Real Estate Terms for First Time Home Buyers

Buying a house for the first time is an education in the language of real estate. First time home buyers may feel overwhelmed by the unfamiliar terminology of real estate transactions.  Here is a glossary of real estate terms:

Amortization The lenght of time needed to decrease a debt to zero when payments are made consistently. Amortization periods are usually 15, 20, or 25 years.

Anniversary Most lenders permit borrowers to make an extra payment on the anniversary of the mortgage.  This payment is applied against the principal and is a good way of reducing a loan.

Appraisal The process determining the market value of a property.

Appraised Value The estimated value of a property completed by a certified appraiser for mortgage financing.

Approved Lender A lending institution authorized by the Government of Canada to make loans under the terms of the National Housing Act. Only Approved Lenders can negotiate mortgages that require mortgage insurance.

Assumption A legal document signed by a homebuyer requiring the buyer to assume responsibility for the obligations of a mortgage by the builder or original owner.

Balanced Market When demand for property equals the supply of available property. Prices remain stable and there is usually a reasonable selection of homes to choose from. Sellers usually accept reasonable offers and houses generally sell in sufficient time periods.

Blended Payment A mortgage payment that includes principal and interest, paid regularly during the term of the mortgage. The amount of payment stays the same, but the principal portion increases and the interest portion decreases over time.

Building Permit A certificate that must be acquired from the municipality and posted in a conspicuous place by the property owner or contractor before a building can be erected or repaired. It must remain posted until the job is completed and passed as satisfactory by a municipal building inspector.

Buyer’s Market When there are more homes to choose from than active buyers. Prices tend to be lower and homes take longer to sell. Buyers usually have more leverage in negotiating a purchase.

Closed Mortgage A mortgage loan with a locked-in payment schedule, that doesn’t vary over the life of the closed term. A buyer who uses a closed mortgage will probably pay a penalty to fully repay the loan before the end of the closed term.

Closing Costs Costs, such as legal fees, transfer fees, and disbursements, that are payable on the closing date. Closing costs typically range from 2%-4% of a home’s selling price.

Closing Date The date on which the sale of a property becomes final.

CMHC Canada Mortgage and Housing Corporation A Crown corporation that administers the National Housing Act for the federal government and creates and sells mortgage loan insurance products.

Collateral Mortgage A mortgage securing a loan by way of a promissory note. This money can be used to buy a property or for another purpose, such as a home renovation or a vacation.

Commitment Letter / Mortgage Approval Written notification from the mortgage lender to the borrower that approves the advancement of a specific amount of mortgage funds under particular conditions.

Conditional Offer / Conditions of Sale An Offer to Purchase subject to specified conditions, ie, the arranging of a mortgage. Usually, the specified conditions must be met within a stipulated time limit.

Conventional Mortgage A mortgage loan up to a maximum of 75% of the lending value of the property. This type of mortgage does not require mortgage loan insurance.

Covenant A clause in a legal document which gives the parties to the mortgage a right or an obligation. A covenant can impose the obligation on a borrower to make mortgage payments in certain amounts on specified dates, for example. A mortgage document consists of covenants agreed to by the borrower and the lender.

Conveyancing The transfer of ownership of any property or real estate from one person to another.

Deed A legal document, signed by both the vendor and the purchaser, transferring ownership. This document is registered as evidence of ownership.

Default Failure A failure to make mortgage payments, defaulting on the loan, may give cause to the mortgage holder to take legal action to possess (foreclose) the mortgaged property.

Deposit A sum of money placed in trust by the purchaser when an Offer to Purchase is made. The real estate representative or lawyer holds the sum until the sale is closed, and then it’s paid to the vendor.

Discharge of Mortgage A document signed by the lender and given to the borrower when a mortgage loan has been repaid in full.

Down payment The portion of the house price the buyer pays up front before securing a mortgage. It generally ranges from 5%-25% of the total purchase price.

Easement A right acquired for access to or over, or for the use of, another person’s land for a specified purpose, such as a driveway or public utilities.

Encumbrance A registered claim for debt against a property, such as a mortgage.

Equity The difference between the price for which a home could be expected to sell and the total debts registered against the home.  Generally, equity increases as the outstanding principal of the mortgage is reduced although market values and improvements to the property can also affect equity.

FHLI First Home Loan Insurance – This is a CMHC product of particular interest to first time buyers. If qualified, they may be able to purchase a home with as little as 5% down. The CMHC will insure mortgages of up to 95% of the home’s purchase price or the market value of the property, whichever is less. (Restrictions may apply. Contact your local lender.)

Foreclosure A legal procedure in which the lender obtains ownership of the property if the borrower defaults on the mortgage loan.

Gross Debt Service Ratio The percentage of the borrower’s gross income used for monthly payments of principal, interest, taxes, heating costs, and half of any condominium maintenance fees.

High-Ratio Mortgage / Insured Mortgage Loan A mortgage loan in excess of 75% of the lending value of the property. This mortgage must be insured against payment default.

Holdback A sum of money withheld by the lender during construction of a house to ensure that construction is satisfactory. A standard holdback is 10% of the total cost of the project.

Interest The cost of borrowing money for a specific period of time. Interest is usually paid to the lender in installments along with repayment of the principal loan amount.

Interest Adjustment Date (IAD) The date from which interest on the mortgage advanced is calculated for regular payments. This date is usually one payment period before regular mortgage payments begin. Interest due between the date the mortgage is advanced and the IAD is due on closing.

Interest Rate The rate at which you pay interest to the lender. For example, if the mortgage balance is $100,000, and the interest rate is 6 per cent, one single annual payment will include $6,000 interest. More frequent payments will result in different amounts.

Lending Value The purchase price or appraised value of a property, whichever is less.

Loan-to-Value Ratio The ratio of the loan to the lending value of a property expressed as a percentage. For example, the loan-to-value ratio of a loan for $25,000 on a home which costs $100,000 is 25%.

Lien (Mechanics) A claim against a property for money owing. A lien may be filed by a supplier or a subcontractor who has provided labour or materials but has not been paid. A lien must be properly filed by a claimant and has a limited life, prescribed by statutes that vary from province to province. If the lien holder takes action within the prescribed time, the homeowner may be required to pay the amount claimed by the lien holder or the lien holder may force a sale of the property to pay off the debt.

Maturity Date The last day of the term of the mortgage agreement when the mortgage loan must be paid in full or the agreement renewed.

Mortgage Security The purchaser’s personal guarantee to repay the loan and a pledge of the property as security for the loan.

Mortgage Life Insurance Insurance to pay off your mortgage in full if you die.  This insurance is frequently offered by the lender and the premium addedto your mortgage payments but you may want to compare rates for equivalent products from an insurance broker.

Mortgage Loan Insurance Insurance required by lenders for high-ratio mortgages (more than 75% of the purchase price). It can be acquired from CMHC or a private insurer for a cost of between 0.5% and 3% of the amount of the mortgage.

Mortgage Payment A regularly scheduled payment that includes both principal and interest.

Mortgagee The lender providing the mortgage loan.

Mortgagor The borrower pledging the property as security for the loan.

Net Worth A person’s total financial worth, calculated by subtracting total liabilities from assets.

NHA Premium Insurance Insurance required by lenders for high-ratio mortgages (more than 75% of the purchase price). It is available from CMHC or a private insurer for a cost of between 0.5% and 3% of the amount of the mortgage. The premium can be added to your mortgage loan, or paid off in a lump sum at the time of purchase to save interest charges.

Offer to Purchase A written contract setting out the terms under which the buyer agrees to buy. If accepted by the seller, it forms a legally binding contract subject to the terms and conditions as stated in the document.

Open Mortgage A mortgage loan that allows the borrower to make a partial or full payment of the principal amount at any time, without penalty.

Option Agreement A document stipulating that a specified individual is given the first chance to buy a property at or within a specified period of time in exchange for a deposit. An option holder who does not buy at or within the specified period loses the deposit and the agreement is cancelled.

P.I.T. Principal, Interest, and Taxes Payments due on a regular basis under the terms of a mortgage agreement. Usually, payments are made monthly and include one-twelfth of the estimated annual municipal and school taxes. Because these taxes change from year to year, this section of the mortgage will also change .

P.I.T.H. Principal, Interest, Taxes, and Heating Costs used to calculate the Gross Debt Service ratio (GDS).

Portability An option available on a mortgage that allows the mortgagor to take their current mortgage loan with them to another property without penalty.

Pre-Approved Mortgage When a lender approves the potential mortgagor for a specified amount, based on how much money the lender is prepared to lend to the borrower. This allows buyers to shop for homes that are within their means and not homes that may be too expensive, or out of the borrowers means to finance.

Prepayment Privileges Allows the borrower to make voluntary payments on the mortgage loan, above the regular, scheduled mortgage payments.

Principal The amount of money borrowed.

Property Purchase or Land Transfer Tax A tax paid to the provincial and/or municipal government(s) for transferring property to the buyer from the seller.

Realtor® A trademark name for a real estate representative who is a member of an organization of persons engaged in the business of buying and selling real estate, such as the Canadian Real Estate Association.

Refinance To pay off a mortgage or other registered encumbrance and arrange for new financing, sometimes with a different lender.

Regular Mortgage With this type of mortgage, you pay between 10% and 25% of the cost of the home as a down payment and the remaining balance is the amount of the mortgage loan required. A high-ratio mortgage requires mortgage loan insurance. CMHC offers it for a premium of 0.5%-3% of the mortgage amount. This fee can be added to your mortgage payments or paid in full on closing.

Renewal When the borrower re-negotiates the loan for a new term at the end of a mortgage term.

Second Mortgage An additional mortgage on a property that is already mortgaged.

Seller’s Market When more buyers are looking for homes than there are homes for sale. House prices generally increase and homes sell quickly and there is a smaller inventory of homes available for sale and many buyers looking to purchase.

Strata or Condominium Fee A payment made by all owners of condominiums or townhouses within a complex. These funds are allocated to pay expenses like maintenance, repairs and management costs.

Statement of Adjustment (s) A balance sheet statement that shows credits to the vendor – for example, the purchase price – and prepaid taxes and credits to the buyer, such as the deposit, and the balance due on closing.

Survey A document illustrating the property boundaries and measurements, showing the location of buildings on the property, and indicating any easements or encroachments.

Term The length of time during which a mortgagor pays a specific interest rate on the mortgage loan. The entire principal is usually not paid off at the end of the term because the amortization period is normally longer than the term.

Title (freehold or leasehold) Legal possession. A freehold title gives the holder ownership of land and buildings for an indefinite period of time. A leasehold title gives the holder a right to use and occupy land and buildings for a defined period of time. In a leasehold arrangement, actual ownership of the land, sometimes along with the buildings, remains with the landlord.

Total Debt Service Ratio (TDS) The percentage of gross annual income required to cover all payments for housing and other debts, such as car payments.

Variable-rate Mortgage A mortgage with fixed payments but fluctuating interest rates. The change in current interest rates doesn’t alter the amount of the mortgage payment, but determines how much of each payment is applied against the principal amount and how much goes to pay interest to the lender.

Vendor Take-Back Mortgage Mortgage financing arranged between the seller  and the buyer. Often this type of loan is a second mortgage, which the seller is willing to arrange at below market rates to allow the buyer to purchase the house. Generally these arrangements are not renewable or transferable to the next owner of the house.

Zoning Bylaws Municipal or regional laws that specify or restrict land use.

Our first time home buyer expert Jodi Baker can clarify any of these real estate terms if you need further explanation – just ask her!