By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
From time to time I am asked to explain the term “real estate closing” or “PITI” or whatever. Many of you reading this do not yet own real estate or, perhaps, have just purchased real estate. Real estate brokers tend to just spout technical terms without realizing that some of these terms are not understood by their clients. The following list of definitions is FAR from complete, but will go a long way on your everyday real estate transactions.
APR
Annual percentage rate. This is a complex formula derived by the Federal government under “truth in lending” laws. The APR is basically the interest rate on the loan PLUS the extra fees and costs (figured over the life of the loan).
Acceleration Clause
Any clause that “accelerates” the due date of a promissory note. This acceleration can be due to a transfer of the property, further encumbrance of the property, etc.
AITD
All inclusive trust deed or wrap around. This is a fairly sophisticated financing instrument heavily used in the “creative financing” days of 1977-1983.
Amortization
In real estate, this is a fixed monthly payment that completely extinguishes a loan in a particular period of time. Typical amortization terms in California are 15 and 30 years; therefore, the same monthly payment is made on a fixed rate loan every month for 15 or 30 years. That payment includes principal and interest and at the end of the term the loan is completely paid off.
ARM
Adjustable rate mortgage. This is the most common form of adjustable rate loan.
Beneficiary
Lender on deed of trust.
Closing
Real estate “closing” is a term generally associated with Eastern states. These closings generally involve a meeting with an attorney for the buyer and an attorney for the seller at the title company. In this process, the seller’s deed would be surrendered to the title company for recording and the buyer’s payment would be transferred to the seller’s attorney. In California this cumbersome process is handled by an escrow company.
Deed of Trust (Trust Deed)
The most popular real estate financing instrument, used predominantly in western states. This document is far superior (from the lender’s point of view) to a mortgage and allows for either judicial foreclosure like a mortgage or non-judicial foreclosure–a cheaper, quicker process.
Due on Sale Clause
A clause that “accelerates” the due date of a promissory note. Though the note may have another 5-20 years to run, the lender may call the note due and payable upon the “sale or alienation” of the property.
Escrow
An independent third party (company) that handles the paperwork aspects of real estate transactions, including purchases, loans, etc. In a real estate sale the escrow company basically takes possession of the seller’s deed and the buyer’s money at the appropriate time, when all of the escrow conditions are met. The deed and related documents (if applicable) are recorded and the money is disbursed to the seller minus escrow fees, prorations, loan payoffs, etc. In Southern California escrow is usually handled by an independent escrow company. In Northern California escrow is generally handled by title insurance companies.
Foreclosure
A three month plus three week process which enables the lender to force the repayment of a debt (in default). If all sums owed have not been paid to the lender during the foreclosure process, the foreclosure culminates in a “Trustee’s Sale,” which auctions the property to satisfy the lender’s debt.
Impound Account
Extra money held by your lender, usually paid monthly. This account is usually used to pay real estate taxes and insurance
LTV
Loan to value ratio. This is what a lender uses to determine the maximum amount to lend on a particular property. A lender who will lend 80% LTV would therefore make a loan of $160,000 on a $200,000 property.
Mortgage
Though the term “mortgage” is commonly used to describe real estate loans, mortgages are really used in eastern and midwestern states. Real estate lenders in California use a trust deed, which is technically very different from a mortgage. Though a mortgage can legally be used in California, I have never seen one in over 25 years of real estate practice. Therefore, the typical California “mortgage company” or “mortgage broker” actually deals in trust deeds, although the term “mortgage” is more familiar to the general public.
PITI
This financing term is usually associated with FHA (Federal Housing Authority) or VA (Department of Veterans’ Affairs) loans or with conventional real estate loans having a low down payment. In addition to the principal and interest payment (see “Amortization”), an additional payment is added on to cover taxes and insurance, which are then paid by the lender. In this manner the lender is certain that there will be enough money to pay the real estate taxes and insurance when due. Therefore, PITI stands for principal, interest, taxes and insurance.
Points
Just like the movie industry, the real estate industry has “points.” A point is 1% of the amount of something. If you are applying for a $200,000 loan and the broker charges two points, the fee would be $4,000.
REO
REO stands for real estate owned and is really an accounting term used on a bank’s or institution’s financial statement. It literally means real estate owned. In common terms, it means a piece of real estate that a bank has foreclosed on and is, theoretically, available for sale at “a bargain.”
Recording
Each county in California maintains an office of “County Recorder.” The recorder’s office accepts documents for recording, which include real estate items such as deeds to property, deeds of trust, options, leases, liens, notices of actions, etc., etc., etc. This is the only way a private individual or title company would be able to “search” a property to determine who owns it and what (if any) liens exist on the property.
Trustee
A third party named on deed of trust. The Trustee performs reconveyance or foreclosure functions under the deed of trust. The Trustee is usually a title company or company associated with an escrow, lender or foreclosure company,.
Trustor
Borrower on deed of trust.
As I indicated above, this is not intended to be a complex glossary of real estate terms. I will, however, do updates from time to time.
Peter Rosenthal
VIP Trust Deed Company