The settlement process includes several key terms that you should familiarize yourself with. Review our
list of the most commonly used keywords used in real estate settlement.
Abstract : The accumulation of recorded documents relating to a piece of real property or land
from which an attorney or licensed agent will give an opinion of the status of the title.
Adjustable Rate Mortgage (ARM) : A mortgage in which interest and payment rates vary
periodically, based on a specific index, such as 30‐year Treasury bills or the Cost‐of‐Funds index.
Adjustments : Money credited to either/both buyer and seller at closing, including real estate
taxes, price adjustments based on disclosures in the inspection, etc.
Amortization : A method by which monthly mortgage payments are equalized over the life of
the loan despite the fact that the proportion of principal to interest changes.
Appraisal : Professional and unbiased written opinion of property's value based on recent,
comparable sales, quality of construction, current condition and style of architecture.
Assessed Value : The value placed on property by the County Property Appraisers Office as a
basis for taxation.
Assessor : A municipal or county official who determines the value of properties for the
purpose of taxation.
Assignment : A transfer of real or personal property and all rights to said property to another.
Assumption of Mortgage : Agreement by a buyer to assume an existing mortgage or deed of
trust.
Balloon Payment : A loan in which the final installment payment is greater than the preceding
payments, and pays the note in full.
Chain of Title : A history of conveyances and encumbrances affecting the title of real property.
Closing/Settlement : The day when buyers and sellers sign the papers and actually swap
money for title to the home. The settlement finalizes the agreements reached in the sales
agreement.
Closing Costs : ALL of the cost associated with the closing on a piece of property. Closing costs
include: points, origination fees, loan service fees, document preparation fees, escrows, title
insurance, title company fees, recording fees, real estate taxes, and transfer taxes, etc.
Commission : A previously agreed upon percentage of the home's sale price paid to the listing
and selling agent(s).
Commitment : The written report of the title company showing status of title and pledging to
issue a title insurance policy when the requirements shown therein are met.
Conventional Mortgage : A mortgage securing a loan made by banks, lenders or investors
without government underwriting by the Fair Housing Administration or the Veterans
Administration.
County Clerk : The county authority with whom all real estate documents are filed.
Courier Fee : Charges for delivery.
Deed : the document used to transfer ownership in a property from seller to buyer.
Deed in Lieu of Foreclosure : All alternative to foreclosure wherein the lender agrees to halt
foreclosure activities in exchange for a deed executed by the owner/borrower in favor of the
lender. Typically only applicable where the owner/borrower has some equity in the property
that would cover the lender's expenses, including expenses incurred by the lender because of
the borrower's default, legal fees and the cost to re‐sell the property.
Deed of Trust : An instrument similar to a mortgage that gives the lender the right to foreclose
on the property if there is default under the note by the borrower.
Default : The inability to pay monthly mortgage payments in a timely manner or to otherwise
meet the mortgage terms.
Delinquency : Failure of a borrower to make timely mortgage payment under a loan
agreement.
Disclosure : To make known or public. When dealing with real property, all disclosures should
be in writing.
Down Payment : The portion of a home's purchase price that is paid in cash and is not part of
the mortgage loan.
Earnest Money Deposit : Money you will put down to show that you are serious about
purchasing the home. It often becomes part of the down payment if the offer is accepted, is
returned if the offer is rejected, or may be forfeited if you do not follow through with the deal.
Easement : A recorded right of use affecting real property. “An easement could be for utility
purposes or for ingress or egress, for example. All easements of record would be shown
originally on the title insurance commitment.
Encumbrance : Anything that affects or limits the ownership of real property, such as
mortgages, liens, easements or restrictions of any kind.
Equity : The difference between the sale price of a property and the mortgage on the property.
Escrow : The deposit of documents and/or funds, with instructions to a neutral third party
(Title Company), to carry out the provisions of an agreement or contract.
Escrow Account : An impound account in which a portion of your monthly mortgage payment
is deposited to cover annual charges for homeowner's insurance, mortgage insurance (if
applicable), and property taxes.
Escrow Agent : A person or entity holding documents and funds in a transfer of real property,
acting for both parties pursuant to instructions. Typically the agent is a person (often an
attorney), escrow company or title company, depending on local practices.
Exclusive Right to Sell : A written agreement between the Seller and their real estate agent,
giving the agent the right to sell a property and collect a fee for a set term.
Executor : The person chosen in the will to carry out, or execute, the will's terms, now often
called the Personal Representative.
Fair Market Value : The price a willing buyer and a willing seller would arrive at after an arm's
length bargaining where there is no compulsion to buy or to sell and where both parties are
aware of all relevant facts.
Federal Tax Lien : Nonpayment of any federal tax, including income tax, can result in a Federal
Final Decree : An order from a court of competent jurisdiction documenting the final decision
of all pending matters in a case before it.
Fixed‐Rate Mortgage : A mortgage that has a set interest rate and is basically unaffected by
interest rate changes.
Foreclosure : a legal process in which mortgaged property is sold to pay the loan of the
defaulting borrowers.
Gap : The common title industry name for the period from the effective date on the
commitment to the day of closing and recording of documents. A “Gap Check” is the title
company's search of the public records for this time period.
Good Faith Estimate (GFE) : An estimate of the settlement charges you are likely to incur; it
also contains other information about the loan.
Government Recording, Recordation Taxes, and Transfer : Fees for legally recording your deed
and mortgage. These fees may be paid by you or by the seller depending upon the terms of the
sales agreement.
Heir : One who receives the estate, or partial estate, of a deceased person by law.
Home Inspection : A formal survey of a home's structure, mechanical systems and overall
condition, generally performed by a licensed professional inspector.
Homeowner's Insurance or Home Hazard Insurance : An insurance policy that protects your
home and your possessions inside from serious loss, such as theft or fire. This insurance is
usually required by all lenders to protect their investment and must be obtained before closing
on your loan.
HUD‐1 Settlement Statement : A statement that itemizes the services provided to you and the
fees charged for those services. This form is filled out by the person who will conduct the
settlement. You can ask to see your settlement statement at least one day prior to your
settlement.
Indemnity Agreement : Agreement between two or more parties wherein one party agrees to
protect, reimburse and/or assume the liabilities of another for damages or losses suffered by
that person.
Instrument : Legal documents, such as deeds, mortgages, assignments, wills, etc., are also
known as instruments.
Interest : A fee charged by the lender for the use of its money.
Interest Rate : The charge by the lender for borrowing money expressed as a percentage.
Joint Tenancy : Ownership of property by two or more people in which the survivors
automatically gain ownership of a decedent's interest.
Judgment : The final decision in a court of law.
Junk Fees : The pejorative name sometimes used to identify the reasonable, customary and
sometimes excessive fees charged to the borrower by the lender against the borrower by the
lender at closing for the privilege of borrowing money.
Legal Description : The description of a parcel of land, identifiable by metes and bounds, or
designated as a Lot and/or Block number.
Lien : An encumbrance for money against property.
Living Trust : A living trust (revocable living trust or inter vivos trust) is a type of trust created
for the purpose of holding ownership to an individual's assets during the person's lifetime and
for distributing those assets after death.
Loan to Value (LTV) ratio : A percentage calculated by dividing the amount to be borrowed by
the price or appraised value of the home to be purchased (whichever is less). The loan to value
ratio is used to qualify borrowers for a mortgage, and the higher the LTV, the tighter the
qualification guidelines for certain mortgage programs become. Low loan to value ratios are
considered below 80%, and carry lower rates since borrowers are lower risk.
Loan Origination Fee : A one‐time fee charged by the mortgage company (lender) to arrange
financing for the loan.
Marketable Title : A title which is free from any encumbrance that would limit or prevent its
sale; a title that is free to be used in transactions.
Mortgage : The transfer of an interest in property to a lender as a security for a debt. This
interest may be transferred with a Deed of Trust in some states.
Mortgagee : The party lending the money.
Mortgagee's Title Insurance Policy : Also called Lender's Policy. An insurance policy required
by the mortgagee to protect the mortgagee's interest against loss caused by title defects. It
does not protect the Buyer. It is also required for 2nd mortgages.
Mortgagor : The party borrowing the money.
Notary Public : A person legally empowered to witness or certify the validity of signatures on
documents.
Owner's Title Insurance Policy : A policy that insures the Buyer against loss due to any defect
of the title, not accepted to or excluded from the policy.
Partial Release : A partial release of property covered by a mortgage.
Payoff : Full payment of an existing loan.
PITI : Principal, Interest, Taxes and Insurance : The four elements of a monthly mortgage
payment; payments of principal and interest go directly towards repaying the loan while the
portion that covers taxes and insurance goes into an escrow account to cover the fees when
they are due.
Points : A point is equal to one percent of the loan amount, and can be paid by either Buyer or
Seller.
Power of Attorney : Enables one person to act for another.
Pre‐paid items : Lenders often require the prepayment of items such as insurance premiums
for private mortgage insurance, homeowner's insurance, and real estate taxes.
Prepayment Penalty : A fee charged if the mortgage loan is paid before the scheduled due
date.
Private Mortgage Insurance (PMI) : Insurance that protects your lender if you default on your
loan. With conventional loans, mortgage insurance is usually required if you do not make a
down payment of at least 20% of your home's appraised value. Your lender may require
payment of your first year's mortgage insurance premium or a lump sum premium that covers
the life of the loan in advance at settlement. The same insurance protection on an FHA loan is
called Mortgage Insurance Premium (MIP).
Probate : The legal term for the pr4ocess of administering a deceased person's estate or
property through the state courts.
Proration : The proportional division of certain costs of home ownership. Usually used at
closing to figure how much the buyer and seller each owe for certain expenditures such as real
estate taxes, assessments and water bills.
Recording : The process of filing documents at a specific government office. Upon such
recording, the document becomes part of the public record.
Recording Fee : A fee charged by the County Clerk's Office to record documents in the public
record. The charges are based upon the type of document to be recorded and on the number
of pages to be recorded.
Refinancing : The process of applying for a new mortgage to gain better terms of use of equity.
Release : A document releasing property from lien or judgment.
Re‐recording : If an error occurred on the original recorded document and is in need of
correction, the corrected document must be re‐recorded with the County Clerk's office to show
the correction.
Rescind : To cancel a transaction or agreement is to “rescind” it. In title terms, it most often
refers to the right of rescission given individuals to cancel home loans when refinancing.
Restriction : As to title, this would mean any limitation on the right of use of a property. A
restriction could be created by deed, covenants, or court order.
RESPA (Real Estate Settlement Procedures Act : RESPA is a consumer protection act aimed at
making consumers better shoppers for settlement services and to eliminate kickbacks and
referral fees that unnecessarily increase the costs of certain settlement services. For more
information visit HUD's RESPA web site.
Sales Agreement : The contract signed by a buyer and the seller stating the terms and
conditions under which a property will be sold. It may also be called an “Agreement of Sale” or
“Purchase Contract.”
Second Mortgage : A mortgage that ranks behind the first mortgage in lien priority due to its
later filing of record.
Settlement : The time at which the property is formally sold and transferred from the seller to
the buyer. It is at this time that the borrower takes on the loan obligation, pays all closing costs
and receives title from the seller.
Settlement/Closing Agent : In some states, a settlement agent, or closing agent handles the
real estate transaction when you buy or sell a home. It may also be an attorney or a title agent.
He or she oversees all legal documents, fee payments, and other details of transferring the
property to ensure that the conditions of the contract have been met and appropriate real
estate taxes have been paid.
Settlement Costs/Closing Costs : The customary costs above and beyond the sales price of the
property that must be paid to cover the transfer of ownership at closing; these costs generally
vary by geographic location and are typically detailed to the borrower at the time of GFE is
given.
Settlement Statement or HUD‐1 : A statement that details the monies paid out and received
by the buyer and settlement at closing.
Short Sale : An alternative to foreclosure wherein the lender agrees to accept some amount
less than the outstanding principal owed on real property so that the owner/borrower can sell
the property.
Survey Fee : A fee for obtaining a drawing of your property showing the location of the lot, any
structures, and any encroachments. The survey fee is usually paid by the borrower.
Tax Exemption : Not having to pay property tax or other taxes, granted to religious,
educational and governmental organizations.
Tax Lien : Lien recorded against a property for nonpayment of taxes.
Tenants by the Entireties : The default ownership interest for married couples, automatically
includes the right of survivorship in the surviving spouse.
Tenants in Common : Sometimes referred to as “TIC.” A type of joint tenancy of property
without right of survivorship; each tenant's portion of ownership is separately owned and each
owner may do with their share as they see fit without regard for the other tenants.
Termite Inspection : An inspection required by the Lender to show that the property is free
and clear of active termites.
Title : Evidence of ownership of real property.
Title Service Fees : Title service fees include charges for title search, closing fee, and title exam
if required. This fee also includes the services of a title or settlement agent.
Title Insurance : Insurance that protects your lender against any title dispute that may arise
over your property. Through a title search, the lender verifies who the actual property‐owners
are and whether the property is free of liens. The title search company then issues title
insurance which protects the title of the property against any unpaid mortgages and
judgments. In case a claim is made against the property, the title insurance provides legal
protection and pays for court fees and related costs. You may also purchase Owner's title
insurance which protects you as the homeowner.
Title Report : A report detailing the condition of title to real property. A title report is generally
used to determine a property's marketability by identifying outstanding liens, judgments
and/or other clouds on title in preparation of sale of the property.
Tolerance Category : The maximum amount by which the charges for a category or categories
of settlement cost may exceed the amount of the estimate for such category or categories on a
good faith estimate. When the originator selects and identifies the provider of services, these
charges may only increase 10% in the aggregate. If the borrower selects a provider that is not
on the written list provided by the loan originator, the lender is not subject to any tolerance
restrictions for that service.
Tract : A parcel of land.
TILA (Truth In Lending Act) : Was originally enacted as part of the 1968 Consumer Protection
act and was designed to protect consumers in credit transactions by requiring clear disclosure
of key terms of the lending arrangement and all costs.
Underwriting Fee : A fee charged by the Lender to underwrite the loan.
Uniform Commercial Code : The set of laws regulating commercial transactions or transaction
between merchants, especially ones involving the sale of goods and secured transactions.
VA Funding Fee : A fee charged by the Veteran's Administration for originating a VA loan.
Walk‐Through Inspection : The final inspection by the buyer, usually in the company of the
buyer's real estate sales agent, to ensure that all conditions noted in the offer‐to‐purchase, and
all seller‐related contingencies have been met. This inspection is most often completed
immediately prior to the official act of closing, after the seller has vacated the premises.
Warehouse Fee : A fee charged by the Lender to hold the loan locally before selling it in the
secondary market, to an investor.
Warranty : Protection provided to the purchaser regarding the condition of appliances and
pictures. Often, new homes have more extensive warranties also covering the overall
structure.
Warranty Deed : A deed used to convey title of property from one party to another, whereby
the seller guarantees title to be free from encumbrances.
Zoning : An act by municipality authorities specifying the type of use for which a property may
be used.
