs.
When no closing costs means no "lender" closing costs, be prepared to pay the other closing costs, such as title
insurance, county recording fees and attorney expenses.
Some lenders will actually pay most or all borrower closing costs. But don't make the mistake of thinking that
they are doing this out of generosity. Often times, these "no closing costs" programs pass the costs back to you
in the form of higher interest rates. This is actually not a bad idea for cash-strapped borrowers, but don't be
fooled.
Just as there is no such thing as a free lunch, there is no such thing as a true "no closing cost" loan. Someone
must pay the closing costs—one way or another it will usually be the borrower.
Minimizing Closing Costs

With this firm understanding that the borrower is responsible for closing costs, the question becomes how to
minimize these costs.
For borrowers who have the money, it is highly recommended that they pay the closing costs. The options
discussed later show you how to avoid paying for closing costs out-of-pocket, but you merely end up financing
them—and paying interest on them.
However, there are steps you can take to minimize closing costs. First of all, remember that practically
everything is negotiable. The following is a list of typical closing expenses that can be negotiated:
● Appraisal fee. The appraisal is necessary and separate from your professional inspection. In most
cases, lenders use independent appraisers. If that is the case, arrange to pay the appraiser directly.
This may give you an opportunity to negotiate a discount. Typical appraisal fees are $250-$300 for a
single-unit house or condominium and $450-$500 for two- to four-unit properties. Note that jumbo,
distant and unique properties will sometimes cost more.
● Attorney fee. The average attorney fee is $250-$500, although they can surpass $1,000 with some
purchases. Attorneys are only necessary during purchases, not refinances. Unless the property
purchase will be complicated, your attorney will primarily be used to review the purchase closing
documents—most of which are fairly standard. If you are buying a relatively inexpensive, but good
home, try to find a relatively inexpensive, but good attorney.
● Inspection services. You have the option to hire a professional inspector to examine the stability,
functionality and basic worthiness of the property. You should not skimp on this, especially if this is your
first purchase. Most inspection services cost $150-$300; again, however, the relative value of the
property should limit how much you should spend on it.
● Lender points. Origination and discount points or fees are not always mandatory—in fact, it's
downright unnecessary if you have excellent credit, sufficient income and enough funds for the down
payment. Unless you are obtaining a loan with below-market interest rate, have damaged credit or
bring an unusual applicant situation to the table, you should not have to pay points. If you are asked to
pay more than two- to three-points, chances are you can find a better loan elsewhere.
● Title charges. This is the SELLER's choice, actually it is the choice of the seller's attorney. Because of
this, most buyers do not put up a fuss. However, you can make requests to the seller's attorney, and
there is often a wide range in title company prices. You can call up the different title companies in the
area and ask them to fax you their price list. Title costs at the closing will include the title insurance
commitment, endorsements and closing fee. However, because of the time involved with this shopping
and negotiating effort, many borrowers will not bother unless they become frequent investors.
For a more detailed discussion of closing costs, please consult the "About The Good Faith Estimate" article.
This will detail all the closing costs often involved with a normal purchase. It can be shocking, but it is necessary.
Prepaid Expenses Not Included
Closing costs are one-time expenses. In addition, the borrowers must be prepared for prepaid
expenses at the closing. Prepaid expenses are regular parts of the projected monthly housing
payment (interest, insurance, taxes & assessments) that must be paid in advance.
For example, the borrower may be required to establish an escrow account at the time of the
closing. The borrower will normally have to escrow two or three months of insurance and real
estate tax payments into the escrow account. Also, the borrower must purchase a full year's
property insurance coverage prior to the closing.
These prepaid expenses are not part of the closing costs, and normally must be paid by the
borrower's own funds. However, the borrower may receive a gift in certain instances to
address these funds.
Eliminating Closing Costs With Seller Subsidy

A final method for lowering closing costs is to negotiate for the seller to pay them. Unfortunately, many home
buyers, sellers and first-time real estate agents are also sometimes unaware of this option.
Moreover, seller-paid closing costs are often tax-deductible for the buyer (that's correct), while reducing the
capital gains calculation for the seller. This is often called a "seller subsidy" or "seller closing contribution."
Either way, it's additional funds working in the buyer's favor.
The basic guideline for seller subsidies are as follows:
● If the down payment is less than 10%, the seller can subsidize borrower closing costs up to 3% of the
purchase price.
● If the borrower's down payment is 10% or more, the seller can contribute up to 6% of the sales price to
pay the borrower's closing costs.
For example, Lisa has found a home, priced at $100,000, that she wants to buy. Atlas Mortgage is willing to
provide her with a no down payment loan, provided that she can cover the closing costs of $3,000 and $1,200 in
reserve requirements. Lisa has excellent credit and income; however she only has about $1,300 in the bank.
Never one to give up quickly, Lisa negotiates with the seller that she will accept their asking price of $100,000, if
they will agree to a seller subsidy toward closing costs of 3%, or $3,000 in this case. Both parties close happily:
the sellers basically receives the net price they realistically expected (if not more) and Lisa buys a home with
practically nothing.
Lender-Paid Closing Costs

As discussed previously, some lenders are willing to make arrangements to pay the borrower's closing costs by
increasing the interest rate. Moreover, with an FHA loan, you can actually finance a portion of your closing
costs.
As with seller subsidies, most lender contributions toward closing costs are limited to only 3% of the loan
amount.
The lender simply increases the interest rate to a level where they will be receiving sufficient income to cover
your closing costs and interest. This increase will probably range anywhere from one-half to one full percent,
depending on the loan size.
As scary as this interest rate hike may seem, it's actually a smart move:
● Interest is tax-deductible. The impact of the higher interest rate is lessened because of your ability to
deduct them from your taxes.
● Refinance option erases the closing costs. Remember, there's few if any restrictions to your
subsequently refinancing to a lower rate. In a sense, you can make the closing costs disappear.
For example, Jesse has enough money for the down payment and reserves but none for the closing costs. The
sellers are unwilling to renegotiate, so Jesse arranges for a lender subsidy. His interest rate increases from
7.25% to 8.00%. However, a few months after the closing, he contacts the lender to refinance.
Since the lender still has his file (including appraisal and title), they are able to lower his rate with no lender costs
and total closing costs of $50 (to record the new mortgage). The new rate is back to 7.25%, or lower if the
market has improved.
The beauty of this approach is that the closing costs are financed short-term, and then they are essentially
refinanced away.
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Buying Foreclosure Properties
Admit it. You've seen those infomercials about buying foreclosure properties and
turning them into profit; and you've probably considered building your empire this
way. Why would you be reading this diatribe, if you don't have that entrepreneurial
streak running down your back like tire tracks on road kill.
Some of you may have even spent the money to get those training tapes with
uplifting introduction music and glossy materials on how to profit from foreclosure
properties.
But the information you can obtain from those tapes are common knowledge among
experienced real estate professionals and mortgage lenders. Atlas Mortgage's
resource library may even provide you with additional resources or opportunities that
you won't find in those books—for free.
There are bargains to be found in purchasing "distressed" properties at foreclosure
sales, especially if you know how the system works. This article will review the
foreclosure procedure and how to prepare and shop for potential investments.
Foreclosure Procedure
There are many reasons that lead a homeowner to loan default and foreclosure. A
drop in income, an increase in housing costs or bills, or just biting off more than the
borrower can chew can all lead to foreclosure.
At the loan closing, probably the two most important documents signed by the
borrowers are the promissory note and the mortgage deed.
The promissory note is the borrower's promise to repay the mortgage loan. The
mortgage deed or security agreement puts up the subject property as collateral for
the loan. To "mortgage" a property is to offer it as security for the loan. The key
here is that the title is in the borrower's name.
Unlike a car loan, where the finance company holds the car's title until the loan is
paid off, with a mortgage loan, the subject property remains in the homeowner's
name. At the county records office, the property's title will indicate the borrower as
the owner of the property. The lender is listed as having a mortgage lien on the
property.
The promissory note normally has a default clause that allows the lender to declare
the borrower in default if payments are not made as agreed. If the borrower defaults
on the promissory note, that defaults activates the mortgage or security agreement.
It is the mortgage or security agreement that gives the lender the right to foreclose
on the property. The lender cannot exercise this foreclosure right unless the
borrower defaults on the promissory note. Even after a borrower defaults, the
property remains in the homeowner's name. The path leading to foreclosure
normally proceeds as follows:
1. Delinquency. The borrower falls behind on mortgage loan payments.

2. Default notice. As required by the mortgage deed, the lender issues a notice
of default to the borrower. This usually happens after the borrower has fallen
at least 60 days behind on payments. The default notice allows the borrower
to recover their mortgage loan by paying all past due amounts.
3. Default judgment. If the lender’s collection attempts prove futile, the lender
will then legally file for a default judgment from the court. This legal judgment
gives the lender the right to demand full repayment of the entire loan
balance—not just the past due amount. However, most lenders will still allow
the borrower to reinstate the loan if all past due amounts and penalties are
paid.
4. Foreclosure notice. If the lender’s collection attempts still prove futile, the
lender can then file for a foreclosure judgment from the court. Borrowers often
will still have the option to reinstate their loan—but at a greater cost.
5. Foreclosure judgment. After a foreclosure period of at least 60-90 days, the
court will issue a foreclosure notice if the borrower has not repaid all past due
amounts, late fees and penalties. Up to this point, the property is still owned
by the borrower; now it is owned by the court.
6. Auction or foreclosure sale. The judge will order a sheriff’s sale or
foreclosure auction. The proceeds of this sale is meant to reimburse the
lender for its loan balance and losses. If the auction amount is insufficient to
meet the lender requirements, the lender will usually step in and take the
property. If the there is any surplus from the foreclosure, the borrower may
have the option of claiming it.
When foreclosure proceedings begin, it is normally after the borrower has received
several notices of past due payments and default. The lender then petitions the
court to begin foreclosure procedures. The borrower will normally receive a
redemption period during which they have the opportunity to regain their loan.
When the necessary processing period has passed, the lender obtains a final
foreclosure judgment and property is normally scheduled for a foreclosure or sheriff's
sale. If the lender does not receive adequate bids at an auction, it often will retain
the property until it can sell the property for a sufficient price.
The Lender's Perspective

Generally speaking, lenders are not in the market to retain or maintain
real estate, especially foreclosure properties. They are normally in a rush
to sell the property, because regardless of the sales price mortgage
lenders often expect to lose money on foreclosure properties.
Attorney, legal, administrative, brokering and maintenance costs can run
into the thousand's of dollars—not including past due payments, interest
and real estate taxes.
Most lenders prefer to handle all foreclosure-related inquiries and
solicitations through selected attorneys and real estate brokers. If the
homeowner wishes to try to redeem the property, he or she will have to
communicate with the attorney. Once the foreclosure is final, potential
investors may try to bid for the property at auctions or make offers on the
subject property with the broker.
Many lenders just want to minimize their losses as much as possible.
They have already made allowances for non-performing or bad loans.
But by moving quickly and intelligently, many lenders can often minimize
their losses and sometimes break even.
How To Prepare
Because speed and efficiency are of the essence to the lender, they tend
to prefer prepared investors. They especially prefer buyers who have
adequate cash or are preapproved for a purchase mortgage loan, so that
they can close immediately.
If you're currently a property owner, Atlas Mortgage can arrange an equity

line of credit for you. This line of credit gives you a check book and a
credit line, against which you can draw funds with few if any restrictions.
This line of credit only charges interest on the current balance; so if you
never use it, you never pay any interest. Thus, you can simply draw
funds from this credit line to immediately purchase such properties.
If you're not currently a homeowner, the best preparation is to obtain a
mortgage loan preapproval. Atlas Mortgage can underwrite your overall
credit-worthiness and as long as the property is acceptable, you can close
shortly after agreeing to the purchase terms.
You can obtain a list of available properties prior to the auction so that you
can drive by the property to inspect it. Just contact the sheriff's office for
information about scheduled foreclosure sales.
It's also highly recommended that you read available county foreclosure
auction instructions and attend some auctions without bidding to get an
understanding of the process.
You can also obtain a listing of properties in default, as well as in various
stages of foreclosure, by contacting the records office or court recorder.
Defaults and foreclosures are legal judgments, so they are public record.
A review of those records will reveal a plethora of information, including
original sales price, original loan amount, current loan balance, etc.
Start Investing
When you have made your preparations and are ready to begin investing, you
actually have three routes available:
● Buying Directly from the Lender

● Auctions & Sheriff's Sale
● Buying from the Homeowner
Buying Directly From The Lender

Armed with the necessary cash or mortgage loan approval, you can then
make an offer to the lender. If you know or get to know someone of
position at the local bank, you may be able to approach that executive
about available REO (Real Estate Owned) properties, the term most
banks use for properties that have been fully foreclosed.
Smaller banks and lenders are sometimes willing to sell REO properties
directly to qualified buyers, when possible. This allows them to save real
estate commission and other marketing expenses.
As you negotiate with the lender, remember the benefits you bring to the
table. The most important benefit is time. Each month delay is additional
expenses for the lender in the form of unpaid interest, property taxes, late
charges, attorney fees, legal costs and administrative expenses. Just by
avoiding the final foreclosure and sale, lenders can save up to $10,000.
Auctions & Sheriff Sale

However, the most common way to purchasing REO properties is to
attend the foreclosure auction or sheriff's sale and make bids on available
properties.
If the auction bids do not satisfy the lender's minimum requirements the
property is not sold. Instead, the property is retained by the lender, which
then tries to sell it through a real estate broker. You can then make offers
through the real estate broker. In some cases, the lender may skip the
auction altogether.
As you will soon find out, you will not be the only person with the notion of
finding a bargain on the foreclosure market. Before you begin bidding,
you should already have established what the property is probably worth
and how much you are willing to pay for it. To establish its market value,
you will need to consult a good, but inexpensive appraiser or a real estate
agent with experience in the area.
When purchasing foreclosure properties, the wise investor should NEVER
pay market price. If you are willing to pay market value, you might as well
buy a house through an agent, who will obtain helpful disclosures and
warranties for you. When you buy a foreclosure property, you buy it as
is—any hidden problems are normally your problems, not the seller.
Buying From The Home Owner

More aggressive investors will often contact the owner of foreclosure
properties to try to buy the property before the auction. This is sometimes
very intrusive and many homeowners (already traumatized by the whole
foreclosure experience) are very annoyed and angered by what they
perceive as vulture-like tactics.
But in fact, many homeowners are looking to sell their foreclosure
property. By avoiding the actual foreclosure, their credit report is slightly
more improved. Although the lender may have lots of past due interest,
late charges and attorney fees stacked on the price, there's no law saying
that you cannot negotiate that away.
Many mortgage lenders will drastically reduce any penalties and fees, in
order to facilitate such a "distress" sale. Remember that the lender wants
to unload non-performing loans because it looks awful during their annual
audit.
Foreclosure Purchases and Buyer's

Conscience
A seldom addressed issue when buying foreclosure properties is the buyer's
conscience (if you have one) bothering him or her about pushing people out of their
home.
Some people probably deserve to lose their home. Unfortunately, many people who
face foreclosure do so because of a job loss, family crisis or widespread economic
downturn.
An alternative approach to buying from the actual home owner is to offer to give
them a chance to redeem their property. You can negotiate to buy the property; then
rent it back to them with a purchase option. By offering them this lease with
purchase option, they get to stay in their home and have a chance to buy it back
once they are back on their feet.
You will profit from the rental income stream, as well as from the net difference
between your purchase price and the sales price.
Remember also that during such a lease-to-own period, you own the property and
can use its equity for other investment purposes. So you can turn around and buy
more properties.
Buying Tax Sale Properties
In some locales—such as many counties in Illinois and Florida—tax auctions are a little-known but highly
lucrative source for real estate investors. Savvy investors can, in fact, buy properties at one-tenth (10%) of their
actual value through tax auctions.
There are risks involved; but smart investors are assured of returns on their investment of 15%-25%, depending
on the locale. Very few legal investments can beat this guarantee.
In a nutshell, tax auctions allow investors to obtain property by purchasing past due taxes. These past due taxes
can eventually result in full ownership of the property. At the very least, investors are normally assured return of
their original investment, plus 15%-25% interest.
This introduction to buying tax sale properties will review the following elements of this tactic:
1. Mechanics of real estate taxes

2. Investing opportunities with tax sale properties
3. Foreclosure purchases and buyer's conscience
Mechanics of Real Estate Taxes

The real estate taxes assessed by the local taxing authority have primary lien on the property. This primary lien
means that they are the first to be paid from any sale of the property.
This lien also allows the taxing authority—or their assigned agent—to foreclose on the property if the property is
not paid.
Note that if the county, for example, were to foreclose on a property, all of the mortgages on that property would
be automatically cleared from the title. This is why mortgage lenders insist on verifying that the taxes are paid.
However, most local governments do not want to deal with the hassle of foreclosures. So, instead, they opt to
sell the tax defaults. By selling the (past-due) tax certificates, the government recoups its tax revenues
immediately.
The investors who purchase these tax defaults have basically purchased a secured debt. The property owner
now owes these tax payments to the investor holding the tax certificate. If the delinquent property owner does
not redeem these tax certificates within six to 24 months, depending on the property or locale, the investor has
the right to foreclose on the property.
In summary, the typical process would be as follows:
1. Property owner does not pay real estate taxes.

2. After one year, depending on locale, the government auctions the tax certificate on the property.
3. An investor bids for the tax certificate.
4. The property owner is provided a redemption period of six to 24 months, depending on locale, to pay
back the past-due taxes, plus 15%-25% redemption penalty. With owner-occupied residential
properties, most counties will allow longer redemption period.
5. If the property owner redeems the property, the investor regains the initial auction bid, plus 15%-25%
interest.
6. If the redemption period passes without repayment, the investor can begin foreclosure proceedings.
7. At the end of the foreclosure proceeding, the investor receives the Tax Deed to the property.
This tax deed will have no other liens on the property, except for current tax liens. The court will issue an order
removing all mortgage and other non-governmental liens currently on the property. The real estate investor
receives the property “free and clear” of any liens.
For more information about property taxes, please review the "Real Estate Taxes and Special Assessments"
article.
Investing Opportunities with Tax Sale Properties

As you can see from above, buying a tax deed provides you with a property full of equity. You can then obtain a
line of credit against the available equity and use those funds to invest in more properties.
For example, let’s say you have just obtained a $100,000 property from a tax deed. To obtain this property, you
probably spent about $12,000 to purchase the tax certificate and for administrative and legal fees.
Now that you own the property free and clear, you can obtain a $75,000 line of credit against the equity on the
property. This will recoup your $12,000 investment plus provide you with another $63,000 that you can use for
other investments—or improvements to the property.
Property owner rights
As mentioned above, the current property owner does have several rights and protections
during this tax foreclosure period.
First of all, the local taxing authority normally will not sell past-due taxes until after at least 12-
18 months have passed since the initial due date. During this period, the government will be
trying to collect the taxes themselves.
Even after the tax certificate is auctioned, the property owner will continue to have a
redemption period. For non-owner-occupied properties, the property owner will have at least
six months to redeem the property—with the appropriate penalty.
For homeowners, the redemption period can last longer. Some locales provide for up to two or
three years to redeem the tax certificates on the property.
During this redemption period, the property still belongs to the original owner and NOT the
investor. The investor receives full foreclosure rights after the redemption period has passed.
Even then the property stays in the original owner’s name until the foreclosure proceedings
have been completed and the tax deed is issued to the investor.
Investor Preparation
If you are interested in investing in tax certificates, you will need two important attributes: patience and liquidity.
Because of the redemption and foreclosure period required, the investor must be willing to wait six to 24 months
before receiving full ownership of the property.
The prospective investor also needs cash now to bid for tax certificates. The taxing authority will want money up
front for tax certificates.
Because the investor does not own the property until after the redemption period has passed and foreclosure
has been completed, the investor will be unable to obtain mortgage financing. Note, however, that tax
certificates can and are routinely bought and sold after the auction. This is perfectly legal and allows investors to
cash in their investments ahead of schedule.
Although full of opportunities, the tax sales market is also full of potential losses. There are many reasons why
property taxes go unpaid and must be sold.
In many cases, the property is in need of repair. The current owner may have calculated that it would be better
to simply walk away from the property, rather than spending the money to make necessary repairs or
improvements.
This is especially the case with industrial properties with toxic waste, a big risk in today’s market. Avoid such
toxic waste properties at all cost. Even though you are not responsible for the pollution, you will be required to
clean up the waste. That is the law, which is why everyone in the real estate industry avoids properties that ever
handled chemicals or possible toxic ingredients.
You will also find that most tax foreclosure properties tend to be in the poorer and often least marketable areas of
town. Thus, the potential for immediate gain with these properties tend to be minimal.
If you are serious about using this approach to obtain investment properties, we strongly recommend that you
review the in-depth "Creative Real Estate Investment Guide" in the "Real Estate Investing" section
Foreclosure Purchases and Buyer's Conscience

A seldom addressed issue when buying tax sale properties is the buyer's conscience (if you have one) bothering
him or her about pushing people out of their home.
Some people probably deserve to lose their home. Unfortunately, many people who face foreclosure do so
because of a job loss, family crisis or widespread economic downturn.
An alternative approach to buying from the actual homeowner is to offer to give them a chance to redeem their
property. You can rent the property back to them with a purchase option. By offering them this lease with
purchase option, they get to stay in their home and have a chance to buy it back once they are back on their feet.
You will profit from the rental income stream, as well as from the net difference between your purchase price and
the sales price. Remember also that during such a lease-to-own period, you own the property and can use its
equity for other investment purposes. So you can turn around and buy more properties.
Getting Started
Whether you are purchasing foreclosure properties or trying to arrange a seller-financed purchase, please
remember that Atlas Mortgage is always available with the resources to meet your creative financing needs.
Also, remember that regardless of your credit situation, there are ways to buy a home or invest in real estate.
See the "Damaged Credit Options" article for a thorough discussion of the many options and alternatives
available.
If you are interested in obtaining a loan preapproval, we recommend that you please complete the Preapproval
Application form. Because you will not need or be able to use a mortgage loan until the tax certificate is
completed and you already own the property, you will need a refinance loan, instead of purchase financing.
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Buying FSBO Properties
For some, this is the "macho" way of buying a home. One-on-one. No intermediary or go-between with ulterior
agendas to cloud the negotiations.
Fizboh's—as For-Sale-By-Owner (FSBO) properties are sometimes called—are any properties that are being
sold directly by the seller, without benefit of a real estate agent, broker or Realtor.
FSBO properties can often be a good source for house-hunting bargains, if conditions are right. However, such
bargains come at a price. Home buyers or real estate investors pursuing FSBO properties normally must do so
without the aid and advice of professional real estate agents. FSBO shoppers must be knowledgeable about
properties and the subject neighborhood—or have a good lender or attorney, who can provide solid advice about
such a purchase.
We recommend that you review the sample proposal letter provided (click here), to get an idea of one way to
approach the seller of a FSBO property.
Price, The Primary Advantage

As with foreclosure properties, you should not buy a FSBO home at its market price. If you are buying it at its
market value, you might as well go through an experienced real estate agent—who can probably get you a better
and more secure deal.
The advantage of FSBO properties for the seller is that the seller avoids paying 4%-7% commission to the real
estate agents involved with the listing and sale of the property. It's only fair that the seller passes on some of
that savings to you.
Unfortunately, many FSBO sellers are more aware of how much the property is worth to them, rather than to the
market. If you wish to proceed with negotiations in such cases, then you should have some appraisal values or
recent sales listings of comparable properties with which to back up your arguments. Use facts about recent
sales in the area to persuade the FSBO sellers to lower their asking price to a more realistic level.
The only exception to this rule, of never buying FSBO homes at market prices, is if you really want that particular
property. Yes, it's the age old dilemma: should you follow your head or your heart? Considering that this is
probably one of the most expensive investments you will ever make, it is highly recommended that you rein in
your heart for something less costly.
Preapproval Recommended
It's also advisable to have a mortgage preapproval ready before any FSBO shopper starts searching for possible
FSBO purchases. With a mortgage preapproval, the FSBO shopper can close the purchase almost
immediately. This is an additional negotiating advantage for the savvy buyer.
Other shoppers who have not yet obtained a mortgage preapproval will normally have to ask for 45-60 days from
the seller. That is at least two more months of loan, insurance and tax payments that the seller must endure. If
such payments equal the difference between the buyer's offer and the seller's price, then the seller is losing
money by going with the higher offer (and waiting). This is something that many negotiating buyers fail to bring
up with the seller:
What good is a higher price for the seller, when they have to use those additional profits to cover their costs of
staying. This calculation does not even consider the worth of the seller's time as they wait for the buyer to obtain
a mortgage loan.
Creative Financing
Another advantage that the prospective buyer should toss into the negotiating picture is the possibility of creative
financing. For example, the seller may be willing to hold a second mortgage; this can reduce or eliminate the
need for a down payment. For more information and ideas about seller financing options, check out the "Seller
Financing Options" article.
The seller also may more readily agree to take responsibility for closing costs. For a typical $100,000 purchase,
closing costs can range from $900 to $5,000, depending on the financing and purchase situation. For more
details and ideas, please see the "No Closing Cost Options" article.
The FSBO purchase transaction may also provide the buyer with an opportunity to exercise an assumption
option, which has many little-known benefits for the buyer, including savings of thousands of dollars in interest
payments and possible reduced down payments. For more details about the benefits and advantages of
mortgage loan assumptions, see the "Buying Property With Loan Assumptions" article.
Don't Skip The Attorney

You may save money with a FSBO purchase by avoiding a real estate agent, but you can probably lose more by
skimping on an attorney. It is crucial that the FSBO shopper select an experienced real estate attorney to
represent their interests in such a purchase transaction.
The rest of the typical FSBO purchase proceeds as a normal sales transaction. Without a real estate agent to
guide you, however, it is important to have a good attorney to review all of your documents and protect your
interest. Also, the real estate agent normally provides the all-important sales contract. In lieu of the real estate
agent, the attorney should be the one to prepare and provide the sales contract.
Getting Started
You have probably ascertained that purchasing FSBO properties, although a useful and profitable approach, can
be very complex. If you would like professional help in making a proposal to a seller, let Atlas Mortgage assist
you.
We recommend that you review the sample proposal letter provided (click here), to get an idea of one way to
approach the seller of a FSBO property.
Also, please remember that regardless of your credit situation, there are ways to buy a home or invest in real
estate. Please review the "Damaged Credit Options" article for a thorough discussion of the many options and
alternatives available.
complete Preapproval Application form.
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Buying Real Estate with Option Contracts
The option contract is an effective method for buying real estate with no down payment. Unfortunately, this fact is
hidden from the vast majority of homebuyers and prospective investors. This article will attempt to shed some
light on this tactic.
1. Elements
2. Process
If you plan to use this tactic to acquire investment property, please take the time to review the "Creative Real
Estate Investment Guide" in the "Real Estate Investing" section.
Elements of the Option Contract

Options typically contain the following elements:
● Period. The purchase option gives the buyer a limited time period to exercise the option's purchase
rights. The period is negotiable and can last from a few hours to a several years.
● Option fee. To obtain the option, the buyer usually pays a fee. If the buyer does not exercise the
purchase option, the seller will keep that fee. The option fee is often applied toward the purchase price if
the buyer does decide to exercise the purchase option.
● Pre-determined price. It is to the buyer's and sometimes the seller's advantage to set the price. With
longer term options (3+ years), the option may include an index that allows the seller to adjust the price
higher according to inflation or market changes.
● Exit clause; and first right of refusal. Some options may give the seller an exit clause, should the
seller find a different, more attractive buyer. Such a termination clause may require the seller to return
the option fee with interest and penalties. Whenever the option does contain an exit clause, the buyer
should try to negotiate a first right of refusal, whereby the buyer can immediately exercise his purchase
option to negate the exit clause.
● Legal instrument. The option is a legally binding instrument. The buyer should make sure that it is
notarized and recorded with county. Recording the option will establish an encumbrance on the
property, warning all other buyers that the current owner is prohibited or restricted from selling the
property without first notifying the option buyer.
Perhaps the best advantage that options offer is that many lenders allow the investor to exercise the purchase
option and acquire the property with a refinance loan, instead of a purchase loan. The refinance loan approach
allows the investor to use the property's value rather than the purchase price. The main requirement is that the
purchase option be at least 12 months old; and many lenders require that the option be legally recorded for at
least 12 months.
Example: Option purchase
Donna sees an undervalued property that the seller is considering selling, but
has had no serious takers. Donna offers the seller $5,000 for a purchase
option with a term of three years and a fixed price of $100,000. If Donna were
to buy the property now, the best loan she could qualify for would be an 80%
LTV loan—$80,000. After one year, Donna can still only get an $80,000 loan.
But now she is able to appraise the property for its full market value of
$140,000; and 80% of that appraised value is $112,000-more than enough to
pay off the seller completely.
A sample option to purchase is provided for your review. As with all forms in this website, however, please have
your attorney review and edit any of your forms before use.
Process
With a purchase option, the buyer pays the seller for an option to buy the property at a certain price within a
certain amount of time. This option contract can be arranged to provide a variety of conditions, contingencies and
exit strategies.
The option contract approach offers key advantages to the buying investor:
● Exercise purchase with refinance loan after 12 months

● Minimize risk exposure and expenses
● Lock in price and property
● Contract is transferable
The basic terms of the contract is that the seller takes the option fee as income. The option buyer does not own
the property, but has the option to buy it outright. If the buyer exercises that option, the buyer merely has to pay
the balance of the agreed price. If the buyer does not exercise the option, the seller keeps the option fee and is
free to sell the property to anyone else.
If the seller finds a different buyer at a higher price during the period of the option contract, the contract
sometimes may allow that seller to buy out the option contract—usually with a premium to the original buyer.
However, in most cases, the seller will be unable to sell the property to anyone else (except for the option holder)
until the option period has expired.
It is important to note that with the option contract, the seller keeps both the title and possession of the property.
The buyer does not get to hold, possess or use the subject property. That buyer only receives a limited interest in
the property. However, this right to purchase typically implies the right to market. So the option holder can sell
the property, even if he or she does not have full ownership.
Returning to the analogy of options on stocks and commodities, most people are familiar with the investment
maxim of "buy low, sell high." However, most people fail to realize that you don't have to buy low before you can
sell high. You can first sell high (something you don't really have) and buy low later to satisfy any sales
agreement you may sold. The real estate option contract allows you to sell (preferably high) a property that you
don't yet have.
Example: Buy and Sell Using Option Contract
Connie finds a house on sale for $70,000. After some research, she
discovers that the median price in the area for recently sold similar properties
was about $92,000. With some cosmetic repairs and improvements, Connie
believes that she can resell the house for about $100,000.
Unfortunately, Connie has no current employment and income, and her credit
is awful, so she will not be able to qualify for mortgage financing. She does
have some money set aside, so she obtains a three-month purchase option
to buy the house for the asking price of $70,000. She also arranges with the
seller to allow Connie to make cosmetic repairs and improvements to the
home—at Connie's expense. This primarily involves repainting some rooms,
repairing the front porch and some landscaping.
Connie completes the improvements within a week and then immediately

finds a buyer to purchase the property from her for $100,000. She then
arranges a simultaneous purchase-and-resale closing in which she buys the
property from the seller and sells it to the buyer at the same time. Connie's
buyer brings $100,000 in down payment and loan funds to the closing and
gives it to Connie; Connie uses part of that to pay off the seller; the seller
gives the title to the property to Connie, who then transfers it to the buyer.
Connie receives a gross profit of about $30,000.
Exercise purchase with refinance loan after 12 months
Perhaps the most important advantage that the purchase option offers is that the option can be
exercised using a refinance loan. Most people don't realize this, and many who do fail to grasp
its implications: refinance loans don't require down payments!
As long as the property has sufficient equity, a refinance loan avoids the need for down
payment. As noted above, however, to use this tactic, the purchase option must be at least 12
months old. Lenders who accept this approach will also place the burden of proof on the
investor. It is up to the investor to prove that the purchase option is at least one year old.
Investors interested in this approach should follow these tips:
1. Notarize the option contract. The notary public will certify the date; the notary will
also record in their files the date that he or she notarized your contract.
2. Record the notarized contract. The option is a legal instrument that can be recorded
with the county recorder of deeds. In addition to documenting your contract date,
recording the contract notifies other potential sellers that you already have the
property under contract, at least through the duration of the option term.
3. Keep option payment check. Obviously, you shouldn't pay with cash. Most people
use a personal check; once this check cycles through your account and is returned to
you by the bank, keep it as further proof that you made an option payment. You may
also want to consider using a money order or cashier's check; in such cases, make
sure that you keep your check receipt.
Example: Using a Refinance Loan to Buy with No
Money Down
Tiffany has found an apartment building for sale by owner. The seller wants
$400,000; Tiffany discovers that the property is actually worth about
$500,000. Unfortunately, remember that the bank will base its lending on the
lower purchase price and not on the higher appraisal value. Tiffany and the
property can qualify for an 80% LTV loan from the bank, but she does not
have the 20% down payment.
But Tiffany is resourceful. She negotiates an option contract with the seller for
the asking price of $400,000. The option contract has a term of 16 months,
and Tiffany pays a non-refundable option fee of $5,000 to secure the option.
In the meantime, she agrees to volunteer a few hours a week to help the
seller make improvements to the apartment building.
Tiffany follows the above steps to formally establish her contract date. After
one year, she applies for a refinance loan to exercise her purchase contract
option. Tiffay is approved for an 80% LTV refinance loan. Her property is
appraised at a value of $500,000, 80% of that is $400,000. That is exactly the
amount she needs to pay off the seller and acquire the property.
Minimize risk exposure and expenses
The option offers both the seller and buyer risk management benefits. The seller keeps the
property, although its title may be temporarily encumbered by the option. The buyer receives
limited rights to the property, without having to shoulder the burden of carrying costs such as
mortgage payments, taxes, insurance, management and operating expenses.
Yes, the buyer will have to make a non-refundable deposit. But that small fee buys the investor
time to conduct due diligence and possibly market the property. If the investor decides not to
exercise the option to purchase the property, the money lost is considered a capital loss and
can be used to offset capital gains from other investments.
Lock in price and property
It should go without saying two of the most important benefits that the option contract offers to
the investor is that it allows the investor to take the property off the market and lock in a sale
price. This means that any appreciation in value will be to the benefit of the buyer.
Many astute investors will buy properties on an options contract at their full market value, but
on a long-term option contract, because they foresee significant appreciation in value.
Example: Using Option Contracts to Reap

Appreciation
Larson Development wants to lay the groundwork for future projects. It

approaches Farmer Jones to obtain an option to buy his huge farm located
near the Interstate. Farmer Jones isn't ready to sell, but he does need money
to make up for a bad year. Larson Development appraises the farm for about
$1 million; however, they offer Farmer Jones a contract price of $1.1 million.
In addition, they offer Farmer Jones a non-refundable option fee of $100,000,
which will be credited toward Larson Development's purchase price if and
when the developers exercise their purchase option.
Nine years later, the property is worth $2 million. Larson Development can
now easily go to the bank and get a 50% LTV refinance loan to get the $1
million they need to pay off Farmer Jones and acquire the property.
But Larson Development has an experienced finance manager. By the time

the company is ready to buy the property, they have also put together their
development plans. Larson Development plans to subdivide the property into
300 lots. The total cost of this subdivision (survey, grading, legal subdividing,
bringing in water & sewers, street paving and basic preparations) will be
about $1.5 million. However, the total value of the subdivided farm will be $6
million. Larson Development then applies for and receives a 50% LTV loan of
$3 million. This is enough to pay the $1 million sale price to Farmer Jones
and the $1.5 million cost of the subdivision; the $500,000 surplus cash from
the loan will go to Larson Development.
Contract is transferable
Here's the special twist about option contracts. The contract is transferable. The buyer with the
option can sell that option contract. This is actually better than buying and selling the real
estate, because such a tactic will involve two sets of closing costs. By selling the contract to a
prospective buyer, the investor avoids all the real estate transfer stamps and closing costs.
For example, let's say that Ronald buys an option on a 4-flat for $200,000. A month later, he
finds Albert who is willing to buy the property from him for $250,000—a $50,000 profit for
Ronald. Ronald can do one of two things:
● Exercise the option and sell to Albert. Ronald can now exercise the option and buy
the property from the seller. He then turns around and immediately sells the property
to Albert for a nice profit. This can actually be done simultaneously, so that Ronald
doesn't even have to get a loan or use his own money to purchase the property.
● Sell the option to Albert. Another, probably better option is for Ronald to simply sell
his option to Albert for the $50,000. Because he is selling the option and not real
estate, Ronald avoids transfer stamps and other property-related taxes. Albert now
can exercise the option and buy the property directly from the original seller.
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Buying Real Estate with Installment
Contracts
A wonderful, but not widely known alternative method to purchasing real estate is through the use of an
installment contract.
Sometimes called a “land contract” or “warranty agreement,” the installment contract is another creative
approach to real estate investing, especially for prospective buyers who are currently unable to qualify for a
satisfactory mortgage loan.
As its name implies, the installment contract purchases real estate in installments. It works much like a "lay-
away" plan to buying property with the seller retaining ownership of the property until all payment requirements
have been satisfied. Unlike the store "lay-away" plan, however, the installment contract approach allows the
buyer to occupy and use the property during the contract period.
The main advantage that installment contracts offer is the opportunity to buy the property with a refinance loan,
rather than a purchase loan. The benefit of this advantage is that a refinance can eliminate the need for cash to
cover the down payment and closing costs.
Atlas Mortgage has provided a Sample Installment Agreement, as well as a Sample Installment Agreement
Proposal, which, as the name implies, offers a sample proposal letter that can help you prepare a proposal that
you can present to your seller.
Overview of the Installment Contract

The installment contract is a legal instrument that replaces both the usual promissory note and mortgage deed of
a typical purchase mortgage transaction.
Instead of selling the property outright, the seller is essentially giving the buyer a conditional opportunity to own
the property. The prospective buyer should be aware that these conditions can be formidable—but the potential
rewards can be very positive.
Most installment contracts are extremely detailed. Because of the complex nature of this type of transaction, the
interests of both parties need to be protected. The typical installment contract, however, will contain variations
with the following elements:
1. Down payment requirement

2. Buyer use of the property
3. Schedule of payments
4. Defined (short) term
5. Seller responsibility
6. Completion of the purchase
Down payment (optional) requirement
The installment contract is sometimes risky and bothersome to many sellers. Consequently,
many property sellers will not even consider the installment contract option unless they are
unable to sell the property in a timely manner.
With hesitant or unsure sellers, the down payment provision is a strong enticement to take the
risk on the prospective buyer. The installment contract is normally structured so that if the
buyer does not meet the responsibilities and conditions outlined in the contract, the seller can
terminate the contract and keep all funds paid by the buyer.
This may sound as if the buyer is getting the short end of the stick; however, it is important to
note that the seller has the most to lose—namely, the property.
This down payment is a negotiable feature. If the buyer can make an attractive proposal to the
seller, a formal down payment may not be required. Consequently, it is feasible and highly
encouraged for the buyer to enter into this agreement with little or no down payment.
Buyer use of property
The installment contract normally allows the buyer to immediately occupy and use the property,
as of the effective date of the contract.
However, the contract will usually have a description of permitted and prohibited usage of the
property. For example, contracts for residential properties will normally not allow the buyer to
use the property for commercial purposes. Most installment contracts, especially for residential
homes, will also include a provision requiring the buyer to maintain the property's appearance,
stability and functionality.
If the borrower fails to follow the conditions and requirements of the installment contract, the
seller is normally allowed to cancel the contract and keep any funds paid to date by the buyer.
Schedule of payments
The installment contract requires the buyer to make regular— usually monthly—payments to
the seller. These payments are not rent; they are actual installment payments applied to the
purchase price.
Many sellers will amortize the payments to reflect interest charges. Some sellers, however,
just establish a sales price and allow every installment payment to fully deduct from that sales
price. Whenever possible, the buyer should try to arrange this latter, no-interest method of
scheduling payments.
The schedule of payments normally allows for a grace period of 10-15 days before the
borrower is considered delinquent, as well as for a limited redemption period before a notice of
default is issued. A default immediately allows the seller to terminate the contract, evict the
prospective buyer and keep any funds paid to date by the buyer.
Defined (short) term

Installment contracts are normally short-term agreements, with most contracts in effect for only
three, five or seven years. In effect, the installment contract is a balloon program. At the
conclusion of the balloon term, the buyer must still satisfy a large principal balance.
The typical installment contract will require that the buyer obtain a refinance loan within the
effective term of the contract. If the buyer fails to obtain a refinance mortgage within the
prescribed period, the seller can immediately terminate the contract, evict the prospective
buyer and keep any funds paid to date by the buyer.
Note that a foreclosure is not required because the property never left the seller's possession.
The installment contract just provided the buyer with an opportunity to purchase the title to the
property, as long as the contract conditions are met. To remove a failed installment buyer, the
seller would have to initiate legal eviction procedures.
Seller responsibility
Not all of the installment contract's burdens are solely on the buyer. The seller must also meet
certain obligations or face a substantial lawsuit.
The seller is normally responsible for paying the real estate taxes on the subject property. If
the seller currently has a mortgage on the property, the payments must be made on a timely,
responsible manner.
The seller may refinance or add additional mortgage liens on the property, as long as they do
not unfairly restrict the buyer's rights as outlined in the installment contract. Regardless of how
the seller manipulates the property's title, the seller must provide a clear and marketable title
once the buyer exercises the contractual right to complete the purchase.
Completion of the purchase
As indicated above, the buyer must complete the purchase within the prescribed loan term.
Completing the purchase entails a mortgage loan to refinance the installment contract, which is
essentially a seller-financing arrangement.
The mortgage loan that the buyer will need is a refinance, with some adjustments. Because it
is a refinance, no down payment is required. The property's available equity can be used for
the down payment and closing costs.
For refinances, however, most mortgage lenders require the installment contract to be
"seasoned" at least 6-12 months. If that seasoning requirement is not met, most lenders will
treat the financing as a purchase loan and require an actual down payment.
The buyer must pay the monthly installment payments with a personal check, and then retain
the canceled checks. The lender will require copies of the canceled checks to support the
buyer's credit history and ensure that the buyer has been making the monthly payments on
time. In a sense, the installment contract becomes a training regimen for first-time home
buyers or investors. As such, it is crucial that the buyer make all contract payments on
time—in addition to maintaining overall good credit.
Advantage of Fixed Price
One important advantage of the installment contract approach to home purchase is that the buyer can often lock
in a purchase price, even if the actual purchase transaction is still years away. The benefit of this is that such a
fixed price can beat inflation by taking advantage of anticipated appreciation.
Consequently, even if the buyer and seller agree to a market price today, the buyer will be purchasing the
property at a premium value (because of its equity appreciation) a few years later.
For example, consider the scenario of Lorna who wishes to buy a $90,000 property with an installment
contract—and with no down payment. After three years, the property's value appreciates to (hypothetically)
$100,000. During that same period, Lorna's monthly payments lower the principal balance to $80,000.
Thus, when Lorna applies for a refinance, she will be applying for a mortgage loan of $80,000 on a property
worth $100,000—therefore, she has established $20,000 in equity without really trying.
$90,000 Sales price on installlment contract

$100,000 Appraised value at time of purchase completion
$80,000 Balance on installment contract sales price after three years
$20,000 Property’s built-in equity at time of purchase completion
If she wanted to, Lorna could take out a second mortgage on her equity of $20,000. She could then use that
second mortgage loan to consolidate other debts, arrange home improvements or make a down payment on
another property. She could also decide to sell it.
Quick Resale For Profit

The installment contract approach may also be used to quickly buy and resell a bargain property, with little or no
cash from the prospective intermediary.
At the same closing, the buyer can purchase the property from the owner and immediately sell it to another
buyer. For example, Fiona finds a home on sale for $75,000.
1. She knows that she can resell the home for $110,000 with good marketing—for a delightful profit.
Unfortunately, Fiona doesn’t have the down payment, credit or resources necessary to buy the property.
2. So Fiona approaches the sellers and negotiates an installment contract for $75,000.
3. As soon as the installment contract is signed, Fiona immediately signs an agreement to sell the property
to another buyer—for $110,000.
4. It is a complicated closing because it is essentially two settlements happening at once: Original Sellers
completing the purchase to Fiona; and Fiona selling to the New Buyers. However, her real estate
attorney is able to help her through the whole procedure. This is a perfectly legal transaction, at the end
of which the seller gets their $75,000, the buyer gets the property and Fiona walks away with a tidy
profit.
The new buyers will provide the $110,000 sales price. From these proceeds, Fiona pays off the $75,000 (or
less) balance of the agreement with the original sellers. Upon that payment, the original sellers will immediately
transfer the title to Fiona, who then gives the title to the new buyers. Once the transaction is fully concluded,
Fiona walks away with a $35,000 ($110,000 - $75,000) profit, less closing costs:
$75,000 Sale price for home, per lease-purchase agreement

$110,000 Appraisal value for home, and price at which Fiona re-sells home
$35,000 Profit from resale of home, or even of just the purchase option
Final Tips
You have probably ascertained that the installment contract, although useful and profitable, can be very
complex. An experienced real estate attorney will be necessary. A sample installment agreement is available in
the Sample Installment Agreement file. We have also provided the Sample Agreement Proposal, which, as the
name implies, offers a sample proposal letter that you can present to the seller.
Please remember that regardless of your credit situation, there are ways to buy a home or invest in real estate.
The "Damaged Credit Options" article offers a thorough discussion of the many options and alternatives
available for prospective investors, homeowners and borrowers who have damaged credit.
complete either the Preapproval Application form. We will obtain a preliminary approval for you, based on the
information you provide in the application. There are no obligations on your part. You may decide to cancel at
any time until the closing, with no penalty.
If you are serious about using installment contracts to acquire investment real estate, please take the time to
review the "Creative Real Estate Investing Guide" in the "Real Estate Investing" section.
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Lease with a Purchase Option
Another entry in the realm of creative tactics is to purchase property using the Lease with Purchase option. With
this approach, the property remains in the seller's name; however, the prospective buyer will be allowed to move
in and rent the subject property.
The primary ingredient of this approach is that the rental lease agreement will contain a limited purchase option
clause.
This approach of obtaining a lease with a purchase option is advantageous for home buyers and real estate
investors who currently cannot qualify for a sufficient mortgage loan. It is also another variation of the no down
payment plan. This article looks at this program in the following areas:
1. Overview of the "lease with purchase option"

2. Real estate investing with this approach.
We have also provided a sample Proposal Letter (buyer-to-seller) Reqesting a Purchase Option, along with a
sample Purchase Option Addendum for lease agreements, that you can review to further understand how this
tactic is used.
Overview of the Lease-Purchase

On the surface, the lease with purchase option is exactly like renting an apartment or house. The prospective
buyer occupies the subject property and makes rental payments to the owner.
However, the lease will contain a clause giving the renter-buyer an option to buy the property—usually at a
predefined price within a predefined period. If the buyer does not exercise this purchase option, then the
agreement remains a standard lease rental contract. This purchase option will have a time limit, usually one to
five years. The prospective buyer must complete the purchase of the property within this specified period.
The buyer exercises this option by obtaining the funds or mortgage financing to buy the property from the seller.
The lease with purchase option offers significant advantages for the buyer:
● Refinance instead of purchase loan

● Monthly payments can earn credit toward purchase price
● You can fix the price to beat inflation
● You can sell the option without a purchase
Refinance Instead of Purchase Loan
The biggest advantage of the lease-purchase is that it allows the buyer to use a refinance
financing, rather than a purchase loan.
The incredible benefit this advantage offers is that purchase loans require down
payment—refinance loans do NOT require down payment. With a refinance loan, the
property’s equity is viewed as the down payment.
Moreover, a refinance allows some borrowers to increase the loan amount to pay the closing
costs or even give the borrower cash back.
For example, let’s say that you find a house with a sales price of $100,000. You could obtain a
95% purchase loan of $95,000 and come up with the down payment of $5,000. Or you can
lease the property instead:
1. Make your monthly payments on time to develop a strong track record.

2. Exercise your purchase option after at least one year.
3. Appraise the property for $110,000.
4. Refinance with a 95% loan of $104,500—more than enough to cover the agreement
price.
Credits toward Purchase
Lease agreements with purchase options will often add a provision for a monthly credit toward
purchase. This credit is basically an additional installment payment on the projected down
payment.
With this credit provision, a predetermined portion of each month's rent is credited toward the
eventual purchase closing. This credit is usually counted by the lender and seller as a portion
of the down payment.
For example, consider the case of Robin who has a lease agreement with a purchase option on
a $100,000 condominium. The rental credit provision of this agreement earns Robin a $150
credit toward the down payment each month. After two years, Robin has earned $3,600 (24
months x $150) toward the down payment. That amount is enough for the minimum 3% down
payment requirement for first-time home buyers.
$100,000 Agreement purchase price

$3,600 Rent credit over two years (24 months x $150) usable for down payment
Net purchase price (note that appraisal value will be used instead of
$96,400
price)
Thus, Robin has saved enough money for the down payment to buy her home. Moreover, her
property has probably appreciated in value by an additional $5,000-$10,000 during the past two
years, giving Robin an additional bonus.
Unfortunately, most credit provisions do not allow for refunds if the buyer decides not to
exercise the purchase option. It you want to have a refund option, make sure that it is written
into the contract. If it is not in there, you will have a difficult, if not impossible, task ahead of
you trying to retrieve those funds, as the seller is not required to maintain it in a separate
account for the entire duration of the agreement.
It is important that the prospective buyer make all payments on time, as her rental payments
will form a crucial portion of her credit record.
Most lenders require copies of the canceled checks used by the buyer to make rental
payments. The canceled checks will provide documentary proof (based on the bank's
cancellation dates) that the buyer had made the payments on time.
Fixed Price
One important advantage of this lease with a purchase option approach to home purchase is
that you can often lock in a purchase price, even if the actual purchase transaction is still years
away.
Just as in Robin's example above, even if you agree to a market price today, you will be
purchasing the property at a premium value (because of its equity appreciation) a few years
later. If the property undergoes strong appreciation, you can sometimes ignore the whole issue
of "credits toward purchase" as the equity appreciation can sometimes be considered your
down payment.
For example, Sarah enters a lease agreement for a house, with a five-year purchase option
and a fixed price of $85,000. If she decides to exercise her purchase option at the end of the
third year and, hypothetically, the property has appreciated to a value of $100,000, Sarah will
have established $15,000 in equity. With some lenders, that 15% equity can be accepted as
the down payment.
Voila! Sarah has purchased a property with no down payment. In fact, she can turn around
and cash-out that established equity ($15,000 in this case) immediately after the purchase is
finalized. She can then use that extra cash for debt consolidation, home improvements or to
invest in even more properties.
$85,000 Agreement purchase price

$100,000 Appraisal value when buyer exercises purchase option
$90,000 Loan amount buyer obtains with refinance at 90% of value
$0 Out-of-pocket down payment and closing costs paid by buyer
Transferring Purchase Option
Some agreements will allow the prospective buyer to transfer the purchase option, along with
the purchase credits, to another party. However, lenders are more restrictive about allowing
such transfers.
At the very least, transferring the option still offers the eventual buyer the benefit of a fixed price
that should take advantage of any inflationary pressures.
By selling the option, you the renter obtain money immediately. The person buying your
purchase option can exercise the option at any time. The option sale will often require the
renter to assist the buyer in successfully closing the eventual purchase.
It may be more advisable to bring on a co-borrower, if necessary, to assist you in purchasing

the loan. Once the property is purchased, you can make subsequent arrangements about final
ownership of the property. You can sell your ownership interests to your co-borrower, or you
can both sell the property outright for a quick profit.
Real Estate Investing with the Purchase Option

The lease with purchase option can be an excellent method for the real estate investor, as well as for the
prospective homeowner. Two options in particular are discussed below. One has short-term approach, the
other has a more long-term view:
● Quick Resale for Profit

● Building a Real Estate Portfolio
Quick Resale for Profit
This lease with purchase option approach may also be used to quickly buy and resell a bargain
property, with little or no cash from the prospective intermediary.
At the same closing, the renter can buy the property from the owner and immediately sell it to
the new buyer. For example, Fiona finds a home on sale for $75,000.
1. She knows that she can resell the home for $110,000 with good marketing—for a
delightful profit. Unfortunately, Fiona doesn’t have the down payment, credit or
resources necessary to buy the property.
2. So Fiona approaches the sellers and negotiates a lease agreement with purchase
option for $75,000.
3. As soon as the lease agreement is signed, Fiona immediately signs an agreement to
sell the property to another buyer—for $110,000.
4. It is a complicated closing because it is essentially two settlements happening at once:
Original Sellers completing the purchase to Fiona; and Fiona selling to the New
Buyers. However, her real estate attorney is able to help her through the whole
procedure. This is a perfectly legal transaction, at the end of which the seller gets
their $75,000, the buyer gets the property and Fiona walks away with a tidy profit.
The new buyers will provide the $110,000 sales price. From these proceeds, Fiona pays off
the $75,000 (or less) balance of the agreement with the original sellers. Upon that payment,
the original sellers will immediately transfer the title to Fiona, who then gives the title to the new
buyers. Once the transaction is fully concluded, Fiona walks away with a $35,000 ($110,000 -
$75,000) profit, less closing costs.
$75,000 Sale price for home, per lease-purchase agreement
$110,000 Appraisal value for home, and price at which Fiona re-sells home
$35,000 Profit from resale of home, or even of just the purchase option
Building a Real Estate Portfolio
With the Lease To Own Option, a person can theoretically go around leasing multiple
properties with purchase options. That ingenious person—let's call her Genie—can then turn
around and rent out those properties (that Genie is leasing from someone else) and wait until
she builds up enough purchase credits or equity appreciation.
Genie can exercise each purchase option (when the timing is right) and buy the selected
properties from the seller. Genie already has tenants, so the income stream continues. But
now she owns the property and fully controls the available equity.
We don't recommend this course of action for anybody. This is just an imaginative extension of
the basic concept of the Lease-To-Own approach. This Genie is an extraordinary person, to be
able to handle all of these properties and negotiations. But this is just one example of the
different creative financing opportunities available for the astute entrepreneur.
Just Ask
If you are currently renting your condominium or small residential building from a private owner, ask if the current
owner is considering a possible sale of the property in the near future.
If the seller is interested, try to negotiate a lease with purchase option. Give yourself a outlet by establishing
refundable rent credits. Thus, if you decide to back out of the purchase, you will not lose any money. However,
if you do decide to exercise your purchase option, you will have fixed the price at an earlier rate.
What do you have to lose? Consider what you have to gain.
Getting Started
As you can probably ascertain, the Lease-With-Purchase option can be somewhat complicated. An experienced
attorney is necessary, especially for first-time investors. If you have any questions about the mortgage end of it,
call or email Atlas Mortgage for suggestions and solutions.
We have provided a sample Proposal Letter (buyer-to-seller) Reqesting a Purchase Option, along with a sample
Purchase Option Clause for lease agreements, that you can review to further understand how this tactic is used.
Also, please remember that regardless of your credit situation, there are ways to buy a home or invest in real
estate. For more information, see the Damaged Credit Options article.
If you are interested in testing the water to determine for what type of mortgage loan you can qualify, fill out and
submit the
> Buying with Loan Assumptions
Whenever you have a chance to buy any real estate by assuming an existing loan, your probably should do it. In
most cases, loan assumptions can save you thousands of dollars. The older the loan, the more money you will
save.
With many commercial properties and select residential properties, a loan assumption can be an advantageous
alternative to a standard purchase. The loan assumption is an ideal alternative for prospective home buyers and
real estate investors currently unable to qualify for sufficient mortgage financing.
In a way, a loan assumption is similar to buying a used mortgage loan. Unlike a used car, however, a mortgage
loan doesn't receive the usual wear-and-tear or depreciation, as the mortgage deed and promissory note are
only paper. If anything, the wear-and-tear is on the interest charges due on the loan.
The special treasure offered by assumed mortgages is that they offer buyers built-in appreciation, since a great
deal of the interest that the loan will incur throughout its entire term have already been prepaid.
This introduction to loan assumptions is divided into four categories:
Overview of assumptions
Benefits of assumptions
Limited availability
Beware of unofficial assumptions
Overview of Assumptions
A sample proposal letter offered by a buyer to a seller, requesting an assumption of the seller's existing
mortgage, is provided.
An assumption allows another person to take over responsibility for and payment of a mortgage loan. This
person fully, officially and legally assumes the mortgage loan obligation. This eliminates the need for a purchase
loan application, because the seller's current mortgage loan remains in place.
Financially speaking, the only change is the name on the mortgage loan's promissory note. But this official
change is important. Informal assumptions, by contrast, are very dangerous and should be avoided.
In a typical assumption transaction, the buyer will assume the current mortgage loan but immediately
compensate the seller for the difference between the loan amount and purchase price.
For example, Emily is selling her house for $100,000. It has an assumable ARM loan with a balance of $80,000
at a very low interest rate. If the buyers are qualified, they can offer Emily a cash down payment of $20,000 and
then assume the $80,000 mortgage.
$100,000 Sales price of home

- $80,000 Current mortgage that buyer will assume
= $20,000 Balance of sales price to be paid as down payment
Aside from this alternative way of obtaining financing, the rest of this transaction proceeds as normal. The price
and closing procedures are basically unaffected. The assumption method is actually simpler and easier than
standard mortgage loans.
Benefits of Assumptions
For the home buyer, an assumption loan offers the buyer several important advantages. The primary benefits all
save the buyer-assumer a lot of money:
● No loan costs
● Avoid loan rejection
● Drastically less interest payments
● Shorter term & lower rate
● No down payment opportunity
No loan costs
Homebuyers can avoid loan costs with a mortgage loan assumption. Consider that a new
mortgage loan can cost the buyer at least $1,000; sometimes closing costs can add up to 5%
of the sales price. By assuming an existing loan, the buyer only has the usual sales expenses
and none of the lender and financing charges. This can save the buyer more than $1,000.
However, the buyer must not skimp on attorney costs. Because of the complexity of this
maneuver, a competent real estate attorney is absolutely necessary.
Avoid rejection
Home buyers can avoid or minimize loan rejection by using the assumption feature. Buyers
who have been rejected for financing but still wish to buy a home should strongly consider
assumption loans. In many cases, buyers who cannot qualify for a conventional loan may find
a solution to their problems with an assumption.
Although many mortgage loans that allow assumption also require preliminary review and
approval by the lender of the prospective buyer, their underwriting procedures are often more
lenient with assumptions than with standard loans.
Less interest payments
An assumed loan—even if the note's interest rate is more than current market rates—will save
the buyer thousands in interest payments. Remember that the bulk of the interest charges on a
mortgage loan is paid during the first years of the loan. Regardless of the interest rate on the
loan promissory note, your actual interest rate will only be a fraction of that rate.
Another way to look at assumption loans is that, in a sense, the seller has paid discount points
for the buyer, which lowers total interest charges.
For example, if a buyer assumes a 30-year loan after the seller has had it for ten years, the
seller has already paid much of the interest. The buyer will therefore pay the low monthly
payments of a 30-year loan, but with only twenty years of mostly principal payments remaining.
A more direct example of the savings assumptions offer is to compare an assumption of a

$100,000 balance on a 30-year loan with only 20 years left and a $100,000 20-year fixed-rate
loan. Let’s assume that with both options, the interest rate is 10%.
● With the assumption, the buyer will pay $119,679 in interest.

● With the standard 20-year loan will require $131,605 in interest.
● That’s a savings of $11,926 by assuming instead of getting a whole loan.
Shorter term and lower rate
As noted in the preceding example, an assumed loan translates into a shorter term for the
buyer—without the higher payments of standard short-term loans. During times of high interest
rates, assumptions can often be a gold mine of low rates.
The assumption may have a lower interest rate than currently available or, if it is an ARM loan,
it has rate caps that will NOT allow the rate to increase over current rates.
Even if the loan's rate are not advantageous, remember that you will not have a full 30-year
loan with an assumption, as the seller has already been making payments for a number of
years.
No Down Payment Opportunity
In some cases, it is possible to turn an assumption transaction into a no down payment

purchase. This can be done by signing a promissory note to the seller for the down payment
amount.
The current mortgage is still assumed as normal. However, the balance of the purchase price
is owed (instead of immediately paid) to the seller. The seller does become the lender of a
second mortgage on the property. At the closing, the buyer will only have to come up with
enough funds for the closing costs.
The important selling point of this approach is that a year later, the buyer can refinance the
mortgages and consolidate both loans into one new loan. That consolidation refinance will pay
off the balance owed to the seller and remove any risk that the original seller was carrying.
For example, consider this example scenario of Jim buying a house from his aunt Martha:
They agree on a sales price of $90,000.
1. Aunt Martha has a mortgage balance of $70,000 that Jim will assume.
2. Jim doesn't have the $20,000 balance. In fact, he barely has enough to cover the
projected closing costs of $2,500. So Aunt Martha accepts a promissory note for the
$20,000. No moneys are exchanged.
3. At the closing, Jim assumes the existing first mortgage and then signs a promissory
note of $20,000 to his aunt. Jim then uses what little cash he had to pay the required
closing costs. Jim’s new home will have $90,000 in liens.
4. A year later Jim takes out a $20,000 home equity loan to refinance the second
mortgage. This refinance loan pays off his $20,000 loan with Aunt Martha, and Jim
has bought a home with no down payment.
Another option would be to refinance with a consolidation loan that pays off both the assumed
loan and the $20,000 promissory note. Jim could also use this refinance opportunity to pull out
additional cash from the property.
Note that this approach can be used even if the seller and buyer are not related—the buyer
must merely find a cooperative seller. For more information about using seller-held second
mortgages, see the "Seller Financing Options" article.
If you are considering use of assumption loans to acquire investment property, please take the
time to review the "Creative Real Estate Investing Guide" in the "Real Estate Investing" section.
Limited Availability
Loan assumptions are no longer allowed on any conforming fixed-rate loans. Assumptions are still allowed on
some ARM loans, as well as many other non-conforming programs—on a restricted basis. Many lenders today
require more stringent underwriting requirements of the prospective buyer/assumer.
FHA and VA loans, for example, still allow assumptions on a limited and restricted basis. Many non-conforming
loans on residential properties also allow assumptions, often with more lenient guidelines. Overall, loan
assumptions on commercial properties and multi-unit apartment buildings are easier to arrange than residential
loans.
If you are looking at an apartment building or commercial property, you may have better luck. Many commercial
loans lenders are willing to let qualified buyers assume existing mortgages.
Beware “Unofficial” Assumption
It is possible for a seller to unofficially assume the seller's loan. Some relative-to-relative transactions are done
this way, often to get around a loan's "No Assumption" clause.
But this tactic is dangerous for the seller. With such unrecorded assumptions, the seller carries the legal and
financial burden, without the counter-balance of property ownership:
1. The loan remains in the seller's name—but the property does not.
2. If the buyer/assumer is late on a payment or, worse yet, defaults on the loan, the lender will pursue the
seller, whose name is legally recorded as the official borrower.
With a true assumption, the lender will remove the seller's name from the promissory note and replace it with the
name of the assuming buyer. If the assumer becomes delinquent with or defaults on the loan, the lender will
only go after that assumer. The seller will not have to worry about possible liabilities.
Getting Started
As you can probably ascertain, the assumption can be somewhat complicated. An experienced real estate
attorney is necessary, especially for first-time home buyers. If you would like professional help in making a
similar proposal to a seller, please do not hesitate to email Atlas Mortgage.
If you are interested in obtaining a refinance loan to consolidate the assumption loan at a later date, we can
preapprove you for a refinance or home equity loan. There are no obligations on your part. You may decide to
cancel at any time until the closing, with no penalty.
For a sample proposal letter that you can use to approach the seller, review the Sample Assumption Request
letter. You can copy and amend it to serve your situation.
from our site.
properties.
Seller Financing Options
Some may consider seller financing as playing with make-believe money, but it is in fact a creative and effective
method for purchasing property without the usual restrictions or requirements of conforming mortgage loans.
Seller financing is, in fact, one of the most prevalent tactic to purchasing real estate with less or no down
payment.
Seller financing—also called seller-held mortgages, seller hold-backs or seller financing—refers to either a first or
second mortgage on the property, that the buyer will owe to the seller. With seller-held mortgages, the seller
becomes a "paper" lender.
To assist your understanding of this tactic, Atlas Mortgage has also provided a sample proposal that a buyer
would provide to a seller to request seller financing. Click here to view the sample Seller Financing Request &
Proposal Letter.
The seller-held mortgage is another creative approach to purchasing property with less or no down payment. It
is also helpful for prospective buyers currently unable to obtain a mortgage loan for the purchase. The seller-
held mortgage does not really cost the seller any money; in fact, this approach may even lower the seller's
capital gain taxes in the long run.
In most cases, seller financing refers to a second mortgage that the seller will hold for the buyer. However,
sometimes the seller will finance the entire purchase for the buyer with a seller full financing. Both types of seller
financing options will be discussed below.
Seller Second Mortgages

With a seller-held second mortgage, the buyer will obtain a first mortgage loan from a regular bank or financial
institution. Part or all of the difference that the first mortgage does not cover will be in the form of a second
mortgage held by the seller.
The first mortgage is normally a conventional mortgage loan from a standard lender. However, the first
mortgage can also be an assumption loan that the buyer assumes from the seller.
Although the seller is technically the lender of the second mortgage, the seller does not have to provide any
cash. Instead, the seller is lending from the property's equity, as elaborated in the example below. The seller-
held second mortgage is therefore only a paper loan, rather than an actual transaction of cash.
To clarify the purpose and function of the seller-held second mortgage, the following examples are provided of a
reduced down payment and a no down payment program.
Example: Seller Second With Reduced Down Payment

Victor is purchasing a $200,000 property from John Q. Seller. However, he only has $20,000
for the down payment and the lender has approved Victor for a mortgage loan of only
$130,000. Consequently, Victor is short $50,000.
Not one to give up too easily, Victor negotiates a seller second mortgage for the $50,000 short-
fall. At the closing, the bank provides the $130,000 loan, which is recorded as the first
mortgage. Victor then signs a second mortgage promissory note to the seller (John Q. Seller)
for $50,000. Victor lastly provides the $20,000 down payment and completes the purchase.
The house is completely and legally in Victor's name. The title will show two legally recorded
mortgage liens: the bank's $130,000 first mortgage and John Q. Seller's $50,000 second
mortgage.
The seller grosses $150,000 ($130,000 + $20,000) from the sale, plus a legally binding
promissory note for an additional $50,000. After a seasoning period, Victor can obtain a
refinance mortgage loan of $180,000 to consolidate the two mortgage loans of $130,000 (bank
1st) and $50,000 (seller 2nd).
Example: Seller Second With NO Down Payment
Yvette has bad credit, very low documented income and no money. She finds a 4-unit property
selling for $150,000 that is actually worth much, much (let's say $50,000) more.
Yvette needs a No Income Verification (NIV) loan, because she is unable to document
sufficient income. The mortgage lender does approve her for an NIV loan of 75% of the
purchase price, or $105,000.
Armed with this preapproval, Yvette negotiates for the seller to hold a second mortgage of
$45,000. The two mortgages combine to cover the entire purchase price of $150,000.
Yvette, however, has one final problem. She doesn't have the money to pay for the closing
costs, estimated to be about $4,000.
Disclaimer. The samples in this website are provided to familiarize yourself with proposals and
approaches you may consider taking. We do not warranty or recommend usage of any of these
forms. You must consult a real estate attorney or professional to prepare and/or approve
specific contracts or documents you intend to use.
CONTRACT FOR PURCHASE AND SALE

Seller Buyer
Seller Daytime Phone Seller Evening Phone Buyer Daytime Phone Buyer Evening Phone
Seller Full Address Buyer Full Address
To: Above-indicated seller of subject property indicated below,

1. The above-indicated and undersigned buyer,
2. Offers to purchase the following described real estate commonly known as:
Full Address of Subject Property
Tax/Property Identification Number County Legal Description
SEE ATTACHED TITLE
3. And to pay you therefore:

Purchase price: $
Initial earnest money: $ At time of seller acceptance
Additional earnest money: $ 5 days after seller acceptance
Buyer’s mortgage loan: $ Commitment within 20 days
Balance of down payment: $ Buyer to pay at closing
4. The Buyer’s obligations pursuant to this contract are contingent upon the ability of the buyer
to do the following:
Obtain by _____________________ (mortgage contingency date), written mortgage

loan commitment of not less than $_____________________ due in not less than
_________ years with interest at not more than __________% ( Fixed Rate /
Adjustable Rate) with monthly principal and interest payment not to exceed
$______________ and lender-required flood insurance premiums not to exceed
$____________________ per year, or such other terms and conditions accepted by
Buyer or this contingency waived by Buyer in writing by such date, or this Contract shall
be void. Buyer agrees to promptly deliver to Seller a copy of the loan commitment or
written denial of Buyer's loan application upon request. Loan service charges and/or
discount, if any, shall be paid by Seller not to exceed __________% of mortgage amount
specified above and shall be paid by Buyer not to exceed _________%, with any
reduction in percentage charged to be shared prorata by the parties.
Enter into a Contract for the sale of property in which Buyer now has an interest, located
at ____________________ _____________________ _____________________ for not
less than $________________ or such lesser amount as is _____________________
(date), and complete the sale of such property on or before closing. Seller reserves the
right to accept another bona fide offer subject to the rights of Buyer under this Contract.
This Contract shall be void unless Buyer eliminates this contingency B in writing within
________ hours after receiving written notice of Seller's receipt of a bona fide offer.
Review any of the following documents, marked as required with a checkmark, to be
furnished by Seller within 10 business days of seller acceptance (attorney review
contingency date):
Copy of leases including option to renew/rental agreements/options to
purchase;
List of tenants, monthly rental and security deposit
List of personal property located on the premises to be transferred to Buyer;
Evidence that the premises are presently zoned and present use is
_____________________ (conforming or non-conforming).
Inspection of the premises within 10 days of seller’s acceptance by
________________________________ ( Buyer, Buyer’s agent,
Building department or Fire department)
Receive from Seller 5 days of seller’s acceptance a written environmental
assessment report at ( Seller's or Buyer's) expense submitted by
professional environmental engineers or consultants and this Contract shall
be void unless such assessment report is approved by Buyer in writing by
_____________________.
In the event the funding of Buyer's loan referenced in Paragraph 5A hereof is conditioned upon
the completion of the sale of property in which Buyer now has an interest, and such sale does
not occur resulting in lender's failure to fund the loan, Buyer's earnest money shall be forfeited
to Seller as Seller's exclusive remedy, notwithstanding the provisions of Paragraphs 6 and 20.
However, in such event, Buyer shall nonetheless be entitled to a return of earnest money if this
Contract as of date of closing is contingent upon the completion of the sale of Buyer's existing
property pursuant to Paragraph 5B. Buyer agrees to make a good faith effort to satisfy the
contingencies set forth in Paragraphs 5A and 5B, if applicable.
6. Except as otherwise provided herein, if any contingency cannot be carried out, this Contract
shall become void and earnest money shall be returned to Buyer.
7. This transaction shall be closed by _____________________, and Seller shall deliver
possession at time of closing.
8. Rents, premiums under assignable insurance policies, real estate taxes, water and other
utility charges, fuels, prepaid service contracts, general taxes, accrued interest on mortgage
indebtedness, if any, and other similar items shall be adjusted ratably as of the time of
closing. The amount of current general taxes no then ascertainable shall be adjusted on
the basis of one of the following:
Try ______% of the most recent ascertainable taxes.
The most recent ascertainable taxes and subsequent adjustment thereof pursuant to
the terms of re-proration letter attached hereto and incorporated herein by reference.
Other: _____________________ _____________________________.
9. The earnest money shall be held in escrow by _____________________
_____________________ for the mutual benefit of the parties and shall be disbursed
according to the terms of this Contract. In the event either party submits a written request to
Escrowee for disbursement of the escrowed funds other than for purposes of closing,
Escrowee shall provide a 30-day written notice to the other party of the proposed
distribution, at the party's address shown on this Contract or such other address last
provided to Escrowee. In the event such other party fails to object in writing to the proposed
distribution within 30 days of mailing of the notice, Escrowee shall disburse the escrowed
funds accordingly; otherwise the funds shall continue to be held in escrow pending joint
direction of the parties or an order of court of competent jurisdiction.
10. Seller warrants that Seller owns and hereby sells all fixtures and equipment on and attached
to the premises, in addition to the items listed in accordance with Paragraph 5C, including
__________ furnaces, __________water heaters, __________water softeners, and
_____________________ _____________________ _____________________
_____________________ _____________________.
11. Seller warrants there are no rented fixtures or equipment unless stated herein:
_____________________ _____________________ _____________________
_____________________ _____________________
12. Seller warrants that all mechanical equipment, heating and air conditioning equipment,
water heater, water softener., well, septic, plumbing, fire sprinkler, lawn sprinkling and
electrical systems are in NORMAL OPERATING CONDITION AS OF DATE OF
POSSESSION. Buyer shall give written notice of the existence of any breach of warranty
existing at time of possession within 21 days after possession, provided Buyer shall have
nine (9) months to give written notice of any breach of warranty existing as of date of
possession in seasonal equipment (air conditioning/heating/lawn sprinkling) or the septic
system. The Buyer’s failure to give notice as specified waives the warranty contained
herein. If the real estate is served by a well or septic system, Seller shall provide, at Seller's
expense, an evaluation of the well water and septic system by the
_____________________ County Department of Health or a State of
_____________________ licensed sanitarian showing that the well water is
bacteriologically safe and the nitrate level is within standards approved by the State of
_____________________ and that the septic system is in normal operating condition and
without observable defects. If Seller is unable to provide a satisfactory evaluation and is
unwilling to pay the cost of remedying any defect, then this Contract shall be voidable at the
option of Buyer and all earnest money shall then be refunded to Buyer.
13. Buyer shall have the right to inspect the premises within 48 hours prior to closing to
determine that premises are in same condition as date of acceptance of Contract, ordinary
wear and tear excepted.
14. Seller warrants that Seller has not conducted, authorized or permitted the generation,
transportation, storage, treatment or disposal at or from the premises of any hazardous
substance as defined by the Federal Emergency Planning and Community Right to Know
Act of 1986. This warranty is specifically intended to survive the closing of this transaction.
15. This Contract may be subject to the local and State provisions regulating the transfer of real
property on which hazardous chemicals are or have been stored, manufactured, or used as
defined and required to be reported under Section 312 of the Federal Emergency Planning
and Community Right to Know Act of 1986 or containing underground storage tanks
requiring notification under Section 9002 of the Solid Waste Disposal Act. The parties
hereto agree to comply with the notice and recording requirements of such Act. In the event
Seller has not previously provided Buyer a written Disclosure Statement pursuant to such
Act, Seller agrees to provide Buyer at closing with an affidavit stating that to Seller's
knowledge, the premises are not subject to the Disclosure Statement requirements of the
Act.
16. Seller (shall or shall not) _____________________ furnish boundary survey showing
location of improvements without encroachments.
17. Seller shall furnish a current title insurance commitment in the amount of the purchase price,
to Buyer prior to closing, and a final policy thereafter, at Seller's expense, showing
merchantable title subject only to the following permitted exceptions: a) all taxes and special
assessments confirmed prior to closing; b) building and building line, use and occupancy
restrictions, conditions and covenants of record; c) zoning laws and ordinances; d)
easements for the use of public utilities; e) roads and highways; f) drainage ditches, feeders
and laterals. None of the foregoing exceptions shall be considered permitted exceptions if
they are violated by the existing improvements or present use of the premises or if they
materially restrict the reasonable use of the property.
18. If Seller cannot deliver merchantable title to Buyer at closing, subject only to the permitted
exceptions, this Contract, at Buyer's option, shall be void and earnest money shall be
returned to Buyer or Buyer may elect to close and deduct from the purchase price a definite
and ascertainable amount required to satisfy and release any non-permitted exceptions, and
in such case Seller shall convey the premises to Buyer.
19. If prior to delivery of deed or agreement for deed the improvements on the premises shall be
destroyed or materially damaged by fire or other casualty, Buyer shall have the option of
declaring this Contract null and void and receiving a refund of the earnest money paid, or of
accepting the premises as damaged or destroyed, together with the proceeds of any
insurance payable as a result of the destruction or damage, which proceeds Seller agrees to
assign to Buyer.
20. Should Buyer fail to perform this Contract promptly at the time in the manner herein
specified, the earnest money shall, at the option of Seller be forfeited by Buyer as liquidated
damages, and this Contract shall become and be null and void, and Seller shall then have
the right to possession of the premises. Time is of essence of this Contract, and of all the
terms and conditions hereof. In the event Seller does not elect to accept forfeiture of
earnest money, Seller shall be entitled to exercise all other legal remedies available to Seller
under the laws of the State of _____________________, other than recovery of money
damages.
21. At closing Seller shall convey merchantable title to the property, subject to permitted
exceptions, to Buyer or whomever Buyer may direct by stamped recordable warranty deed
or such other appropriate deed or agreement for deed as required. At the same time, the
remainder of the purchase price or any further part of it then due shall be paid and all
documents relative to the transaction shall be signed and delivered.
22. Seller shall surrender possession of the premises in broom-clean condition and free of
debris.
23. Any real estate commission to be paid by Seller shall be paid at closing in accordance with
the conditions of the Listing Agreement unless otherwise agreed, but if the sale is not
completed and the earnest money forfeited, such earnest money shall be first applied to the
payment of expenses incurred for Seller by Seller's broker and the balance, if any, shall be
divided equally between Seller and broker.
24. The parties agree to comply with the following federal or state acts when applicable:
Federal Real Estate Settlement Procedures Act (RESPA).
Other: ___________________________________
25. For purposes of execution of this Contract and providing subsequent notices and
contingency removals hereto, any signed document transmitted by fax machine shall be
treated as an original document.
26. This document represents the entire agreement and shall be binding upon the parties, their
heirs, successors and assigns.
27. Optional standard clauses lettered _______________ are incorporated herein by reference
and identified by the initials of the parties.
Optional Standard Clauses

Cancellation of Prior Contract. This Contract is subject to the
___/___ ___/___ cancellation of Seller’s prior Contract on or before __________________.
Attorney’s Approval. This contract is subject to Buyer’s / Seller’s
attorney's written approval of this Contract and this Contract shall be void
___/___ ___/___ unless approved or approval waived in writing by _________________.
Inspection. This Contract is subject to Buyer-ordered professional
inspection for/of pest, radon, well-mechanical, roof, heating,
air-conditioning, mechanical systems, structural, swimming pool,
complete building, at Buyer's or Seller's expense, and this Contract
shall be void unless inspection approved by Buyer or approval waived in
___/___ ___/___ writing by _________________.
Repair or Replacement. This Contract is subject to the Seller's
repair or replacement of ___________________(attach addendum for
itemization), to normal operating condition or in a workmanlike
___/___ ___/___ manner, at Seller's expense prior to closing.
As Is. Buyer accepts the premises in "AS IS" condition as of date of
Contact and waives the provisions of Paragraph 12 hereof. This clause,
however, does not waive any disclosure requirements otherwise required
___/___ ___/___ by local, state and federal law.
Tax-Deferred Exchange. The parties agree to cooperate in the
completion of a tax-deferred exchange in accordance with the applicable
___/___ ___/___ provisions of the Internal Revenue Code; provided, however, that no party
shall be required to accept conveyance of and re-convey other premises
unless specifically agreed to in writing by them. A party's rights under this
Contract, however, may be assigned to a qualified third-party escrowee to
accomplish a "Starker" exchange.
Flood Certification. This Contract is subject to Buyer obtaining by
_____________(date) a guaranteed determination that the premises are
not located in a FEMA designated special flood hazard area or this
___/___ ___/___ Contract shall be void.
Notice to Parties
By the signing of this contract, you are entering into a binding legal agreement. Any
representation upon which you rely should be included in this agreement. No oral
representation will be binding upon or an obligation of the seller, buyer, real estate broker or
agent.
Notice Regarding Environmental Liability

Because of the risk of substantial liabilities resulting from the ownership of parcels of
commercial or industrial real estate that may be affected by environmental defects or otherwise
subject to federal and/or state environmental regulations, sellers and buyers are advised to
consult their respective attorneys prior to executing a contract for purchase and sale, regarding
such liability risks and regarding additional contract language addressing the assessment of
environmental liability risks.
Witness the hand(s) and seal(s) of the undersigned.

Buyer Signature Date Seller Signature Date
Buyer Signature Date Seller Signature Date
Buyer’s Attorney (print) Phone Seller’s Attorney (print) Phone

Disclaimer. The samples in this website are provided to familiarize yourself with proposals and
approaches you may consider taking. We do not warranty or recommend usage of any of these
forms. You must consult a real estate attorney or professional to prepare and/or approve
specific contracts or documents you intend to use.
January 1, 2001
To: From:
Pete Seller Jane Doe
1234 W. Ashland Ave. 2900 N. Randolph
Chicago, IL 60610 Milwaukee, WI 54321
Re: Purchase of subject property—9876 S. Waveland, Chicago, IL 60625

(purchase with assumption of existing mortgage)
Dear Mr. Seller:
As a follow-up to our earlier conversation, I wish to propose a purchase of your property, with an
exercise of the assumption option that your current mortgage contains. Subject to confirmation
of the mortgage balance which I will assume, the transaction will be as follows:
Purchase price: $
Less your current mortgage: $ I will assume this amount
Balance to be paid to you: $ My down payment
This assumption will be handled as any normal purchase transaction. Your net revenue from
this assumption transaction will be the same as a standard non-assumption purchase. Our
attorneys will handle all of the details. The main difference is that instead of getting a new
mortgage, I will merely “assume” your current mortgage loan.
Because this is a legal assumption, the lender will remove your name from the loan after the
assumption is completed. Your credit report will show this loan as being paid off, because this
assumed loan will no longer be yours.
As your attorney will inform you, this is a perfect legal, common and advantageous method of
completing this purchase transaction. Please contact me or my attorney by January 30, 2001,
as to your decision. Upon your agreement, I will need to contact your current mortgage lender
to obtain their approval for my assumption request.
Thank you for your time and consideration. If you have any questions, please do not hesitate to
call me immediately at 312-555-1212.
Sincerely,
Jane Doe

Real Estate in Depth

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Real Estate in Depth

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Real Estate In Depth

1. Introduction to Real Estate: Land; Real Estate; Real Property

Assistance from Atlas Mortgage

Questions? Ask Atlas Mortgage

Example: Ownership of Land

Real vs. Personal Property

Assistance from Atlas

For more information, see the "Condominiums" article.

Assistance from Atlas Mortgage

General Warranty Deed

1. Covenant against encumbrances. The grantor provides assurances that property's

Special Warranty Deed

Bargain and Sale Deed

Requirements for a Valid Deed

Optionally, the deed may also contain the following items:

Assistance from Atlas Mortgage

Questions? Ask Atlas Mortgage

This article will review the following issues regarding easements:

There are two general types of easements:

This section will review three areas of appurtenant easements

1. Elements of appurtenant easements

Elements of appurtenant easements

To be a legal appurtenant easement, the properties involved must be

● Dominant tenement. The real property that benefits from the

It is legal for a property owner to give an appurtenant easement to a tenant. It

For example, a mall owner leases a large store to a commercial tenant. As

Party wall easement

Townhouses are, in fact, some of the most common example of appurtenant

Easement Right of Burial

Often times, when a purchaser buys a cemetery lot from a cemetery

Although the easement in gross normally cannot be transferred, commercial

Easement vs. License

The license is a limited privilege, allowing access and, sometimes, use of a

Creating & Ending Easements

There are eleven common ways to create an easement:

There are five common ways to terminate an easement:

Assistance from Atlas Mortgage

Questions? Ask Atlas Mortgage

This article reviews the two basic types of fixtures:

1. Buyer over the seller

1. History of mortgage foreclosures

Go to next segment: "History of Mortgage Foreclosures"

1. History of mortgage foreclosures

● Estate for years

1. Basic lease elements

Go to next segment: "Basic Lease Elements: Part 1 of 3"

1. Basic lease elements

● Estate for years

● Estate for years

Oil and gas lease

For more information, please see the Sale-Leaseback article.

● Estate for years

Estate for years

Oil and gas lease

For more information, please see the Sale-Leaseback article.

1. The closing process

Go to the next segment: "Closings and Transactions: The Closing

Assistance from Atlas Mortgage

Questions? Ask Atlas Mortgage

Go to the next segment: "Condominiums: Definition"

The "Condominiums" article contains the following segments

Assistance from Atlas Mortgage

Questions? Ask Atlas Mortgage